CMP Associates Regulation Blog: November 2011

US Growth Standstill, Falling Real Disposable Income, Repression of Savings, Euro Zone Survival Risk and World Economic Slowdown

Carlos M. Pelaez

Executive Summary

I US Growth Standstill

II Falling Real Disposable Income and Repression of Savings

IIA Falling Real Disposable Income

IIB Repression of Savings

III World Financial Turbulence

IIIA Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

IVA United States

IVB Japan

IVC China

IVD Euro Area

IVE Germany

IVF France

IVG Italy

IVH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

Executive Summary

There are three major themes on the US economy discussed in this post. (1) Economic growth is mediocre relative to earlier upswings of the business cycle in the postwar period. The average rate of growth in earlier upswings was 6.2 percent but the average rate of growth in the current upswing is only 2.4 percent, resulting in 29 million unemployed or underemployed. (2) Real disposable income is falling. (3) There is a tax on savings in the form of zero interest rates of monetary policy. This tax is highly regressive because of its incidence on people with lower income and wealth and without access to more sophisticated investments. This tax is similar to interest rate controls that are considered in the economics literature as financial repression.

Mediocre Economic Growth. In the first three quarters of 2011, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.4 percent in the first quarter of 2011 (IQ2011), 1.3 percent in IIQ2011 and revised 2.0 percent in IIIQ2011. The annual equivalent rate of growth of GDP for 2011 is 1.2 percent, obtained as follows. Discounting 0.4 percent to one quarter is 0.1 percent; discounting 1.3 percent to one quarter is 0.32 percent; and discounting 2.0 percent to one quarter is 0.5 percent. Real GDP growth in the first three quarters of 2011 accumulated to 0.92 percent {[(1.001 x 1.0032 x 1.005)-1]100}, which is equal to 1.23 percent for an entire year of four quarters {(compounding 0.92 by 4/3) = (1.0092)^4/3}. The US economy is still close to a standstill especially considering the GDP report in detail. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Tue Nov 21 the second estimate of GDP for IIIQ2011 at 2.0 percent seasonally-adjusted annual rate (SAAR).

Table ES1 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the nine quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the three quarters of 2011 show the economy in standstill with annual equivalent growth of 1.2 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table ES1, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIIQ2011	9	5.5	2.4

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart ES1 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart ES1, US, Real GDP, 1980-1989

Chart ES2 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first nine quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart ES2, US, Real GDP, 2007-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

Falling Real Disposable Income. Chart ES3 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.

Chart ES3, US, Real Disposable Income Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart ES4 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2011. There has been a period of positive rates of real disposable income followed by decline of rates and then negative rates.

Chart, ES4, US, Real Disposable Income, Percentage from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Interest Rate Tax on Savings. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 3.5 percent in the 12 months ending in Oct. Funding problems motivated compensatory measures by banks. Money-center banks invented the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”

Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:

“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”

Friedman (1970, 26-7) predicted the future:

“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”

In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”

Chart ES5 provides savings as percent of disposable income or the US savings rate. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 the savings rate has been declining as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart ES5, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

I US Growth Standstill. In the first three quarters of 2011, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.4 percent in the first quarter of 2011 (IQ2011), 1.3 percent in IIQ2011 and revised 2.0 percent in IIIQ2011. The annual equivalent rate of growth of GDP for 2011 is 1.2 percent, obtained as follows. Discounting 0.4 percent to one quarter is 0.1 percent; discounting 1.3 percent to one quarter is 0.32 percent; and discounting 2.0 percent to one quarter is 0.5 percent. Real GDP growth in the first three quarters of 2011 accumulated to 0.92 percent {[(1.001 x 1.0032 x 1.005)-1]100}, which is equal to 1.23 percent for an entire year of four quarters {(compounding 0.92 by 4/3) = (1.0092)^4/3}. The US economy is still close to a standstill especially considering the GDP report in detail. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Tue Nov 21 the second estimate of GDP for IIIQ2011 at 2.0 percent seasonally-adjusted annual rate (SAAR). The objective of this section is analyzing US economic growth. There is initial brief discussion of the concept of “slow-growth recession” followed by comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of the quarterly performance in the first half of 2011.

The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 29.3 million people in job stress, consisting of an effective number of unemployed of 18.4 million, 8.4 million employed part-time because they cannot find full employment and 2.5 million marginally attached to the labor force (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html )The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.

In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:

“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”

Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.

The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):

“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”

Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table 1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase from contractions in comparison than the current slow-growth recession.

Table 1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

	IQ	IIQ	IIIQ	IVQ
1953	7.7	3.1	-2.4	-6.2
1954	-1.9	0.5	4.6	8.3
1955	12.0	6.8	5.4	2.3
1957	2.5	-1.0	3.9	-4.1
1958	-10.4	2.5	9.7	9.7
1959	8.3	10.5	-0.5	1.4
1973	10.6	4.7	-2.1/	3.9
1974	3.5	1.0	-3.9	6.9
1975	-4.8	3.1	6.9	5.3
1976	9.4	3.0	2.0	2.9
1979	0.7	0.4	2.9	1.1
1980	1.3	-7.9	-0.7	7.6

Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&Freq=Qtr&FirstYear=2008&LastYear=2010

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 5.1 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table 2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981-1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the second estimate of IIIQ2011 released on Nov 21, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_2nd.pdf). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.7 percent to -8.9 percent. The striking difference is that in the first nine quarters of expansion from IQ1983 to IIIQ1984, shown in Table 2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 7.1, 3.9, 3.3 and 5.4 while the percentage growth rates in the first eight nine quarters of expansion from IIIQ2009 to IIIQ2011, shown in relief in Table 2, were mediocre: 1.7, 3.8, 3.9, 3.8, 2.5, 2.3, 0.4, 1.3 and 2.5. Asterisks denote the estimates that have been revised by the BEA. During three quarters of a year GDP has been growing at annual equivalent rates of 0.4 percent in IQ2011, 1.3 percent in IIQ2011 and 2.0 percent in IIIQ2011 in what can be considered as a slow growth recession because of the 28.8 million in job stress (http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html ). Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983.

Table 2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.6	-6.4	5.1	7.1	-1.8*	-6.7*	3.9*
II	-3.2	2.2	9.3	3.9	1.3*	-0.7	3.8*
III	4.9	-1.5	8.1	3.3	-3.7*	1.7	2.5*
IV	-4.9	0.3	8.5	5.4	-8.9*	3.8*	2.3*
				1985			2011
I				3.8			0.4
II				3.4			1.3
III				6.4			2.0
IV				3.1

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_2nd.pdf

Chart 1 provides the strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

Chart 1, US, Real GDP 1947-1999

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 2 provides the growth of real quarterly GDP in the US between 1979 an 2010. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.

Chart 2, US, Real GDP 1970-2010

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table 2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart 3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1984

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, growth rates in the comparable first nine months of expansion in 2009 and 2011 in Chart 4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart 4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Characteristics of the four cyclical contractions are provided in Table 3 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction in annual equivalent rate. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table 3, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Annual Equivalent Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-5.1	-0.87

Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html

Data: http://www.bea.gov/iTable/index_nipa.cfm

Table 4 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the nine quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the three quarters of 2011 show the economy in standstill with annual equivalent growth of 1.2 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table 4, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIIQ2011	9	5.5	2.4

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 5 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart 5, US, Real GDP, 1980-1989

Chart 6 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first nine quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 6, US, Real GDP, 2007-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

As shown in Tables 3 and 4 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 5.5 percent (last row in Table 4). As a result, the level of real GDP in IIIQ2011 with the third estimate is only higher by 0.1 percent than the level of real GDP in IVQ2007. Table 5 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.7 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 4.0 percent (1.023 x 1.017). Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.2 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in three successive quarters from IVQ2009 to IIQ2010 of equal growth at 0.9 percent for cumulative growth in those three quarters of 2.7 percent. The economy lost momentum already in IIIQ2010 and IVQ2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent combining the two quarters in annual equivalent rate {(1.006 x 1.006)²}. The economy then stalled during the first half of 2011 with growth of 0.1 percent in IQ2011 and 0.32 percent in IIQ2011 for combined annual equivalent rate of 0.84 percent {(1.001 x 1.0032)²}. The economy grew 0.5 percent in IIIQ2011 for annual equivalent growth of 1.23 percent in the first three quarters {(1.001 x 1.0032 x 1.005)^4/3}. The annual equivalent rate discounting the seasonally-adjusted annual rate (SAAR) of 1.3 percent for IIIQ2011 is 1.23 percent. Growth in a quarter relative to a year earlier in Table 5 slows from over 3 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.2 percent in IQ2011, 1.6 percent in IIQ2011 and 1.5 percent in IIIQ2011. The revision of the seasonally adjusted annual rate in IIQ2011 from 1.0 percent to 1.3 percent merely increases growth in IIQ2011 relative to IQ2011 from 0.25 percent to 0.33 percent. There is stronger quarterly growth in IIIQ2011 of 0.5 percent even with the downward revision. Growth in IIQ2011 relative to IIQ2010 and in IIIQ2011 relative to IIIQ2010 remains at the mediocre rates of 1.6 percent and 1.5 percent, respectively. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in the second half of 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis is the common source of doubts on the rate and direction of economic growth in the US.

Table 5, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,663.2	-4.9	-1.7	-4.5
IIQ2009	12,641.3	-5.1	-0.2	-5.0
IIIQ2009	12,694.5	-4.7	0.4	-3.7
IV2009	12,813.5	-3.8	0.9	-0.5
IQ2010	12,937.7	-2.9	0.9	2.2
IIQ2010	13,058.5	-1.8	0.9	3.3
IIIQ2010	13,139.6	-1.4	0.6	3.5
IVQ2010	13,216.1	-0.8	0.6	3.1
IQ2011	13,227.9	-0.7	0.1	2.2
IIQ2011	13,271.8	-0.4	0.33	1.6
IIIQ2011	13,337.8	0.1	0.5	1.5

Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Chart 7 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

Chart 7, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The experience of recovery after 2009 is not as complete as during the 1980s. Chart 8 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak.

Chart 8, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 9 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

Chart 9, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 10 provides growth rates in a quarter relative to the prior quarter from 2007 to 2011. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart 10, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revised estimates and earlier estimates from IQ2008 to IQ2011 in seasonally adjusted annual equivalent rates are shown in Table 6. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent but growth in IIQ2010 is upwardly revised to 3.8 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession or even possibly contraction.

Table 6, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters	Revised Estimate	Earlier Estimate
2008
I	-1.8	-0.7
II	1.3	0.6
III	-3.7	-4.0
IV	-8.9	-6.8
2009
I	-6.7	-4.9
II	-0.7	-0.7
III	1.7	1.6
IV	3.8	5.0
2010
I	3.9	3.7
II	3.8	1.7
III	2.5	2.6
IV	2.3	3.1
2011
I	0.4	1.9

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

Contributions to the rate of growth of GDP in percentage points (PP) are provided in Table 7. Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIIQ2011. Growth of 2.5 percent at seasonally-adjusted annual rate (SAAR) of GDP in IIIQ2011 consisted of positive contributions of 1.72 percentage points of personal consumption expenditures (PCE) + 0.52 percent points of gross domestic investment (GDI) + 0.22 percentage points of net exports (net trade or exports less imports). Real disposable income stagnated in IIIQ2011 but families still consumed by drawing down savings as percent of personal income from 4.8 in IIQ011 to 3.8 in IIIQ2011.

Table 7, US, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2011
I	0.4	1.47	0.47	0.32	-0.34	-1.23
II	1.3	0.49	0.79	-0.28	0.24	-0.18
III	2.0	1.63	-0.10	-1.55	0.49	-0.02
2010
I	3.9	1.92	3.25	3.10	-0.97	-0.26
II	3.8	2.05	2.92	0.79	-1.94	0.77
III	2.5	1.85	1.14	0.86	-0.68	0.20
IV	2.3	2.48	-0.91	-1.79	1.37	-0.58
2009
I	-6.7	-1.02	-7.76	-2.66	2.44	-0.33
II	-0.7	-1.28	-2.84	-0.58	2.21	1.21
III	1.7	1.66	0.35	0.21	-0.59	0.28
IV	3.8	0.33	3.51	3.93	0.15	-0.18
1982
I	-6.4	1.62	-7.50	-5.47	-0.49	-0.03
II	-2.2	0.90	-0.05	2.35	0.84	0.50
III	-1.5	1.92	-0.72	1.15	-3.31	0.57
IV	0.3	4.64	-5.66	-5.48	-0.10	1.44
1983
I	5.1	2.54	2.20	0.94	-0.30	0.63
II	9.3	5.22	5.87	3.51	-2.54	0.75
III	8.1	4.66	4.30	0.60	-2.32	1.48
IV	8.5	4.20	6.84	3.09	-1.17	-1.35
1984
I	8.0	2.35	7.15	5.07	-2.37	0.86
II	7.1	3.75	2.44	-0.30	-0.89	1.79
III	3.9	2.02	-0.89	0.21	-0.36	0.62
IV	3.3	3.38	1.79	-2.50	-0.58	1.75
1985
I	3.8	4.34	-2.38	-2.94	0.91	0.95

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_adv.pdf

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr

Important aspects of the national accounts are provided in Table 8. The top part of the table identifies sources of change in the rate of growth from one quarter to a future quarter by seasonally-adjusted annual rates (SAAR). The increase in growth in IIIQ2011 relative to the IIQ2011 originated in: (1) increase of personal consumption expenditures by 2.3 percent compared with 0.7 percent of which an increase of consumption of durable goods by 5.5 percent compared with decline by 5.3 percent in IIQ2011; (2) increase in growth of nonresidential fixed investment (NRFI) from 10.3 percent in IIQ2011 to 14.8 percent in IIIQ2011; (3) increase of exports from 3.6 percent in IIQ2011 to 4.3 percent in IIIQ2011; (4) deceleration of decline of state/local government expenditures from minus 2.8 percent in IIQ2011 to minus 1.4 percent in IIIQ2011; (5) increase in federal government expenditures from 1.9 percent in IQ2011 to 1.9 percent in both IIQ2011 and IIIQ2011; and deceleration of growth of imports from 1.4 percent to 0.5 percent. Negative contributions to acceleration of growth into IIIQ2011 originated in (1) deceleration of residential fixed (RFI) investment from 4.2 percent to 1.6 percent; and (2) reduction of private inventories by 1.55 percentage points.

Table 8, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IVQ2010	IQ2011	IIQ2011	IIIQ2011
GDP	2.3	0.4	1.3	2.0
PCE	3.6	2.1	0.7	2.3
Durable Goods	17.2	11.7	-5.3	5.5
NRFI	8.7	2.1	10.3	14.8
RFI	2.5	-2.4	4.2	1.6
Exports	7.8	7.9	3.6	4.3
Imports	-2.3	8.3	1.4	0.5
GOV	-2.8	-5.9	-0.9	-0.1
Federal GOV	-3.0	-9.4	1.9	1.9
State/Local GOV	-2.7	-3.4	-2.8	-1.4
∆ PI (PP)	-1.79	0.32	-0.28	-1.55
Final Sales of Domestic Product	4.2	0.0	1.6	3.6
Gross Domestic Purchases	0.9	0.7	1.0	1.5
Prices Gross Domestic Purchases	1.4	1.9	2.6	2.9
Prices of GDP	1.9	2.5	2.5	2.5
Prices of GDP Excluding Food and Energy	1.3	2.5	2.7	1.8
Prices of PCE	1.9	3.9	3.3	2.3
Prices of PCE Excluding Food and Energy	0.7	1.6	2.3	2.0
Prices of Market Based PCE	1.8	4.0	3.5	2.6
Prices of Market Based PCE Excluding Food and Energy	0.3	1.3	2.4	2.3
Real Disposable Personal Income*	3.5	2.6	1.1	0.0
Personal Savings As % Disposable Income	5.2	5.0	4.8	3.8

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_adv.pdf

Final sales of domestic product rose from 1.6 percent in IIQ2011 to 3.6 percent in IIIQ2011. Price indicators of GDP and gross domestic purchases accelerated into IIIQ2011. Prices of PCE excluding food and energy, which is the inflation indicator of monetary policy, fell from change of 2.3 percent in IIQ2011 to 2.0 percent in IIIQ2011. Similar behavior is observed for the other market-based price indexes. The final two rows of Table 8 show no growth real disposable income in IIIQ2011 relative to IIIQ2010 and reduction of of personal savings as percent of disposable income from 4.8 to 3.8 percent in IIIQ2011. Families interrupted saving and consumed.

Percentage shares of GDP are shown in Table 9. PCE is equivalent to 70.6 percent of GDP and is growing at very low levels with stagnation of real disposable income, high levels of unemployment and underemployment and higher savings rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth.

Table 9, US, Percentage Shares of GDP, %

	IVQ2010
GDP	100.0
PCE	70.6
Goods	23.6
Services	47.0
Gross Private Domestic Investment	12.3
Fixed Investment	12.1
NRFI	9.8
RFI	2.2
Change in Private Inventories	0.3
Net Exports of Goods and Services	-3.4
Exports	13.1
Imports	16.5
Government	20.5
Federal	8.4
State and Local	12.1

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Table 10 shows the percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009 and 2010. The data incorporate the new revisions released by the BEA on Jul 29, 2011. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 3.0 percent in 2010 after six consecutive quarters of growth. The annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions. PCEs contributed 1.44 PPs to GDP growth in 2010 of which 0.99 PP in goods and 0.46 PP in services. GDI deducted 3.61 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.84 PP of ∆PI and added 1.96 PPs to GDI in 2010 of which 0.48 PPs of fixed investment and 1.64 PPs of ∆PI. Trade, or exports of goods and services net of imports, contributed 1.11 PPs in 2009 of which exports deducted 1.18 PPs and imports added 2.29 PPs. In 2010, trade deducted 0.51 PP with exports contributing 1.31 PPs and imports deducting 1.82 PPs. In 2009, Government added 0.34 PP of which 0.45 PP by the federal government and -0.11 PP by state and local government; in 2010, government added 0.14 PP of which 0.37 PP by the federal government with state and local government deducting 0.23 PP.

Table 10, US, Percentage Point Contributions to the Annual Growth Rate of GDP

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.9	0.54	-1.25	-0.18	-0.89	0.70
1959	7.2	3.61	2.80	0.86	0.00	0.76
1975	-0.2	1.40	-2.98	-1.27	0.89	0.48
1976	5.4	3.51	2.84	1.41	-1.08	0.10
1982	-1.9	0.86	-2.55	-1.34	-0.60	0.35
1983	4.5	3.65	-1.45	0.29	-1.35	0.76
1984	7.2	3.43	4.63	1.95	-1.58	0.70
1985	4.1	3.32	-0.17	-1.06	-0.42	1.41
2009	-3.5	-1.32	-3.61	-0.84	1.11	-0.09
2010	3.0	1.44	1.96	1.64	-0.51	0.14

Source:

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf

II Falling Real Disposable Income and Repression of Savings. Subsection IIA Falling Real Disposable Income provides analysis of the personal income and consumption outlays of the Bureau of Economic Analysis for Oct. Subsection IIB Repression of Savings analyzes financial repression and how it is affecting savings in the US.

Subsection IIA Falling Real Disposable Income. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. There are two types of very valuable information on income, consumption and prices in Table 11, showing monthly, and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE.

Table 11, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2011
Oct	0.4	0.3	0.3	0.1	0.1
Sep	0.1	0.1	-0.1	0.7	0.5
Aug	-0.1	-0.1	-0.4	0.2	-0.1
Jul	0.1	0.0	-0.3	0.9	0.5
Jun	0.1	0.1	0.2	-0.2	-0.1
May	0.3	0.2	0.0	0.2	0.0
Apr	0.4	0.3	0.0	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	1.6	0.1	0.4	0.0
Jan-Oct 2011	3.7	3.4	–0.1	4.1	1.5
Jan-Oct 2011 AE	4.4	4.1	–0.1	4.9	1.8
2010
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ10	1.1	1.1	0.5	1.4	0.8
IVQ2010 AE	4.5	4.5	2.0	5.7	3.2

Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi1011.pdf http://www.bea.gov/iTable/index_nipa.cfm

First, the data in Table 11 reveal the weakness of the economy. The column RDPI (real disposable income) shows that after ten months in 2011 in Jan-Oct growth of RDPI has accumulated to minus 0.1 percent, which for a full year is equivalent to minus 0.1 percent. Growth of real personal consumption expenditures accumulated to 1.5 percent in Jan-Oct, which is equivalent to yearly growth of 1.8 percent. Inflation creates the illusion that there has been growth of income, when in fact RDPI stagnated, and growth of consumption, which in fact has grown at the mediocre annual equivalent rate of 1.8 percent. Growth is the result of drawing down savings instead of growth of income and opportunities. The growth engine of the US economy has stalled with resulting adverse effects on job creation and opportunities for advancement.

Second, the difference between NDPI and RDPI (NDPI/RDPI) and NPCE and RPCE (NPCE/RPCE) indicates inflation. Let the rate of inflation be π, the percentage change in nominal value NV and the change in real value rv. Then:

(1+π)(1+rv) = (1+NV) (1)

Thus, if we know (1+NV) and (1+rv), simple rearrangement provides (1+π):

(1+π) = (1+NV)/(1+rv) (2)

The growing gap between NDPI/RDPI and NPCE/RPCE is inflation and accelerating from the final quarter of 2010 to the first ten months of 2011 but at slower rate since the drop in commodity prices beginning in May. The gap becomes more evident in the cumulative percentages Jan-Oct 2011 and IVQ2010 and their annual equivalents Jan-Oct 2011 AE and IVQ2010 AE. The annual equivalent gap of NDPI/RDPI in Jan-Oct 2011 in Table 11 is 4.2 percent (1.041/0.999), which is much higher than in IVQ2010 of 2.5 percent (1.045/1.02). The gap NPCE/RPCE in Jan-Oct 2011 in Table 11 is 3.1 percent (1.049/1.018), which is much higher than 2.4 percent (1.057/1.032) in IVQ2010. There is a radical change in the pattern of US growth. RDPI was growing at the annual equivalent rate of 2.0 percent with real PCE growing at 3.2 percent in annual equivalent in IVQ2010. In the first ten months of 2011, RDPI has contracted at the annual equivalent rate of 0.1 percent and real PCE continues to grow at 1.98 percent at the expense of reduction of the savings rate. Inflation in the deflator of personal income and outlays is moving toward 3 percent per year. That is, the government is benefitting from a tax known as the inflation tax. By issuing money through its central bank the government buys goods and services. In a situation of sizeable deficits and inflation, the government gains by purchasing before effects of issuing money that causes increases in prices (see http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-financial.html Pelaez and Pelaez, International Financial Architecture (2005), 201-12). This is a hidden but actually felt contribution of monetary accommodation to financing bloated government expenditures. The new inflation tax argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates.

Further information on income and consumption is provided by Table 12. The 12-month rates of increase of RDPI and RPCE in the first nine months of 2011 show a sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 0.9 to 0.4 percent in May-Jul. In Aug 2011, RDPI fell 0.2 percent relative to Aug 2010; RDPI fell 0.2 percent in Sep 2011 relative to Sep 2010; and RDPI fell 0.1 percent in Oct 2011 relative to Oct 2010. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.4 percent in Jul, 1.9 percent in Aug, 2.2 in Sep and 2.0 percent in Oct. Market participants have been concerned with data in Tables 11 and 12 showing more subdued growth of RPCE. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12 months rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 6.3 to 7.1 percent in the quarter May-Jul and then 6.0 percent in Aug, rebounding to 7.7 percent in Sep but falling to 6.1 percent in Oct. RPECG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.9 to 4.0 percent in the quarter May-Jul and then only 2.4 percent in Aug, 3.1 percent in Sep and 2.5 percent in Oct.

Table 12, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2011
Oct	-0.1	2.0	2.5	6.1	1.7
Sep	-0.2	2.2	3.1	7.7	1.8
Aug	-0.2	1.9	2.4	6.0	1.6
Jul	0.4	2.4	3.9	7.1	1.7
Jun	0.8	2.0	3.4	6.3	1.4
May	0.9	2.2	4.0	7.8	1.4
Apr	1.6	2.5	4.7	9.2	1.4
Mar	2.4	2.6	4.5	9.3	1.7
Feb	2.7	2.9	5.9	12.8	1.4
Jan	2.8	2.9	5.8	12.0	1.5
2010
Dec	3.2	2.8	5.4	10.2	1.6
Nov	3.6	3.2	5.9	10.2	1.9
Oct	3.8	2.9	6.1	12.2	1.3
Sep	3.1	2.7	5.6	10.5	1.4

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf http://www.bea.gov/iTable/index_nipa.cfm

Chart 11 shows US real personal consumption expenditures (RPCE) between 1995 and 2011. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart 11, US, Real Personal Consumption Expenditures 1995-2011

Source: US Bureau of Economic Analysis http://www.bea.gov/national/index.htm#personal

Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart 12 from 1995 to 2011. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart 12 that the average rate of growth of RPCE was higher before the recession than during the past nine quarters of expansion that began in IIIQ2009.

Chart 12, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/national/index.htm#personal

Personal income and its disposition are shown in Table 13. An important adversity is shown in Table 13 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to the contraction by $11.3 billion in Aug relative to Jul. In the same period, growth of wages and salaries fell from $55.4 billion in Jan/Dec to contraction by 7.1 billion in Aug/Jul. In Sep/Aug income recovered 0.1 percent and wages and salaries 0.4 percent. In Oct/Sep, personal income rose $48.1 billion, or 0.4, and wages and salaries gained $33.2 billion, or 0.5 percent. The final column of Table 13 shows the decline of the savings rate from 5.2 percent in Dec 2010 to 3.5 percent in Sep 2011. The mediocre recovery of the economy is significantly driven by consuming out of savings with negative growth of real disposable personal income.

Table 13, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Oct	13,029.9	6,689.9	1433.1	11,596.8	3.5
Sep	12,981.8	6,656.7	1,415.3	11,566.6	3.3
Change Oct/Sep	48.1 ∆% 0.4	33.2 ∆% 0.5	17.8 ∆% 1.3	30.2 ∆% 0.3
Aug	12,966.3	6,630.4	1,407.5	11,558.8	3.9
Change Sep/Aug	15.5 ∆% 0.1	26.3 ∆% 0.4	7.8 ∆% 0.6	7.8 ∆% 0.1
Jul	12,977.6	6,637.5	1,407.3	11,570.3	4.1
Change Aug/Jul	-11.3 ∆% –0.1	-7.1 ∆% –0.1	0.2 ∆% 0.0	-11.5 ∆% -0.1
Jun	12,970.1	6,615.1	1,403.2	11,566.9	5.0
Change Jul/Jun	7.5 ∆% 0.1	22.4 ∆% 0.3	4.1 ∆% 0.3	3.4 ∆% 0.0
May	12,957.2	6,619.6	1,397.4	11,559.7	4.7
Change Jun/ May	12.9 ∆% 0.1	-4.5 ∆% -0.1	5.8 ∆% 0.4	7.2 ∆% 0.1
Apr	12,938.7	6,616.5	1,387.9	11,550.8	4.8
Change May/ Apr	18.5 ∆% 0.1	3.1 ∆% 0.0	9.5 ∆% 0.7	8.9 ∆% 0.1
Mar	12,909.7	6,614.8	1,377.7	11,532.1	4.9
Change Apr/ Mar	29.0 ∆% 0.2	1.7 ∆% 0.0	10.2 ∆% 0.7	18.7 ∆% 0.2
Feb	12,850.6	6,582.9	1,367.1	11,483.5	5.0
Change Mar/ Feb	59.1 ∆% 0.5	31.9 ∆% 0.5	10.6 0.8	48.6 ∆% 0.4
Jan	12,780.3	6,536.8	1,352.8	11,427.5	5.2
Change Feb/Jan	70.3 ∆% 0.6	46.1 ∆% 0.7	14.3 ∆% 1.1	56.0 ∆% 0.5
Dec 2010	12,625.0	6,481.4	1,247.6	11,377.3	5.2
Change Jan/ Dec	155.3 ∆% 1.2	55.4 ∆% 0.9	105.2 ∆% 8.4	50.2 ∆% 0.4

Source:

http://www.bea.gov/iTable/index_nipa.cfm

Chart 13 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.

Chart 13, US, Personal Income, Billion Dollars, Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

A different evolution of personal income is shown in Chart 14. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income has been anemic and has stalled in 2011.

Chart 14, US, Personal Income, Current Billions of Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source:

http://www.bea.gov/iTable/index_nipa.cfm

Real or inflation-adjusted disposable personal income is provided in Chart 15 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.

Chart 15, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The stagnation of real disposable income is evident in Chart 16. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. The 12 months rates of growth real disposable income in Aug 2011 of 0.1 percent and Sep 2011 of 0.2 percent are barely positive. In fact, as Table 11 shows, real disposable income in the US contracted by 0.3 percent cumulatively in Jan-Sep 2011 at the annual equivalent rate of minus 0.4 percent.

Chart 16, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 17 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.

Chart 17, US, Real Disposable Income Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 18 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2011. There has been a period of positive rates followed by decline of rates and then negative rates.

Chart, 18, US, Real Disposable Income, Percentage from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Oct 2011 at the seasonally adjusted annual rate of $13,029.9 billion, as shown in Table 13 above (http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi1011.pdf Table 1, page 6). The major portion of personal income is compensation of employees of $8,304.7 billion, or 63.7 percent of the total. Wage and salary disbursements are $6,689.9 billion, of which $5,502.4 by private industries, and supplements to wages and salaries of employer contributions to pension and insurance funds and Social Security are $1110.1 billion. The major portion of personal income is compensation of employees of $8,313.1 billion, or 63.8 percent of the total. Wage and salary disbursements are $6,699.0 billion, of which $5,508.4 by private industries, and supplements to wages and salaries of employer contributions to pension and insurance funds and Social Security are $1164.1 billion. Chart 19 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.

Chart 19, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 20 shows US wage and salary disbursement of private industries from 2007 to 2011. There is a drop during the contraction followed by initial recovery in 2010 and then the current stagnation in 2011.

Chart 20, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart 21, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

IIB Repression of Savings. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:

Friedman (1970, 26-7) predicted the future:

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”

Chart 22 provides savings as percent of disposable income or the US savings rate. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 the savings rate has been declining as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart 22, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

III World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past few weeks. Table 14, updated with every comment in this blog, provides beginning values on Fr Nov 18 and daily values throughout the week ending on Fri Nov 25 of several financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Nov 18 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3517/EUR in the first row, first column in the block for currencies in Table 9 for Fri Nov 18, appreciating to USD 1.3498/EUR on Mon Nov 21, or by 0.1 percent. The dollar appreciated because fewer dollars, $1.3498, were required on Nov 21 to buy one euro than $1.3517on Nov 18. Table 14 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention is required to maintain consistency in characterizing movements of the exchange rate in Table 14 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3498/EUR on Nov 21; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Nov 18, to the last business day of the current week, in this case Fri Nov 25, such as appreciation of 2.0 percent for the dollar to USD 1.324/EUR by Nov 25; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (positive sign) by 2.0 percent from the rate of USD 1.3517/EUR on Fri Nov 18 to the rate of USD 1.324/EUR on Fri Nov 25 {[(1.324/1.3517) – 1]100 = -2.0%} and appreciated by 0.7 percent from the rate of USD 1.3327 on Thu Nov 24 to USD 1.324/EUR on Fri Nov 25 {[(1.324/1.3327) -1]100 = -0.7%}. The dollar appreciated during the week because fewer dollars, $1.324, were required to buy one euro on Fri Nov 25 than $1.3517 required to buy one euro on Fri Nov 18. The depreciation of the dollar in the week was caused by increasing risk aversion, largely resulting with the uncertainty on European sovereign risks, with purchases of risk financial investments by reduction of dollar-denominated assets.

Table 14, Weekly Financial Risk Assets Nov 21 to Nov 25, 2011

Fri Nov 18, 2011

M 21

Tu 22

W 23

Th 24

Fr 25

USD/
EUR 1.3517

1.7%

1.3498

0.1%

1.3514

0.0%

0.1%

1.3335

1.3%

1.3327

1.4%

0.1%

1.324

2.0%

0.7%

JPY/
USD 76.88

0.3%

76.9543

-0.1%

76.9755

-0.1%

0.0%

77.3430

-0.6%

-0.5%

77.3855

-0.7%

-0.1%

77.7

-1.1%

-0.4%

CHF/
USD 0.916

-1.9%

0.9169

-0.1%

0.9140

0.2%

0.3%

0.9201

-0.4%

-0.7%

0.9212

-0.6%

-0.1%

0.933

-1.9%

-1.3%

CHF/EUR

1.2390

0.0%

1.2376

0.1%

1.2351

0.3%

0.2%

1.2270

1.0%

0.7%

1.2277

0.9%

-0.1%

1.2317

0.6%

-0.3%

USD/
AUD

1.001

0.9990

2.7%

0.9852

1.015

-1.6%

0.9836

1.0167

-1.8%

-0.2%

0.9688

1.0322

-3.3%

-1.5%

0.9692

1.0318

-3.3%

0.0%

0.971

1.0299

-3.1%

0.2%

10 Year
T Note

2.003

1.97

1.93

1.883

1.91

1.964

2 Year T Note 0.282

0.26

0.262

0.27

0.275

Germany Bond

2Y 0.47 10Y 1.97

2Y 0.41 10Y 1.91

2Y 0.39 10Y 1.92

2Y 0.44 10Y 2.15

2Y 0.47 10Y 2.19

2Y 0.46 10Y 2.26

DJIA

11796.16

-2.9%

-2.1%

-2.6%

-0.5%

-4.6%

-2.1%

-4.6%

-2.1%

-4.8%

-0.2

DJ Global

1784.40

-4.2%

-2.4%

-2.8%

-0.4%

-5.2%

-2.4%

-5.4

-0.2%

DJ Asia Pacific

1170.84

-2.6%

-1.6%

0.0%

-3.3%

-1.7%

-4.5%

-1.2%

Nikkei

8374.91

-1.6%

-1.2%

-0.3%

-0.7%

-0.4%

-0.7%

-0.4%

-2.5%

-1.8%

-2.6%

-0.1%

Shanghai

2416.56

-2.6%

-0.1%

-0.2%

-0.1%

-0.9%

-0.7%

-0.8%

0.1%

-1.5%

-0.7%

DAX

5800.24

-4.2

-3.3%

-4.5%

-1.2%

-5.9%

-1.4%

-6.4%

-0.5%

-5.3%

1.1%

DJ UBS

Commodities

144.90

-2.7%

-1.2%

-0.4%

0.9%

-1.7%

-1.3%

-2.2%

-0.5%

WTI $ B

97.81

-1.2%

97.190

-0.6%

97.91

0.1%

0.7%

96.13

-1.7%

-1.8%

96.49

-1.3%

0.4%

96.77

-1.1%

0.3%

Brent $/B

107.58

-5.8%

107.02

-0.5%

109.14

1.5%

2.0%

107.13

-0.4%

-1.8%

107.49

-0.1%

0.3%

106.40

-1.1%

-1.0%

Gold $/OZ

1723.7

-3.7%

1682.1

-2.4%

1699.5

-1.4%

1.0%

1696.4

-1.6%

-0.2%

1697.1

-1.5%

0.0%

1688.5

-2.0

-0.5%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Source:

http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Risk aversion returned in the past three weeks because of the uncertainties on rapidly moving political development in Greece, Italy, Spain and perhaps even in France and Germany. Most currency movements in Table 14 reflect risk aversion. The dollar appreciated 2.0 percent relative to the euro after appreciating 1.7 percent in the prior week. Safe-haven currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY) have been under threat of appreciation. A characteristic of the global recession would be struggle for maintaining competitiveness by policies of regulation, trade and devaluation (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation War (2008c)). Appreciation of the exchange rate causes two major effects on Japan.

1. Trade. Consider an example with actual data (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-72). The yen traded at JPY 117.69/USD on Apr 2, 2007 and at JPY 102.77/USD on Apr 2, 2008, or appreciation of 12.7 percent. This meant that an export of JPY 10,000 to the US sold at USD 84.97 on Apr 2, 2007 [(JPY 10,000)/(USD 117.69/USD)], rising to USD 97.30 on Apr 2, 2008 [(JPY 10,000)/(JPY 102.77)]. If the goods sold by Japan were invoiced worldwide in dollars, Japanese’s companies would suffer a reduction in profit margins of 12.7 percent required to maintain the same dollar price. An export at cost of JPY 10,000 would only bring JPY 8,732 when converted at JPY 102.77 to maintain the price of USD 84.97 (USD 84.97 x JPY 102.77/USD). If profit margins were already tight, Japan would be uncompetitive and lose revenue and market share. The pain of Japan from dollar devaluation is illustrated by Table 58 in the Nov 6 comment of this blog (http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html): The yen traded at JPY 110.19/USD on Aug 18, 2008 and at JPY 75.812/USD on Oct 28, 2011, for cumulative appreciation of 31.2 percent. Cumulative appreciation from Sep 15, 2010 (JPY 83.07/USD) to Oct 28, 2011 (JPY 75.812) was 8.7 percent.

2. Foreign Earnings and Investment. Consider the case of a Japanese company receiving earnings from investment overseas. Accounting the earnings and investment in the books in Japan would also result in a loss of 12.7 percent. Accounting would show fewer yen for investment and earnings overseas.

There is a point of explosion of patience with dollar devaluation and domestic currency appreciation. Andrew Monahan, writing on “Japan intervenes on yen to cap sharp rise,” on Oct 31, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204528204577009152325076454.html?mod=WSJPRO_hpp_MIDDLETopStories), analyzes the intervention of the Bank of Japan, at request of the Ministry of Finance, on Oct 31, 2011. Traders consulted by Monahan estimate that the Bank of Japan sold JPY 7 trillion, about $92.31 billion, against the dollar, exceeding the JPY 4.5 trillion on Aug 4, 2011. The intervention caused an increase of the yen rate to JPY 79.55/USD relative to earlier trading at a low of JPY 75.31/USD. The JPY appreciated to JPY76.88/USD by Fri Nov 18 for cumulative appreciation of 3.4 percent from JPY 79.55 just after the intervention. The JPY appreciated another 0.3 percent in the week of Nov 18 but depreciated 1.1 percent in the week of Nov 25. Historically, interventions in yen currency markets have been unsuccessful (Pelaez and Pelaez, The Global Recession Risk (2007), 107-109). Interventions are even more difficult currently with daily trading of some $4 trillion in world currency markets. Risk aversion with zero interest rates in the US diverts hot capital movements toward safe-haven currencies such as Japan, causing appreciation of the yen. Mitsuru Obe, writing on Nov 25, on “Japanese government bonds tumble,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060231493070676.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the increase in yields of the Japanese government bond with 10 year maturity to a high for one month of 1.025 percent at the close of market on Nov 25. Thin markets in after-hours trading may have played an important role in this increase in yield but there may have been an effect of a dreaded reduction in positions of bonds by banks under pressure of reducing assets. The report on Japan sustainability by the IMF (2011JSRNov23, 2), analyzes how rising yields could threaten Japan:

 “As evident from recent developments, market sentiment toward sovereigns with unsustainably large fiscal imbalances can shift abruptly, with adverse effects on debt dynamics. Should JGB yields increase, they could initiate an adverse feedback loop from rising yields to deteriorating confidence, diminishing policy space, and a contracting real economy.

 Higher yields could result in a withdrawal of liquidity from global capital markets, disrupt external positions and, through contagion, put upward pressure on sovereign bond yields elsewhere.”

Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc depreciated 1.9 percent relative to the USD in the week of Nov 18 and remained unchanged relative to the euro. Risk aversion is evident in the depreciation of the Australian dollar by cumulative 3.1 percent in the week of Fr Nov 25 after additional depreciation by 2.7 percent in the week of Nov 18. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Increasing risk aversion is captured by decrease of the yield of the 10-year Treasury note from 2.326 percent on Oct 28 to 1.964 percent on Fri Nov 25. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.5 percent in the 12 months ending in Oct (http://www.bls.gov/cpi/). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with declining yield of 0.275 on Nov 25. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities.

A similar risk aversion phenomenon occurs in Germany. The estimate of euro zone CPI inflation is at 3.0 percent for the 12 months ending in Oct (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16112011-AP/EN/2-16112011-AP-EN.PDF) but the yield of the two-year German government bond remained at 0.46 percent by Nov 25. The yield of the 10-year German government bond rose to 2.25 percent on Fri Nov 25. Safety overrides inflation-adjusted yield but there could be duration aversion. Turbulence also affected the market for German sovereign bonds. Emese Bartha, Art Patnaude and Nick Cawley, writing on “German bond auction falls flat,” on Nov 23, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204630904577055590007145230.html?mod=WSJPRO_hpp_LEFTTopStories), find decrease in risk appetite even for the highest quality financial assets in the euro zone. The auction of €6 billion of 10-year bunds on Nov 23 placed only €3.664 billion, or 60.7 percent. Although inflation of consumer prices in the UK at 5.0 percent exceeds euro zone inflation at 3.0 percent, David Oakley, Tracy Alloway, Alex Barker and Gerrit Wiesmann, writing on “UK borrowing costs drop below Germany,” on Nov 24, published in the Financial Times (http://www.ft.com/intl/cms/s/0/78994200-15c2-11e1-8db8-00144feabdc0.html#axzz1eWzvlRSp), inform that on Thu Nov 24 the UK 10-year gilt traded at 2.20 percent, which was lower than the yield of 2.23 percent of the German 10-year bond. Richard Milne, writing on “Italian bond yields rise above 8%,” on Nov 25, published in the Financial Times (http://www.ft.com/intl/cms/s/0/07079856-1754-11e1-b20e-00144feabdc0.html#axzz1eoXVrMVL), provides a quote of 8.13 percent for two-year Italian government bonds registered by Reuters’ data. Emese Bartha, writing on “Italy leads busy week of euro-zone bond sales,” on Nov 25, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060002367158964.html?mod=WSJPRO_hpp_LEFTTopStories), informs that Italy, Belgium, Spain and France are auctioning bonds in the week of Nov 28. Stacy Meichtry and Jonathan Cheng, writing on Nov 26, on “New strains hit euro, global markets,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060660416404298.html?mod=WSJPRO_hpp_LEFTTopStories), inform that the planned auction of bonds by five euro zone governments is for €19 billion.

World equity markets suffered sharp losses during the week in the uncertainty of the details and implementation of the deal of the European bank and sovereign debt deal and rapidly moving political development in Greece, Italy and now Spain. All the equity indexes in Table 14 fell during the week of Nov 18 with sharp drops of 4.8 percent for the DJIA, 5.4 percent for the Dow Global, 5.3 percent for the Dax and 5.4 percent for the Dow Asia Pacific. Stacy Meichtry and Jonathan Cheng, in the article for the WSJ quoted in the prior paragraph, inform that the performance of stocks in the US was the worst for a Thanksgiving week since 1942 and that the DJIA has dropped 7.6 percent in the past two weeks. The Shanghai Composite dropped 1.5 percent and the Nikkei dropped 2.6 percent.

Financial risk assets increase during moderation of risk aversion in carry trades from zero interest rates and fall during increasing risk aversion. Commodities fell together with equity indexes. The DJ-UBS commodities index fell 2.2 percent in the week of Nov 25, Brent lost 1.1 percent and WTI also fell 1.1 percent. Even gold fell 2.0 percent in the week of Nov 25.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the following Subsection IIIA Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. Throughout the week of Nov 25 the yield of the 2-year bond of the government of Greece was quoted mostly above 80 percent, exceeding 90 percent on Nov 24, and the 10-year bond yield traded between 25 and 30 percent. In contrast, the 2-year US Treasury note traded at 0.275 percent and the 10-year at 1.964 percent while the comparable 2-year government bond of Germany traded at 0.46 percent and the 10-year government bond of Germany traded at 2.26 percent (see Table 14). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. Financial turbulence during the week originated in the jump of the yield of the 10-year government bond of Italy close to 7 percent. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIA links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy.

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table 15 is constructed with current IMF World Economic Outlook database for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table 15, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2010 USD Billions	Primary Net Lending Borrowing % GDP 2010	General Government Net Debt % GDP 2010
World	62,911.2
Euro Zone	12,167.8	-3.6	65.9
Portugal	229.2	-6.3	88.7
Ireland	206.9	-28.9	78.0
Greece	305.4	-4.9	142.8
Spain	1,409.9	-7.8	48.8
Major Advanced Economies G7	31,716.9	-6.5	76.5
United States	14,526.6	-8.4	68.3
UK	2,250.2	-7.7	67.7
Germany	3,286.5	-1.2	57.6
France	2,562.7	-4.9	76.5
Japan	5,458.8	-8.1	117.2
Canada	1,577.0	-4.9	32.2
Italy	2,055.1	-0.3	99.4
China	5,878.3	-2.3	33.8*
Cyprus	23.2	-5.3	61.6

*Gross Debt

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The data in Table 15 are used for some very simple calculations in Table 16. The column “Net Debt USD Billions” in Table 16 is generated by applying the percentage in Table 15 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 16. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table 16, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,018.6
B Germany	1,893.0		$7385.1 as % of $3286.5 =224.7% $5424.6 as % of $3286.5 =165.1%
C France	1,960.5
B+C	3,853.5	GDP $5849.2 Total Debt $7385.1 Debt/GDP: 126.3%
D Italy	2,042.8
E Spain	688.0
F Portugal	203.3
G Greece	436.1
H Ireland	161.4
Subtotal D+E+F+G+H	3,531.6

Source: calculation with IMF data http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

There is extremely important information in Table 17 for the current sovereign risk crisis in the euro zone. Table 17 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Sep. German exports to other European Union members are 58.9 percent of total exports in Sep and 59.7 percent in Jan-Sep. Exports to the euro area are 40.0 percent in Sep and 40.1 percent in Jan-Sep. Exports to third countries are only 40.4 percent of the total in Sep and 40.3 percent in Jan-Sep. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone.

Table 17, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Sep 2011 € Billions	12 Months ∆%	Jan-Sep 2011 € Billions	Jan-Sep 2011/ Jan-Sep 2010 ∆%
Total Exports	95.0	10.5	791.7	13.5
A. EU Members	56.6 % 58.9	10.8	472.3 % 59.7	12.7
Euro Area	38.0 % 40.0	11.5	317.4 % 40.1	11.4
Non-euro Area	18.6 % 19.6	9.5	154.9 % 19.6	15.4
B. Third Countries	38.4 % 40.4	10.1	319.4 % 40.3	14.8
Total Imports	77.6	11.6	672.8	15.3
C. EU Members	50.1 % 64.5	13.8	426.5 % 63.4	16.0
Euro Area	34.7 % 44.7	13.0	300.3 % 44.6	15.2
Non-euro Area	15.4	15.6	126.2	17.9
D. Third Countries	27.5 % 35.4	7.9	246.4 % 36.6	14.2

Notes: Total Exports = A+B; Total Imports = C+D

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__408__51,templateId=renderPrint.psml

IIIA Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unepleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_t_{, t+τ})s_t_+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

IV. Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 18 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Newly available data on inflation is considered below in this section. The data in Table 18 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 18. Data for other countries in Table 18 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table 18, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.5	3.5	5.9	9.0
Japan	0.0	-0.2	1.7	4.2
China	9.1	5.5	5.0
UK	0.5	5.0* RPI 5.4	5.7* output 14.1* input 10.5**	8.3
Euro Zone	1.4	3.0	5.8	10.2
Germany	2.5	2.9	5.5	5.2
France	1.6	2.5	6.0	9.9
Nether-lands	1.1	2.8	7.5	4.5
Finland	2.8	3.2	6.2	7.8
Belgium	1.8	3.4	6.9	6.7
Portugal	-1.7	4.0	5.5	12.5
Ireland	NA	1.5	4.2	14.2
Italy	NA	3.8	4.7	8.3
Greece	-5.2	2.9	8.1	17.6
Spain	0.8	3.0	7.1	22.6

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/october-2011/index.html

CPI http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/october-2011/index.html** Excluding food, beverage, tobacco and petroleum

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table 18 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.5 percent in IIIQ2011 relative to IIIQ2010 (Table 8, p 11 in http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_2nd.pdf); Japan’s GDP is flat in IIIQ2011 relative to IIIQ2010 but contracted 1.1 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011; the UK grew at 0.5 percent in IIIQ2011 relative to IIIQ2010; and the Euro Zone grew at 1.4 percent in IIIQ2011 relative to IIIQ2010. These are stagnating or “growth recession” rates, which are positive growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 9.0 percent in the US but 18.1 percent for unemployment/underemployment (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html), 4.2 percent for Japan, 8.3 percent for the UK with high rates of unemployment for young people and 10.2 percent in the Euro Zone. Twelve months rates of inflation have been quite high, even when some are moderating at the margin: 3.5 percent in the US, minus 0.2 percent for Japan, 3.0 percent for the Euro Zone and 5.0 for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section II in this post http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html) (2) the tradeoff of growth and inflation in China; (3) slow growth (see I Slow Growth by Reducing Savings http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html), weak hiring (see Section I Recovery without Hiring, Section I United States Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I Twenty Nine Million Unemployed or Underemployed in http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see II Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.

There were no changes of direction in the meeting of the Federal Open Market Committee (FOMC) from Nov 1 to Nov 2, 2011. The FOMC released the statement as follows (http://www.federalreserve.gov/newsevents/press/monetary/20111102a.htm):

“For immediate release

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”

The FOMC also released the economic projections of governors of the Board of Governors of the Federal Reserve and Federal Reserve Banks presidents shown in Table 19. It is instructive to focus on 2012, as 2011 is almost gone, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC. The first row for each year shows the projection introduced after the meeting of Nov 2 and the second row “Jun PR” the projection of the Jun meeting. There are three major changes in the view.

1. Growth “GDP ∆.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun to 2.5 to 2.9 percent in Nov.

2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun to 8.5 to 8.7 percent in Nov.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun to virtually the same of 1.4 to 2.0 percent in Nov.

Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun of 1.4 to 2.0 percent and the Nov projection of 1.5 to 2.0 percent.

Table 19, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, November 2011

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2011 Jun PR	1.6 – 1.7 2.7 – 2.9	9.0 – 9.1 8.6 – 8.9	2.7 – 2.9 2.3 – 2.5	1.8 – 1.9 1.5 – 1.8
2012 Jun PR	2.5 – 2.9 3.3 – 3.7	8.5 – 8.7 7.8 – 8.2	1.4 – 2.0 1.5 – 2.0	1.5 – 2.0 1.4 – 2.0
2013 Jun PR	3.0 – 3.5 3.5 – 4.2	7.8 – 8.2 7.0 – 7.5	1.5 – 2.0 1.5 – 2.0	1.4 – 1.9 1.4 – 2.0
2014 Jun PR	3.0 – 3.9 NA	6.8 – 7.7 NA	1.5 – 2.0 NA	1.5 – 2.0 NA
Longer Run	2.4 – 2.7 2.5 – 2.8	5.2 – 6.0 5.2 – 5.6	1.7 – 2.0 1.7 – 2.0
Range
2011 Jun PR	1.6 – 1.8 2.5 – 3.0	8.9 – 9.1 8.4 – 9.1	2.5 – 3.3 2.1 – 3.5	1.7 – 2.0 1.5 – 2.3
2012 Jun PR	2.3 – 3.5 2.2 – 4.0	8.1 – 8.9 7.5 – 8.7	1.4 – 2.8 1.2 – 2.8	1.3 – 2.1 1.2 – 2.5
2013 Jun PR	2.7 – 4.0 3.0 – 4.5	7.5 – 8.4 6.5 – 8.3	1.4 – 2.5 1.3 – 2.5	1.4 – 2.1 1.3 – 2.5
2014 Jun PR	2.7 – 4.5 NA	6.5 – 8.0 NA	1.5 – 2.4 NA	1.4 – 2.2 NA
Longer Run	2.2 – 3.0 2.4 – 3.0	5.0 – 6.0 5.0 – 6.0	1.5 – 2.0 1.5 – 2.0

Notes: UEM: unemployment; PR: Projection

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20111102.pdf

An old advice of business economists recommends: “Do not forecast but if you must forecast then forecast often.” The FOMC actually forecasts infrequently or at least reveals forecasts with long lags. Indicators followed by the comments in this blog do show strengthening growth from 0.8 percent at annual equivalent for the first half of 2011 to 1.4 percent for the first three quarters of 2011 (http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Recent recovery has been driven by decline in the savings rate from 5.1 percent to 4.1 percent while real disposable income has fallen by 1.7 percent. Labor markets continue to be fractured with unemployment or underemployment of 29 million, weak hiring and falling real wages. Inflation has been moving on waves with acceleration in more recent months relative to moderation in May-Jul (see section I, http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html). The translation of current trends or appearance of trends into forecasts with statistical predictive value is very difficult or nearly impossible. FOMC policy in the statement is to increase economic growth to reduce the rate of unemployment in accordance with its statutory dual mandate (http://www.federalreserve.gov/aboutthefed/mission.htm):

“The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve's duties fall into four general areas:

· conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

· supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers

· maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

· providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system”

The key phrase in this mission is: “influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”

The Board of Governors of the Federal Reserve and the Federal Reserve Banks has competence at the frontiers of knowledge to develop optimum projections based on the state of the art. The need for projections originates in the belief in lags in effect of monetary policy based on technical research (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Innovative research by Romer and Romer (2004, 1081) concludes:

“Estimates of the effects of policy using the new shock series indicates that monetary policy has large and statistically significant effects on real output. In our baseline specification, a shock of one percentage point starts to reduce industrial production after five months, with a maximum fall of 4.3 percent after two years. The peak effect is highly statistically significant. For prices, we find that the one-percentage point shock has little effect for almost two years, but then lowers the inflation rate by 2 to 3 percentage points. As a result, the price level is about 6 percent lower after four years. This estimate is overwhelmingly significant. The most important uncertainty concerns the lag in the impact of policy on prices: in some specifications, the price level begins falling within six months after the policy shock, while in others it is unchanged for as much as 22 months.”

In short, a monetary policy impulse implemented currently has effects in the future. Thus, monetary policy has to anticipate economic conditions in the future to determine doses and timing of policy impulses. Policy is actually based on “projections” such as those in Table 14 (on central banking see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 69-90, Regulation of Banks of Finance (2009b), 99-116). Bernanke (2003, 9) and Bernanke and Mishkin (1997, 106) characterize “inflation targeting” as “constrained discretion.” The constrained part means that the central bank is under the constraint of maintaining inflation at the desired level of 2.0 percent per year. The “discretion” part means that the central bank is concerned with maintaining output at the level that results in full employment. Central banks anchor inflation expectations at 2.0 percent by means of credible policy measures, that is, economic agents believe that central banks will take all required measures to prevent inflation from deviating from the goal of 2.0 percent. That credibility was lost during the stagflation of the 1960s and 1970s, which was an episode known as the Great Inflation and Unemployment (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011_05_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation). A more general and practical approach is analyzed by Svensson (2003, 429) in which central banks consider specific objectives, target levels, available information and “judgment.” Svensson (2003, 466) finds that actual practice consists of targeting forecasts of inflation. In fact, central banks also target output gaps. Policy is designed to attain the inflation forecast on the basis of existing technical knowledge, empirical information and judgment with minimization of the changes in the output gap. There is as much imprecision and resulting uncertainty in this process as in managing risk exposures by finance professionals on the basis of risk management techniques, existing information and “market sentiment.” In fact, Greenspan (2004, 36-7) has compared central banking to financial risk management (see Pelaez and Pelaez, The Global Recession Risk (2007), 212-14):

“The Federal Reserve's experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape. The term "uncertainty" is meant here to encompass both "Knightian uncertainty," in which the probability distribution of outcomes is unknown, and "risk," in which uncertainty of outcomes is delimited by a known probability distribution. In practice, one is never quite sure what type of uncertainty one is dealing with in real time, and it may be best to think of a continuum ranging from well-defined risks to the truly unknown.

As a consequence, the conduct of monetary policy in the United States has come to involve, at its core, crucial elements of risk management. This conceptual framework emphasizes understanding as much as possible the many sources of risk and uncertainty that policymakers face, quantifying those risks when possible, and assessing the costs associated with each of the risks. In essence, the risk management approach to monetary policymaking is an application of Bayesian decision making.”

Monetary policy is not superior in technique to “proprietary trading” by financial institutions but may actually be more difficult in implementation because of the complexity of knowledge of the entire economy with all of its institutions, including those engaged in trading. Traders can constantly observe changes in conditions that allow them to reverse risk exposures immediately or use loss limit rules. Traders also work in structures with tight chain of command. Rogue traders do cause major problems but infrequently. In contrast, central banks cannot reverse instantaneously the effects of policies because of the long and uncertain lags in effects of monetary policy. Central banks act in delegation of duties by the principals in Congress and the administration who also act in delegation of the ultimate principal consisting of electors. There is long delay in action of the electors in correcting policy errors.

The minutes of the meeting of the Federal Open Market Committee (FOMC) on Nov 1 and 2 reveal the view of the economic environment and risks of members of the committee (http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20111102.pdf 9):

“While recent incoming data suggested reduced odds that the economy would slide back into recession, participants still saw significant downside risks to the outlook for economic growth. Risks included potential spillovers to U.S. financial markets and institutions, and so to the broader U.S. economy, if the European debt and banking crisis were to worsen significantly. In addition, participants noted the risk of a larger-than expected fiscal tightening and the possibility that structural problems in the housing market had attenuated the transmission of monetary policy actions to the real economy. It was also noted that the extended period of highly accommodative monetary policy could eventually lead to a buildup of financial imbalances. A few participants, however, mentioned the possibility that economic growth could be more rapid than currently expected, particularly if gains in output and employment led to a virtuous cycle of improvements in household balance sheets, increased confidence, and easier credit conditions.”

There are three waves of inflation of personal consumption expenditures (PCE) in 2011 shown in Table 20. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. The first wave is in Jan-Apr when headline PCE inflation grew at the average annual equivalent rate of 4.6 percent and PCE inflation excluding food and energy at 2.1 percent. The drivers of inflation were increases in food prices at the annual equivalent rate of 8.7 percent and of energy prices at 41.7 percent. This behavior will prevail under zero interest rates and relaxed risk aversion. The second wave occurred in May and Jun when risk aversion from the European sovereign risk crisis interrupted the carry trade. Taking a longer perspective, the annual equivalent rate of PCE headline inflation is 2.4 percent for May-Sep and 2.2 percent for PCE inflation excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep of headline PCE inflation of 3.7 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 27.3 percent. Increased risk aversion explains negative and subdued price changes in Oct with headline PCE prices falling 0.1 percent while PCE prices excluding food and energy rose 0.1 percent.

Table 20, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Oct	-0.1	-0.3	-0.1	0.1	0.1	0.1	-2.0
Sep	0.2	0.3	-0.4	0.1	0.0	0.5	2.1
Aug	0.3	0.4	-0.1	0.2	0.2	0.6	1.2
Jul	0.4	0.7	-0.1	0.2	0.2	0.4	2.8
∆% AE Jul-Sep	3.7	5.7	-2.4	2.0	1.6	6.2	27.3
Jun	-0.1	-0.5	0.2	0.1	0.2	0.1	-4.5
May	0.2	0.0	0.1	0.3	0.3	0.3	-1.2
∆% AE May-Sep	2.4	2.2	-0.7	2.2	2.2	4.7	0.5
Apr	0.3	0.6	0.2	0.2	0.2	0.4	2.3
Mar	0.4	0.8	0.0	0.2	0.1	0.9	3.7
Feb	0.4	0.8	0.2	0.2	0.2	0.8	3.5
Jan	0.4	0.8	0.1	0.2	0.2	0.7	2.3
∆% AE Jan-Apr	4.6	9.4	1.5	2.4	2.1	8.7	41.7
2010
Dec	0.3	0.6	-0.4	0.1	0.0	0.1	4.1
Nov	0.1	0.0	-0.2	0.1	0.1	0.0	0.1
Oct	0.2	0.4	-0.2	0.1	0.1	0.1	2.8
Sep	0.1	0.2	-0.2	0.1	0.0	0.3	1.2
Aug	0.2	0.3	-0.1	0.1	0.1	0.1	1.7
Jul	0.2	0.5	-0.3	0.1	0.0	0.1	3.4
Jun	-0.2	-0.6	-0.3	0.1	0.1	-0.2	-3.6
May	-0.1	-0.6	-0.2	0.2	0.1	0.0	-2.9
Apr	0.0	-0.2	-0.2	0.2	0.1	0.2	-0.5
Mar	0.2	-0.1	0.0	0.3	0.2	0.2	-0.4
Feb	0.1	-0.1	-0.3	0.2	0.1	0.2	-0.2
Jan	0.2	0.5	0.2	0.1	0.1	0.2	2.7

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: http://www.bea.gov/iTable/index_nipa.cfm

The charts of PCE inflation are also instructive. Chart 23 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2001 around 0.2 percent per month.

Chart 23, US, Percentage Change of PCE Price Index from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart 24. The exclusion of commodity components eliminates negative changes with one exception. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding two outliers.

Chart 24, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As with all commodity prices, oscillations of the PCE price index of food in Chart 25 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010.

Chart 25, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The band of fluctuation of the PCE price index of energy in Chart 26 is much wider. An interesting feature is the abundance of negative changes.

Chart 26, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table 21 provides 12 months rates of PCE inflation. While headline PCE inflation has increased from 1.5 percent in Jan to 2.7 percent in Oct, PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.0 percent in Jan to 1.7 percent in Oct, which is still below the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.

Table 21, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Oct	2.7	4.2	-0.5	1.9	1.7	5.1	15.1
Sep	2.9	4.9	-0.7	2.0	1.6	5.1	20.7
Aug	2.9	4.8	-0.5	1.9	1.7	4.8	19.6
Jul	2.8	4.7	-0.2	1.8	1.6	4.3	20.2
Jun	2.6	4.5	-0.5	1.7	1.4	3.9	20.8
May	2.6	4.4	-1.0	1.7	1.3	3.6	21.9
Apr	2.4	3.9	-1.4	1.6	1.2	3.3	19.8
Mar	2.0	3.0	-1.8	1.5	1.0	3.1	16.5
Feb	1.8	2.1	-1.8	1.6	1.1	2.4	11.9
Jan	1.5	1.2	-2.3	1.6	1.0	1.8	7.9
2010
Dec	1.4	1.0	-2.5	1.5	0.9	1.3	8.3
Nov	1.2	0.4	-2.4	1.5	1.0	1.3	4.1
Oct	1.3	0.6	-2.1	1.6	1.0	1.3	6.3
Sep	1.4	0.4	-1.7	1.9	1.2	1.3	4.1
Aug	1.5	0.4	-1.4	1.9	1.4	0.7	3.8

Source:

http://www.bea.gov/iTable/index_nipa.cfm

The headline PCE index is shown in Chart 27 from 1999 to 2011. There is an evident upward trend with the bump of the global recession after IVQ2010.

Chart 27, US, Price Index of Personal Consumption Expenditures 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The core consumer price index is shown in 28. There is also an upward trend but with fluctuations435

Chart 28, US, Consumer Price Index, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index excluding food and energy is shown in Chart 29. There is less pronounced long-term trend with fewer bumps because of excluding commodity items.

Chart 29, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The core consumer price index, excluding food and energy, is shown in 30. There is also an upward trend but with fluctuations.

Chart 30, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index of food is shown in Chart 31. There is a more pronounced upward trend and sharper fluctuations.

Chart 31, US, Price Index of Personal Consumption Expenditures Food 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the consumer price index of food in Chart 32. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011.

Chart 32, US, Consumer Price Index, Food, NSA, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The most pronounced trend of the PCE price indexes is that of energy in Chart 33. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart 33, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart 34 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 5o 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; and (4) new upward trend after 2010 with episodes of decline during risk aversion shocks.

Chart 34, US, Consumer Price Index, Energy Commodities, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table 22 provides the consumer price index of Japan, with inflation of 0.1 percent in Oct relative to Sep and minus 0.2 percent from Oct 2010 to Oct 2011. There is deflation in most of the 12 months rates in 2011 with the exception of Jul and Aug and stability in Sep. There are eight years of deflation and one of zero inflation in the 12 months rate of inflation in Dec from 1995 to 2010. This experience is entirely different from that of the US that shows long-term inflation. It is difficult to justify unconventional monetary policy because of risks of deflation similar to those experienced in Japan.

Table 22, Japan, Consumer Price Index, All Items ∆%

	∆% Month SA	∆% 12 Months NSA
Oct 2011	0.1	-0.2
Sep	0.0	0.0
Aug	0.2	0.2
Jul	0.0	0.2
Jun	-0.2	-0.4
May	0.0	-0.4
Apr	0.1	-0.4
Mar	0.3	-0.5
Feb	0.0	-0.5
Jan	-0.1	-0.6
Dec 2010	–0.3	0.0
Dec 2009		-1.7
Dec 2008		0.4
Dec 2007		0.7
Dec 2006		0.3
Dec 2005		-0.1
Dec 2004		0.2
Dec 2003		-0.4
Dec 2002		-0.3
Dec 2001		-1.2
Dec 2000		-0.2
Dec 1999		-1.1
Dec 1998		0.6
Dec 1997		1.8
Dec 1996		0.6
Dec 1995		-0.3
Dec 1994		0.7
Dec 1993		1.0
Dec 1992		1.2
Dec 1991		2.7
Dec 1990		3.8

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

http://www.e-stat.go.jp/SG1/estat/ListE.do?lid=000001084130

More detail on the consumer price index of Japan in Oct is shown in Table 23. Inflation the 12 months ending in Oct has been driven by items rich in commodities such as 0.3 percent in fuel, light and water charges and 0.6 percent in fuel, light and water charges in the Ku Area of Tokyo in the preliminary estimate for Nov. There is similar behavior in the preliminary estimate for Oct for the Ku Area of Tokyo. Without risk aversion, unconventional monetary policy is successful in inflating the world economy.

Table 23, Japan, Consumer Price Index, ∆%

2011	Oct/Sep ∆%	Year ∆%
CPI	0.1	-0.2
CPI Excluding Fresh Food	-0.1	-0.1
CPI Excluding Food, Alcoholic Berages and Energy	-0.1	-1.0
CPI Goods	0.2	-0.5
CPI Services	0.0	0.1
CPI Excluding Imputed Rent	0.1	-0.2
CPI Fuel, Light, Water Charges	0.3	4.2
CPI Transport Communications	-0.4	1.4
CPI Ku-Area Tokyo All Items	-0.6	-0.8
Fuel, Light, Water Charges Ku Area Tokyo	0.6	6.1

Note: Ku-area Tokyo CPI data preliminary for Nov

Source: http://www.stat.go.jp/english/data/cpi/1581.htm

V World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI^™ produced by JP Morgan and Markit in association with ISM and IFPSM finds that output and new business growth of the world private sector grew at the slowest pace since the expansion began in Aug 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8791). The JP Morgan all-industry, manufacturing and services, PMI seasonally adjusted diffusion index is closely associated with the seasonally-adjusted annual equivalent rate of global GDP. The JP Morgan global all-industry output index registered 51.4 in Oct, which is slightly lower than 52.0 in Sep.

VA United States. The Manufacturing ISM Report on Business^® purchasing managers’ index fell 0.8 percentage points from 51.6 in Sep to 50.8 in Oct, indicating continuing growth for 27 consecutive months but at slower rate of change (http://www.ism.ws/ISMReport/MfgROB.cfm). New orders, which are an indicator of future business, rose 2.8 percentage points, from 49.6 in Sep to 52.4 in Oct, indicating change from contracting (reading below 50) to growth (reading above 50). The reading of new orders in Oct is the first above 50 or growth after three consecutive months of readings below 50 or contraction. The employment index fell slightly by 0.3 percentage points from 53.8 in Sep to 53.5 in Oct, indicating growth at slower rate of change. Prices paid or costs of inputs fell 15 percentage points from 56.0 in Sep to 41.0 in Oct, which is the first reading below 50 since May.

The ISM Non-Manufacturing Report on Business^® shows mixed results (http://www.ism.ws/ISMReport/NonMfgROB.cfm). The overall index for Oct was virtually unchanged, falling 0.1 percentage points from 53.0 in Sep to 52.9 in Oct. The unfavorable events were decline of business activity/production by 3.3 percentage points from 57.1 in Sep to 53.8 in Oct and more worrisome the decline by 4.1 percentage points of new orders from 56.5 in Sep to 52.4 in Oct. A positive development was the increase in employment by 4.7 percentage points from contraction territory of 48.7 percent in Sep to expansion at 52.0 in Oct. Prices fell 4.8 percentage points from 61.9 in Sep to 47.0 in Oct.

Table USA, US Economic Indicators

Consumer Price Index	Oct 12 months NSA ∆%: 3.5; ex food and energy ∆%: 2.1 Oct month ∆%: -0.1; ex food and energy ∆%: 0.1 Blog 11/20/11
Producer Price Index	Oct 12 months NSA ∆%: 5.9; ex food and energy ∆% 2.8 Oct month SA ∆% = -0.3; ex food and energy ∆%: 0.0 Blog 11/20/11
PCE Inflation	Sep 12 months NSA ∆%: headline 2.9; ex food and energy ∆% 1.6 Blog 10/30/11
Employment Situation	Household Survey: Oct Unemployment Rate SA 9.0% Blog calculation People in Job Stress Oct: 28.8 million NSA Establishment Survey: Oct Nonfarm Jobs 80,000; Private +104,000 jobs created Sep 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.8% Blog 11/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Aug 2011 4.026 million lower by 1.461 million than 5.487 million in Aug 2005 Blog 10/11/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 2.5 First three quarters AE ∆% 1.4 Blog 10/30/11
Personal Income and Consumption	Sep month ∆% SA Real Disposable Personal Income (RDPI) 0.1 Sep month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 0.2; RPCE ∆%: 2.2 Blog 10/30/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIIQ2011 SA ∆%: 0.3 Sep 12 months ∆%: 2.0 Blog 10/30/11
Industrial Production	Oct month SA ∆%: 0.7 Oct 12 months NSA ∆%: 3.9 Capacity Utilization: 77.8 Blog 11/20/11
Productivity and Costs	Nonfarm Business Productivity IIIQ2011∆% SAAE 3.1; IIIQ2011/IIIQ2010 ∆% 1.1; Unit Labor Costs IIIQ2011 ∆% -2.4; IIIQ2011/IIIQ2010 ∆%: 1.2 Blog 11/04/11
New York Fed Manufacturing Index	General Business Conditions From -8.48 Oct to Nov 0.61 New Orders: From 0.16 Oct to minus 2.07 Nov Blog 11/20/11
Philadelphia Fed Business Outlook Index	General Index from 8.7 Oct to 3.6 Nov New Orders from 7.8 Oct to 1.3 Nov Blog 11/20/11
Manufacturing Shipments and Orders	Sep/Aug New Orders SA ∆%: minus 0.3; ex transport ∆%: 1.3 12 months Jan-Aug NSA ∆%: 12.6; ex transport ∆% 12.9 Blog 11/04/11
Durable Goods	Oct New Orders SA ∆%: -0.7; ex transport ∆%: 0.7 Jan-Oct months NSA New Orders ∆%: 9.2; ex transport ∆% : 9.2 Blog 11/27/11
Sales of Merchant Wholesalers	Jan-Sep 2011/2010 ∆%: Total 15.0; Durable Goods: 12.5; Nondurable Goods 17.2 Blog 11/13/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Sep 11/Sep 10 NSA ∆%: Total Business 11.5; Manufacturers 10.9 Retailers 8.6; Merchant Wholesalers 14.8 Blog 11/20/11
Sales for Retail and Food Services	Jan-Oct 2011/Jan-Oct 2010 ∆%: Retail and Food Services: 7.9; Retail ∆% 8.4 Blog 11/20/11
Value of Construction Put in Place	Sep SAAR month SA ∆%: 0.2 Sep 12 months NSA: -2.0 Blog 11/04/11
Case-Shiller Home Prices	Aug 2011/Aug 2010 ∆% NSA: 10 Cities minus 3.5; 20 Cities: minus 3.8 ∆% Aug SA: 10 Cities minus 0.2 ; 20 Cities: minus 0.05 Blog 10/30/11
FHFA House Price Index Purchases Only	Aug SA ∆% minus 0.1; 12 month ∆%: minus 4.0 Blog 10/30/11
New House Sales	Sep month SAAR ∆%: 5.7 Jan/Sep 2011/2010 NSA ∆%: minus 7.9 Blog 10/30/11
Housing Starts and Permits	Sep Starts month SA ∆%: -0.3; Permits ∆%: 10.9 Jan/Oct 2011/2010 NSA ∆% Starts 0.1; Permits ∆% 0.2 Blog 11/20/11
Trade Balance	Balance Sep SA -$43,107 million versus Aug -$44,919 million Exports Sep SA ∆%: 1.4 Imports Sep SA ∆%: 0.3 Exports Jan-Sep 2011/2010 NSA ∆%: 18.3 Imports Jan-Sep 2011/2010 NSA ∆%: 16.7 Blog 11/13/11
Export and Import Prices	Oct 12 months NSA ∆%: Imports 11.0; Exports 6.3 Blog 11/13/11
Consumer Credit	Sep ∆% annual rate: 3.6% Blog 11/13/11
Net Foreign Purchases of Long-term Treasury Securities	Sep Net Foreign Purchases of Long-term Treasury Securities: $68.6 billion Sep versus Aug $10.7 billion Major Holders of Treasury Securities: China $1148 billion; Japan $957 billion Blog 11/20/11
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 8.8; Outlays -8.7; Individual Income Taxes 21.5 Deficit Fiscal Year 2011 $1,298,614 million Deficit Fiscal Year 2011 Oct $98,466 million Blog 11/13/11
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIQ2011 -121B %GDP 3.2 Blog 09/18/11

Links to blog comments in Table USA: 11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/6/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

Durable goods new orders seasonally-adjusted fell 0.7 percent in Oct relative to Sep and shipments increased 1.3 percent, as shown in Table 24. The data are not adjusted for price changes and include large-value items that cause fluctuations in monthly data. Orders excluding transportation increased 0.7 percent in Oct while shipments increased 0.2 percent. Excluding defense orders increased 0.2 percent in Oct and shipments increased 2.1 percent. New orders of computers and related products fell 0.4 percent in Oct but after increasing 5.8 percent in Sep after increasing 5.0 percent in Aug. New orders of motor vehicles increased 6.2 percent after declining 2.4 percent in Sep and falling 9.0 percent in Aug. Financial markets focus on capital goods on the argument that it would suggest investment. New orders of capital goods fell 6.2 percent in Oct after decreasing of 3.2 percent in Sep but gaining 4.7 percent in Aug. Nondefense new orders of capital goods fell 4.6 percent in Oct after dropping 4.0 percent in Sep but gaining 5.4 percent in Aug. Nondefense capital goods orders excluding aircraft lost 1.8 percent in Oct. The volatility of durable goods data is found in nondefense aircraft new orders falling 16.4 percent in Oct and falling 26.8 percent in Sep but after increasing 26.2 percent in Aug.

Table 24, Durable Goods Manufacturers’ Shipments and New Orders, SA, ∆%

2011	Oct ∆%	Sep∆%	Aug ∆%
Total
S	1.3	-0.5	0.1
NO	-0.7	-1.5	0.1
Excluding Transport
S	0.2	-0.1	1.7
NO	0.7	0.6	-0.2
Excluding Defense
S	1.7	-0.5	-0.2
NO	0.2	-1.7	-0.1
Computers & Electronic Products
S	1.2	-0.8	0.6
NO	-0.1	1.8	1.4
Computers & Related Products
S	2.1	3.3	-0.5
NO	-0.4	5.8	5.0
Transport Equipment
S	5.2	-1.9	-4.9
NO	-4.8	-7.6	0.8
Motor Vehicles & Parts
S	6.4	-1.7	-9.1
NO	6.2	-2.4	-9.0
Nondefense Aircraft
S	8.6	3.1	3.4
NO	-16.4	-26.8	26.2
Capital Goods
S	-0.6	-0.8	3.0
NO	-6.2	-3.2	4.7
Nondefense Capital Goods
S	0.2	-1.0	3.0
NO	-4.6	-4.0	5.4
Nondefense Capital Goods Excluding Aircraft
S	-1.1	-1.0	3.1
NO	-1.8	0.9	0.9

Note: S: shipments; NO: new orders; Transport: transportation. Data adjusted for seasonality but not adjusted for inflation.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Chart 35 of the US Bureau of the Census shows new orders for durable goods from Nov 2010 to Oct 2011. There is significant volatility in these data that clouds analysis of the trend of growth of output.

Chart 35, US, Durable Goods New Orders 2010-2010, SA, Monthly Percentage Changes

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr021.html

Table 25 shows growth of new orders and shipments of durable goods in the first ten months of 2011 relative to the same period in 2010. Data are not adjusted for seasonality or price changes. The cumulative values for Jan-Oct 2011 in billions of dollars and percent of total are also included to provide relative value contribution. There are many general categories other than those in Table 25 and some sub-segments are part of general categories such that percentages do not add. New orders rose 9.2 percent in Jan-Oct 2011 relative to the same period a year earlier, 9.2 percent excluding transportation equipment and 10.5 percent excluding defense. The value of shipments and new orders of durable goods is about $2 trillion. The monthly and 12 months rate of growth are consistent with continuing expansion of the US economy. While new orders of the more aggregate component of computers and electronic products fell 0.4 percent relative to a year earlier, the sub-segment of new orders of computers and related products grew 10.6 percent. Transportation equipment new orders, accounting for 24.6 percent of the total, rose 8.9 percent and motor vehicles, accounting for 15.0 percent of total orders, rose 9.9 percent. Nondefense aircraft new orders rose 20.9 percent but account for only 4.4 percent of the total. New orders of total capital goods, accounting for 40.5 percent of the total, rose 8.9 percent and nondefense capital goods excluding aircraft rose 11.0 percent.

Table 25, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %

	Billions of Dollars Oct 2011	% Total	Jan-Oct 2011/ Jan-Oct 2010 ∆%
Total
S	1,979.5	100.0	7.8
NO	1,957.4	100.0	9.2
Excluding Transport
S	1,513.5	76.5	9.1
NO	1,476.8	75.5	9.2
Excluding Defense
S	1,880.9	95.0	9.6
NO	1,854.7	94.8	10.5
Computers & Electronic Products
S	306.3	15.5	2.1
NO	238.3	14.5	-0.4
Computers & Related Products
S	56.9	2.9	11.0
NO	56.7	2.9	10.6
Transport Equipment
S	465.9	23.5	4.1
NO	480.5	24.6	8.9
Motor Vehicles
S	294.5	14.9	9.6
NO	294.2	15.0	9.9
Nondefense Aircraft
S	70.9	3.6	10.2
NO	85.4	4.4	20.9
Capital Goods
S	753.7	38.1	5.6
NO	792.2	40.5	8.9
Nondefense Capital Goods
S	676.7	34.2	9.5
NO	711.1	36.3	11.7
Nondefense Capital Goods Excluding Aircraft
S	635.8	32.1	9.6
NO	657.9	33.6	11.0

Note: S: shipments; NO: new orders; Transport: transportation. Data not adjusted for seasonality and not adjusted for inflation. Percentages do not add to total because not all major categories are included and some items are sub-segments of major categories.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

New orders and shipments of durable goods are highly cyclical, as shown in Table 26. New orders and shipments fell during the contraction in 2008 and 2009 and also in 2003 in the tail of the contraction of 2001.

Table 26, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders

Jan/Oct Relative to Earlier Year	Shipments ∆%	New Orders ∆%
2011	7.8	9.2
2010	7.8	14.7
2009	-18.0	-23.0
2008	-1.1	-2.8
2007	0.1	0.4
2006	6.6	8.3
2005	6.0	7.1
2004	10.4	11.2
2003	-0.2	1.6

Source: http://www.census.gov/manufacturing/m3/historical_data/index.html

VB Japan. The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Purchasing Managers’ Index^™ for Oct, released on Nov 3, registered an increase in the Composite Output Index from 47.0 in Sep to 52.4 in Oct, which is the highest reading since beginning of data gathering in Sep 2007 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8788). The V-shaped recovery from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 is continuing. Alex Hamilton, economist at Markit and author of the report, find new growth in Japan’s private sector in Oct, reversing seven months of reduction. There is expansion of both manufacturing and services. Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Sep ∆% -0.7 12 months ∆% 1.7 Blog 11/13/11
Consumer Price Index	Oct SA ∆% 0.1 Oct 12 months NSA ∆% -0.2 Blog 11/27/11
Real GDP Growth	IIIQ2011 ∆%: 1.5 on IIQ2011; ∆% from quarter a year earlier: 0.0 % Blog 11/20/11
Employment Report	Sep Unemployed 2.75 million Change in unemployed since last year: minus 650 thousand Unemployment rate: 4.2% Blog 10/30/11
All Industry Index	Sep month SA ∆% -0.9 12 months NSA ∆% -0.8 Blog 11/27/11
Industrial Production	Sep SA month ∆%: -4.0 12 months NSA ∆% -4.0 Blog 10/30/11
Machine Orders	Total Sep ∆% -3.7 Private ∆%: 11.6 Aug ∆% Excluding Volatile Orders -8.2 Blog 11/13/2011
Tertiary Index	Sep month SA ∆% -0.7 Sep 12 months NSA ∆% -0.4 Blog 11/13/2011
Wholesale and Retail Sales	Sep 12 months: Total ∆%: 0.1 Wholesale ∆%: 0.6 Retail ∆%: -1.2 Blog 10/30/11
Family Income and Expenditure Survey	Sep 12 months ∆% total nominal consumption minus 1.9, real minus 1.9 Blog 10/30/11
Trade Balance	Exports Oct 12 months ∆%: -3.7 Imports Sep 12 months ∆% 17.9 Blog 11/27/11

Links to blog comments in Table JPY: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

9/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table 27 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture), CON (construction), IND (industrial production), TERT (services), IND (industrial production) and GOVT (government). GDP grew at the annual rate of 1.5 percent in the third quarter. The all industry index grew at 2.0 percent in IIIQ2011. Industry contributed 0.75 percentage points to growth of the all industry index. All components of the indices of all industry activity fell with the exception of government and services in IIQ2011, IQ2011 and IVQ2010. Japan had already experienced a very weak quarter in IVQ2010 when it was unexpectedly hit by the Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.2 percent in IIQ2011 relative to IQ2011 but recovery at 3.8 percent in IIIQ2011. Industrial production fell 4.0 percent from IQ2011 into IIQ2011 but grew 4.3 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the indices of all industry by 1.9 percent in IQ2011 caused by decline of industrial production by 2.0 percent and services by 1.4 percent.

Table 27, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2011
IIIQ	3.8	4.3	1.1	0.1	2.0	1.5
Cont to IIIQ % Change	0.17	0.75	-0.01
IIQ	-7.2	-4.0	0.0	0.7	-0.4	-0.3
IQ	2.7	-2.0	-1.4	0.2	-1.9	-0.7
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	-0.7
III Q	1.9	-1.0	0.6	0.0	0.7	0.7
IIQ	-0.9	0.7	0.4	-0.2	0.8	-0.1
IQ	0.7	7.4	0.7	-0.4	1.3	2.3

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201107j.pdf

There are more details in Table 28. The all industry activity index fell 0.9 percent in Sep relative to Aug with decline of the tertiary or services sector by 0.7 percent and decline of industry of 3.3 percent while construction increased 2.2 percent. Industry reduced growth in Sep by 0.60 percentage points and the tertiary sector reduced growth by 0.47 percentage points with positive contribution of 0.10 percentage points by construction. Weakness in Sep and Aug has interrupted the sharp recovery from Apr to Jul. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table 28, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Sep 2011	2.2	-3.3	-0.7	-0.1	-0.9
Cont to Sep % Change	0.10	-0.60	-0.47	-0.01
Aug	1.8	0.6	0.0	0.1	-0.3
Jul	0.8	0.4	-0.2	-0.6	0.4
Jun	-0.3	3.8	1.9	0.3	2.2
May	3.7	6.2	0.9	1.0	2.0
Apr	-5.7	1.6	2.7	-0.1	1.7
Mar	-8.6	-15.5	-5.9	-0.1	-6.4
Feb	6.3	1.8	0.8	0.2	0.9
Jan	2.3	0.0	-0.1	0.0	-0.5
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table 29. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy.

Table 29, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2010	-7.0	16.4	1.3	-0.7	3.1	4.1
Cont to 2010 % Change	-0.35	2.62	0.88	-0.09
2009	-5.6	-21.9	-5.2	0.1	-7.7	-6.3
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.2
2011
III Q	-2.9	-2.1	-0.1	0.5	-0.4	0.0
Cont to IIIQ % Change	-0.13	-0.38	-0.07	0.06
IIQ	-4.8	-6.8	-0.5	0.5	-1.7	-1.1
IQ	1.6	-2.5	-0.1	-0.4	-0.5	-1.0
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	2.2
III Q	-3.2	14.0	1.8	-0.6	3.2	5.0
IIQ	-11.3	21.3	1.4	-0.7	3.5	3.1
IQ	-12.4	28.0	0.8	-0.5	3.9	5.6

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table 30. The all industry activity fell 0.8 percent in Sep 2011 relative to Sep 2010 with declines of all segments with the exception of government. Industry fell 3.3 percent in Sep 2011 relative to a year earlier and reduced the all industry index by 0.64 percentage points. The tertiary sector fell only 0.4 percent but reduced the index of all industry by 0.26 percentage points. Construction reduced the index by 0.01 percentage points while government increased it by 0.06 percentage points.

Table 30, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Sep 2011	-0.3	-3.3	-0.4	0.5	-0.8
Cont to Sep % Change	-0.01	-0.64	-0.26	0.06
Aug	-4.2	0.4	0.5	-0.2	0.2
Jul	-4.5	-3.0	-0.2	1.2	-0.8
Jun	-4.5	-1.7	0.9	1.1	0.2
May	-6.0	-5.5	-0.2	0.1	-1.3
Apr	-3.8	-13.6	-2.3	0.4	-4.0
Mar	-1.1	-13.1	-3.1	-0.3	-4.5
Feb	4.4	2.9	2.0	-0.3	2.0
Jan	1.3	4.6	1.1	-0.5	1.4
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Japan’s trade balance is in Table 31. Japan experienced another deficit in trade balance in Sep, which is the second deficit since May. The adversity caused by the Great East Earthquake/tsunami is manifested in drops of exports in 12 months ending in Mar through Jul with the first 12-month increase of 2.8 percent in Aug and 2.3 percent in Sep but another decline by 3.7 percent in Oct. At the same time, imports rose rapidly because of the need to reconstruct the country in recovering internal production. The combination of risk aversion in international finance with unconventional monetary policy of zero interest rates and quantitative easing has caused an adverse appreciation of the Japanese yen relative to the dollar. Yen appreciation undermines the competitiveness of Japanese products in world markets.

Table 31, Japan, Exports, Imports and Trade Balance, NSA JPY Billions and ∆%

	Exports JPY Billions	12 months ∆%	Imports JPY Billions	12 months ∆%	Balance YPY Billions
Oct	5,512.8	-3.7	5,786.6	17.9	-273.8
Sep	5,976.7	2.3	5,680.1	12.1	296.6
Aug	5,356.6	2.8	6,136.1	19.2	-775.3
Jul	5,781.0	-3.4	5,713.2	9.9	71.6
Jun	5,775.6	-1.6	5,708.2	9.8	68.6
May	4,760.0	-10.3	5,617.3	12.4	-857.3
Apr	5,156.6	-12.4	5.624.3	9.0	-467.7
Mar	5,861.2	-2.3	5,674.9	12.0	186.3
Feb	5.589.0	9.0	4,938.7	10.0	650.3
Jan	4,970.3	1.4	5,449.7	12.2	-479.4
Dec 2010	6,112.0	12.9	5,392.4	10.7	32.6
Nov	5,439.8	9.1	5,282.2	14.3	157.6
Oct	5,722.5	7.8	4,909.9	8.9	812.6
Sep	5,839.6	14.3	5,065.3	10.3	774.3
Aug	5,209.8	15.5	5,146.0	18.4	63.8
Jul	5,981.9	23.5	5,197.3	16.1	784.6
Jan-Mar 2011	16,420.5	2.4	16,063.3	11.4	357.3
Apr-Jun 2011	15,692.2	-8.0	16,948.5	10.4	-1,256.3

Source: http://www.customs.go.jp/toukei/info/index_e.htm

The structure of exports and imports of Japan is in Table 32. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 30.6 percent of Japan’s imports and increased 35.6 percent in the 12 months ending in Oct. Weakness of world demand depresses prices of industrial goods. Manufactures contribute 13.1 percent of Japan’s exports with decline of 0.4 percent in the 12 months ending in Oct. Machinery contributes 20.0 percent of Japan’s exports with decline of 5.7 percent in the 12 months ending in Oct. Machinery contributes 17.6 percent of Japan’s exports with decline of 12.3 percent in the 12 months ending in Oct. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

Table 32, Japan, Structure and Growth of Exports and Imports % and ∆%

Oct 2011	Value JPY Billions	% of Total	12 Months∆%	Contribution Degree %
Exports	5,512.8	100.0	-3.7	-3.7
Foodstuffs	27.6	0.5	-29.1	-0.2
Raw Materials	74.1	1.3	-2.5	-0.0
Mineral Fuels	120.6	2.2	40.7	0.6
Chemicals	551.3	10.0	-2.6	-0.3
Manufactures	722.7	13.1	-0.4	-0.1
Machinery	1,101.9	20.0	-5.7	-1.2
Electrical Machinery	971.5	17.6	-12.3	-2.4
Transport Equipment	1,263.2	22.9	-0.2	-0.0
Other	679.9	12.3	-1.2	-0.1
Imports	5,786.6	100.0	17.9	17.9
Foodstuffs	474.9	8.2	19.4	1.6
Raw Materials	454.7	7.9	3.0	0.3
Mineral Fuels	1,769.8	30.6	35.6	9.5
Chemicals	516.9	8.9	21.2	1.8
Manufactures	519.6	9.0	18.7	1.7
Machinery	414.4	7.2	9.1	0.7
Electrical Machinery	719.1	12.4	4.3	0.6
Transport Equipment	169.6	2.9	18.2	0.5
Other	747.5	12.9	8.6	1.2

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/2011104e.pdf

Table 33 provides Japan’s exports and imports from 1979 to 2010. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year.

Table 33, Japan, Exports and Imports Fiscal Year 1979-1960

Billion Yens

Years	Exports	Imports

1979	22,531	24,245
1980	29,382	31,995
1981	33,468	31,464
1982	34,432	32,656
1983	34,909	30,014
1984	40,325	32,321
1985	41,955	31,084
1986	35,289	21,550
1987	33,315	21,736
1988	33,939	24,006
1989	37,822	28,978
1990	41,456	33,855
1991	42,359	31,900
1992	43,012	29,527
1993	40,202	26,826
1994	40,497	28,104
1995	41,530	31,548
1996	44,731	37,993
1997	50,937	40,956
1998	50,645	36,653
1999	47,547	35,268
2000	51,654	40,938
2001	48,979	42,415
2002	52,108	42,227
2003	54,548	44,362
2004	61,169	49,216
2005	65,656	56,949
2006	75,246	67,344
2007	83,931	73,135
2008	81,018	78,954
2009	54,170	51,499
2010	67,399	60,764

Source: http://www.customs.go.jp/toukei/suii/html/time_e.htm

VC China. The HSBC Flash China Manufacturing PMI^™ compiled by Markit registers the deepest decline in output since Mar 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8816). The Flash China Manufacturing PMI^™ fell to 48.0 in Nov from 51.0 in Oct, which is the lowest in 32 months. The Flash China Manufacturing Output index fell to 46.7 in Nov from 51.4 in Oct, which is also the lowest in 32 months. Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC finds that decline could result in slower growth in the next few months at 11 to 12 percent per year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8816). Authorities could use new policy measures to maintain growth because of less pressure from inflation. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Oct 12 months ∆%: 5.0 Jan-Oct ∆%: 6.8 Sep month ∆%: -0.7 Blog 11/13/11
Consumer Price Index	Oct month ∆%: 0.1 Oct 12 month ∆%: 5.5 Jan-Oct ∆%: 5.6 Blog 11/13/11
Value Added of Industry	Oct 12 month ∆%: 13.2 Jan-Oct 2011/Jan-Oct 2010 ∆%: 14.1 Blog 11/13/11
GDP Growth Rate	Year IIIQ2011 ∆%: 9.1 Quarter IIQ2011 ∆%: 2.2 Blog 10/23/11
Investment in Fixed Assets	Total Jan-Oct ∆%: 24.9 Jan-Oct ∆% real estate development: 33.1 Blog 11/13/11
Retail Sales	Oct month ∆%: 1.3 Oct 12 month ∆%: 17.2 Jan-Oct ∆%: 17.0 Blog 11/13/11
Trade Balance	Oct balance $17.03 billion Exports ∆% 15.9 Imports ∆% 28.7 Blog 11/13/11

Links to blog comments in Table CNY: 11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

Table EUR, Euro Area Econ VD Euro Area. The Markit Flash Eurozone PMI^® Composite Output Index, with high correlation with GDP of the euro zone, increased from 46.5 in Oct to 47.2 in Nov, indicating slower rhythm of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8813). Private-sector activity in the euro zone has contracted for the third consecutive month. Chris Williamson, Chief Economist at Markit, finds that the information in the survey suggests contraction of the euro zone at 0.6 percent in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8813). Weaker economic conditions are not present only in the so-called “periphery” of the euro zone but are now affecting also “core economies” with contraction in France of about 0.5 percent and near stagnation in Germany. Table EUR provides the regional country data table for the euro zone.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 11/11/11
Unemployment	Sep 2011: 10.2% unemployment rate Sep 2011: 16.198 million unemployed Blog 11/06/11
HICP	Sep month ∆%: 0.8 12 months Sep ∆%: 3.0 Blog 10/16/11
Producer Prices	Euro Zone industrial producer prices Sep 12 months ∆%: 5.8 Blog 11/13/11
Industrial Production	Sep month ∆%: -2.0 Sep 12 months ∆%: 2.2 Blog 11/11/11
Industrial New Orders	Jul month ∆%: minus 2.1 Jul 12 months ∆%: 8.5 Blog 09/25/11
Construction Output	Jul month ∆%: 1.4 Jul 12 months ∆%: 1.2 Blog 09/25/11
Retail Sales	Sep month ∆%: minus 0.7 Sep 12 months ∆%: minus 1.5 Blog 11/13/11
Confidence and Economic Sentiment Indicator	Sentiment 94.8 Oct 2011 down from 107 in Dec 2010 Confidence minus 19.9 Oct 2011 down from minus 11 in Dec 2010 Blog 10/30/11
Trade	Jan-Sep 2011/2010 Exports ∆%: 14.4 Imports ∆%: 14.9 Blog 11/11/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR: 11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/propddddderity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

VE Germany. The Markit Flash Germany PMI^® Composite Output Index, which is a weighted average of manufacturing and services activity, remained unchanged in Nov at 50.3 that is close to stagnation (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8814). The highest reading in services in four months compensated for the lowest reading in manufacturing in 29 months. Tim Moore, Senior Economist at Markit, still finds risk of renewed recession even if contraction of the German economist has become somewhat less likely (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8814). The information in the index on economic uncertainty and inventory policies may have contributed to the highest acceleration in manufacturing exports in more than two years. Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5 Blog 11/27/11
Consumer Price Index	Oct month SA ∆%: 0.0 Aug 12 months ∆%: 2.5 Blog 11/13/11
Producer Price Index	Oct month ∆%: 0.0 12 months NSA ∆%: 5.5 Blog 10/23/11
Industrial Production	Sep month SA ∆%: minus 2.7 12 months NSA: 6.5 Blog 11/13/11
Machine Orders	Sep month ∆%: -4.3 Sep 12 months ∆%: 2.4 Blog 11/04/11
Retail Sales	Sep Month ∆% 0.3 12 Months ∆% 0.4 Blog 11/04/11
Employment Report	Employment Accounts: Sep Employed 12 months NSA ∆%: 1.1 Labor Force Survey: Aug Unemployment Rate: 5.2% Blog 11/04/11
Trade Balance	Exports Sep 12 month NSA ∆%: 10.5 Imports Sep 12 months NSA ∆%: 11.6 Exports Sep month SA ∆%: 0.9 percent; Imports Sep month SA minus 0.8Blog 11/13/11

Links to blog comments in Table DE: 11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

German GDP disappointed with the first estimate of a low rate of growth of 0.1 percent in IIQ2011 relative to IQ2011, which has been revised to 0.3 percent, as shown in Table 34. Growth improved in IIIQ2011 with the estimate of 0.5 percent. Recovery was quite strong in IIQ2010 with growth of 1.9 percent, in IIIQ2010 with growth of 0.8 percent and in IQ2011 with 1.3 percent.

Table 34, Germany Quarter GDP ∆% Relative to Prior Quarter

	IQ	IIQ	IIIQ	IV
2011	1.3	0.3	0.5
2010	0.5	1.9	0.8	0.5
2009	-4.0	0.3	0.8	0.7
2008	1.1	-0.4	-0.4	-2.2
2007	0.7	0.6	0.9	0.3

Seasonal and calendar adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

Growth in a quarter relative to the same quarter a year earlier shows stronger in Table 35. IQ2011 growth relative to IQ2010 was very high at 5.0 percent, providing optimism about the expansion of the German economy. Growth rates then fell to 3.0 percent in IIQ2011 relative to IIQ2010 and to 2.5 percent in IIIQ2011 relative to IIIQ2010. Growth rates in 2007 were quite strong.

Table 35, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA

	IQ	IIQ	IIIQ	IV
2011	5.0	3.0	2.5
2010	2.6	4.4	4.0	3.8
2009	-6.5	-7.4	-5.0	-1.6
2008	2.9	1.8	0.5	-1.9
2007	4.5	3.4	3.4	2.3

Calendar and price adjusted NSA

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

The yearly rate of growth of German GPD is provided in Table 36 from 1992 to 2010. The data have been revised thoroughly. The restructuring of the economy of Germany began to provide excellent results with growth of 3.9 percent in 2006, calendar adjusted, and 3.4 percent in 2007. Germany rebounded from the drop of GDP by 5.1 percent in 2009 followed by growth of 3.6 percent in 2010.

Table 36, Germany, GDP Year ∆%

	Unadjusted	Calendar Adjusted
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Fachveroeffentlichungen/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/NationalAccountsQuarterlyResults6480120113225,templateId=renderPrint.psml

Chart 36 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides GDP at current prices from 2003 to 2011. The German economy is productive with significant dynamism over the long term.

Chart 36, Germany, GDP, Current Prices, Billion Euro

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/GrossDomesticProduct/liste__bip,templateId=renderPrint.psml

Chart 37 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides the index of price-adjusted chain-linked GDP of Germany from 2007 to 2011. Germany was growing rapidly before the contract and rebounded with significant strength along a strong upward trend.

Chart 37, Germany, Index of Price-Adjusted Chain-Linked GDP, 2000-100

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/NationalAccounts/Content100/kvgr111graf0.psml

Table 37 provides percentage point contributions of the use of the GDP of Germany on growth from the prior quarter. Consumption contributed 0.6 percentage points in IIIQ2011 and grew a strong 0.8 percent from the prior quarter. Gross fixed capital formation contributed 0.2 percentage points in IIIQ2011 and grew 0.9 percent relative to the prior quarter. There is strong demand in Germany that has compensated for the decline in the contribution of net exports from 0.4 percentage points in IQ2011 to only 0.1 percent in both IIQ2011 and IIIQ2011. Domestic uses of GDP contributed 0.4 percentage points to growth in IIIQ2011. GDP per employed person and per hour worked rose from minus 0.1 percent in IIQ2011 to 0.3 percent in IIIQ2011.

Table 37, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Prior Quarter, Price, Calendar and Seasonally Adjusted

	IVQ10 PP	∆% IVQ	IQ 11 PP	∆% IQ	IIQ 11 PP	∆% IIQ	IIIQ 11 PP	∆% IIIQ
Consumption Total	0.3	0.4	0.3	0.4	-0.2	-0.3	0.6	0.8
Households Consumption	0.3	0.5	0.3	0.5	-0.3	-0.6	0.5	0.8
Government Consumption	0.0	0.1	0.0	0.2	0.1	0.6	0.1	0.6
Gross Capital Formation	0.2	1.2	0.7	3.8	0.4	2.2	-0.2	-0.9
Gross Fixed Capital Formation (GFCF)	0.0	-0.2	0.7	4.1	0.1	0.4	0.2	0.9
CFCF including Machinery & Equipment	0.2	2.6	0.1	1.0	0.1	1.2	0.2	2.9
CFCF including Construction	-0.2	-2.5	0.7	7.1	0.0	-0.4	-0.1	-0.7
Change in Inventories	0.2		0.0		0.3		-0.4
Domestic Uses	0.5	0.6	1.0	1.1	0.2	0.2	0.4	0.4
Net Exports	-0.1		0.4		0.1		0.1
Exports		1.0		1.6		2.8		2.5
Imports		1.3		1.0		2.9		2.6
GDP		0.5		1.3		0.3		0.5
GDP per Person in Employment		0.2		1.0		-0.1		0.3
GDP per Hour Worked		-0.3		1.1		-0.1		0.3

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

The Statistiche Bundesamt Deutschland provides the analysis of percentage point contributions to GDP on growth from the same quarter a year earlier, shown in Table 38. The original data are adjusted for price and calendar but not for seasonality. There is strong internal demand, or consumption and investment, which is uncommon in advanced economies. Consumption provided 1.0 percentage points to growth in IIIQ2011 and grew 1.3 percent from the same quarter a year earlier. Growth of fixed capital formation provided 0.9 percentage points to growth of GDP in IIIQ2011 and grew 4.8 percent from the same quarter a year earlier. Domestic uses contributed 2.1 percentage points in IIIQ2011 and grew 2.2 percent from the same quarter a year earlier. Net exports contributed 0.4 percentage points in IIIQ2011, declining from 1.0 percentage points in IIQ2011 and 1.6 percentage points in IQ2011. The rates of growth of exports and imports fell from over 10 percent to single digits in IIQ2011 and IIIQ2011. GDP per person in employment grew 3.6 percent in IQ2011 relative to IQ2010 but only 1.6 percent in IIQ2011 and 1.3 percent in IIIQ2011.

Table 38, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Same Quarter Year earlier, Price and Calendar Adjusted

	IVQ10 PP	∆% IVQ	IQ 11 PP	∆% IQ	IIQ 11 PP	∆% IIQ	IIIQ 11 PP	∆% IIIQ
Consumption Total	1.3	1.6	1.3	1.6	1.2	1.6	1.0	1.3
Households Consumption	1.0	1.8	1.2	2.1	0.9	1.6	0.7	1.2
Government Consumption	0.2	1.2	0.1	0.6	0.3	1.6	0.3	1.4
Gross Capital Formation	1.8	12.2	2.1	11.7	0.7	4.3	1.1	6.1
Gross Fixed Capital Formation (GFCF)	1.3	7.5	2.0	13.4	1.0	5.7	0.9	4.8
CFCF including Machinery & Equipment	1.3	17.6	0.9	15.3	0.7	9.9	0.5	7.9
CFCF including Construction	0.0	0.1	1.0	13.3	0.3	3.0	0.3	2.8
Change in Inventories	0.5		0.1		-0.3		0.2
Domestic Uses	3.2	3.4	3.3	3.5	2.0	2.1	2.1	2.2
Net Exports	0.7		1.6		1.0		0.4
Exports		13.9		12.7		7.7		7.9
Imports		14.6		10.3		6.3		7.7
GDP		3.8		5.0		3.0		2.5
GDP per Person in Employment		2.7		3.6		1.6		1.3
GDP per Hour Worked		1.0		2.0		1.0		1.1

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table 39. The two rows of industry ex construction and industry including manufacturing reveal sharp reductions in yearly growth rates from IQ2011 to IIQ2011 and IIIQ2011. Finance and insurance rebounded from decline of 0.5 percent in IIQ2011 to 2.0 percent in IIIQ2011. Business services also grow at relatively higher rates that declined from 4.9 percent in IQ2011 and 4.5 percent in IIQ2011 to 2.9 percent in IIIQ2011.

Table 39, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA

	2010	IQ2011	IIQ2011	IIIQ2011
Agriculture	20.5	3.6	4.3	3.3
Industry ex Construction	9.8	10.8	7.3	6.4
Industry including Mfg	11.3	13.9	9.8	8.5
Construction	1.7	9.5	0.8	0.8
Trade, Transport	3.8	6.1	4.2	2.8
Information & Communications.	5.0	1.2	1.5	1.3
Finance & Insurance	-0.1	0.4	-0.5	2.0
Real Estate	0.2	0.0	1.2	0.7
Business Services	3.8	4.9	4.5	2.9
Public Services, Education & Health	1.6	0.6	0.7	0.5
Other Services	1.2	-0.5	-0.8	-1.5
Total Gross Value Added	4.1	4.5	3.3	2.6

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

Growth of components of the distribution of national income from a year earlier is shown in Table 40. Gross national income grew at 5.1 percent in IQ2011 relative to a year earlier but the rate fell to 3.5 percent in IIIQ2011. Employee compensation has maintained a high rate of growth above 4.0 percent. In contrast with the US and many advanced economies, household disposable income continues to grow in excess of 3 percent per year. The savings ratio of Germany has oscillated at high rates with 9.4 percent in IIIQ2011.

Table 40, Germany, Growth of Components of the Distribution of National Income from Year Earlier ∆%

	2010	IQ 11	IIQ 11	IIIQ 11
Gross National Income	4.0	5.1	3.4	3.5
Net National Income Factor Costs	5.1	4.8	3.8	3.8
Employee Compensation	2.5	4.4	4.8	4.0
Property and Entrepreneurial Income	10.5	5.6	1.5	3.4
Gross Employee Wages & Salaries	2.7	4.8	5.2	4.1
Net Employee Wages & Salaries	4.1	3.6	3.6	3.2
Household Disposable Income	2.9	3.4	3.4	3.1
Savings Ratio in %	11.3	14.4	10.6	9.4

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__435__811,templateId=renderPrint.psml

VF France. The Markit Flash France PMI^® Composite Output Index, which is a weighted average of manufacturing and services indexes with high association with French GDP, registers 48.7 in Nov from 45.6 in Oct, for a high in two months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8815). This means that there is a rate of deceleration in contraction of France’s private sector. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^®, finds service sector resilient performance compensating for deterioration in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8815).

Table FR, France, Economic Indicators

CPI	Oct month ∆% 0.3 12 months ∆%: 2.4 11/13/11
PPI	Sep month ∆%: 0.2 Sep 12 months ∆%: 6.1 Blog 11/04/11
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.4 IIIQ2011/IIIQ2010 ∆%: 1.6 Blog 11/20/11
Industrial Production	Sep/Aug SA ∆%: Industrial Production minus 1.7; Manufacturing minus 1.6 Sep 12 months NSA ∆%: Industrial Production 3.4; Manufacturing 4.2 Blog 11/13/11
Industrial New Orders	Mfg Sep/Aug ∆% -3.1 YOY ∆% 7.9 Blog 11/20/11
Consumer Spending	Sep Manufactured Goods ∆%: minus 0.2 Sep 12 Months Manufactured Goods ∆%: minus 1.0 Blog 10/30/11
Employment	IIQ2011 Unemployed 2.580 million Unemployment Rate: 9.1% Employment Rate: 63.9% Blog 09/04/11
Trade Balance	Sep Exports ∆%: month minus 5.9, 12 months 7.5 Sep Imports ∆%: month minus 0.6, 12 months 10.3 Blog 11/13/11
Confidence Indicators	Historical averages 100 Oct: France 93 Mfg Business Climate 95 Retail Trade 93 Services 92 Building 99 Household 79 Blog 11/27/11

Links to blog comments in Table FR: 11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds deteriorating conditions in Nov. Table 41 shows the INSEE business climate indicator. The headline synthetic index has fallen to 95 in Oct, which is below the average of 100 since 1976. The final row shows the general production expectations falling to -35 in Nov, well below the average of -8 since 1976. Demand and export order levels has fallen to -26, well below the average of -12 since 1976.

Table 41, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011	Average since 1976	Jul	Sep	Oct	Nov
Synthetic Index	100	105	99	97	95
Recent Changes in Output	5	15	4	0	3
Finished- Goods Inventory Level	13	1	12	13	17
Demand and Total Order Levels	-17	-10	-18	-18	-19
Demand and Export Order Levels	-12	-5	-15	-19	-26
Personal Production Expectations	5	6	6	4	-6
General Production Expectations	-8	3	-30	-29	-35

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111123

Chart 38 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index falls during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011.

Chart 38, France, INSEE Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111123

Chart 39 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels registered in the past contractions but rebounds in Oct and Nov.

Chart 39, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111123

Chart 40 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov.

Chart 40, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111123

The Business Climate Indicator for France of the INSEE business tendency surveys in Table 42 deteriorates slightly in Nov to 93 but is 10 points below its level of 105 in Jul. Retail trade has fallen from 102 in Jul to 93 in Nov. Services has fallen from 103 in Jul to 92 in Nov, which is slightly lower than 94 in Oct. Household confidence at 79 in Nov is well below the average level of 100 between Jan 1987 and Dec 2010.

Table 42, France, Confidence Indicators

2011	Average	Jul	Sep	Oct	Nov
France	100	105	96	95	93
Business Climate Mfg	100 since 1976	105	99	97	95
Household Confidence	100 between Jan 1987 and Dec 2010	82	80	82	79
Wholesale trade Business Climate	100 since 1979	105	99	NA	95
Retail Trade	100	102	93	95	93
Services	100	103	95	94	92
Building	100	102	101	100	99

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=20&date=20111125

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20111123 http://www.insee.fr/en/themes/info-rapide.asp?id=60&date=20111123 http://www.insee.fr/en/themes/info-rapide.asp?id=56&date=20111123 http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20111123

Chart 41 of the Institut National de la Statistique et des Études Économiques (INSEE) of France provides the Consumer Synthetic Index from 1994 to 2011. The index has fallen in the contraction of the early 2000s and in the contraction of 2007. After recovery beginning already in 2008, the index shows again downward trend.

Chart 41, France, Consumer Synthetic Index, 1994-2011

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=20&date=20111125

VG Italy. The seasonally adjusted Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® fell from 45.8 in Sep to 43.9 in Oct for the fifth consecutive month of decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8785). Phil Smith, economist at Markit and author of the report (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8785), finds confirmation in the index of optimism in expectation for a year forward that coincide with the measurement in official data. The impact of the euro zone sovereign crisis and new austerity measures restricted business inflows. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Oct month ∆%: 0.6 Oct 12 months ∆%: 3.4 Blog 11/04/11
Producer Price Index	Sep month ∆%: 0.2 Sep 12 months ∆%: 4.7 Blog 11/04/11
GDP Growth	IIQ2011/IIQ2010 SA ∆%: 0.8 IIQ2011/IQ2011 NSA ∆%: 0.3 Blog 09/11/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Sep month ∆%: minus 4.8 12 months ∆%: minus 2,7 Blog 11/13/11
Retail Sales	Sep month ∆%: -0.4 Sep 12 months ∆%: minus 1.6 Blog 11/27/11
Business Confidence	Mfg Oct 94.0, Jun 100.1 Construction Sep 78.6, Jun 74.5 Blog 10/30/11
Consumer Confidence	Consumer Confidence Nov 96.5, Oct 93.3 Economy Nov 83.4, Oct 76.0 Blog 11/27/11
Trade Balance	Balance Sep SA -€ 1350 million versus Aug -€ 2405 Exports Sep month SA ∆%: 0.2; Imports Sep month SA ∆%: -1.3 Exports 12 months NSA ∆%: 10.3 Imports 12 months NSA ∆%: 3.6 Blog 11/20/11

Links to blog comments in Table IT: 11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

An important part of the analysis of Blanchard (2011WEOSep) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and companies. The restraints consist of low economic growth with high debt/GDP ratio. Table 43 provides retail sales growth for Italy. There are only two positive changes in Table 43. Retail sales fell 0.4 percent in Sep relative to Aug and declined 0.7 percent in Jan-Sep 2011 relative to Jan-Sep 2010.

Table 43, Italy, Retail Sales ∆%

	Sep 2011/ Aug 2011 SA	Jul-Sep 11/ Apr-Jun 11 SA	Sep 2011/ Sep 2010 NSA	Jan-Sep 2011/ Jan-Sep 2010
Total	-0.4	-0.6	-1.6	-0.7
Food	-0.3	-0.2	0.7	0.1
Non-food	-0.4	-0.8	-2.5	-1.2

Source: http://www.istat.it/it/archivio/46332

A longer perspective of retail sales in Italy is provided by 12 month rates in 2011 and yearly rates from 2008 to 2010 in Table 44. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010. There is an evident declining trend in 2011.

Table 44, Italy, Retail Sales 12 Months ∆%

	12 Months ∆%
Sep 2011	-1.6
Aug	-0.3
July	-2.3
Jun	-1.1
May	-0.4
Apr	2.2
Mar	-2.1
Feb	0.0
Jan	-1.1
Dec 2010	0.6
2010	0.2
2009	-1.7
2008	-0.3

Source: http://www.istat.it/it/archivio/46332

Chart 42 of the Istituto Nazionale di Statistica provides the 12 months rates of change of retail sales in Italy. Continued deterioration since May was reversed in Aug but continued in Sep.

Chart 42, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Italy’s index of business confidence in manufacturing and construction is provided in Table 45. There has been deterioration below 100 since Jul with reading of 96.5 in Nov. There is mild improvement in the view of the economy with an increase of the index from 76.0 in Oct to 83.4 in Nov. The outlook for the future improved from 82.1 in Oct to 89.1 in Nov. All indexes are higher in Nov than in Oct.

Table 45, Italy, Index of Consumer Confidence SA 2005=100

	Nov	Oct	Sep	Aug	Jul
Confidence	96.5	93.3	94.4	96.7	100.1
Economy	83.4	76.0	78.7	81.9	88.3
Personal	101.6	98.6	100.6	101.9	104.3
Current	102.2	101.0	101.2	104.3	109.8
Future	89.1	82.1	85.6	86.3	87.4

Source: http://www.istat.it/it/archivio/45999

VH United Kingdom. The Markit/CIPS UK Services PMI^® Business Activity Index fell from 52.9 in Sep to 51.3 in Oct, indicating continuing expansion at slower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8777). Chris Williamson, Chief Economist at Markit, finds that growth is weak in the services sector, which generates two-thirds of economic activity in the United Kingdom. The risk of recession in the UK originates in contraction in manufacturing with weakness in services. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators


CPI	Sep month ∆%: 0.6 Sep 12 months ∆%: 5.2 Blog 10/23/11
Output/Input Prices	Output Prices: Oct 12 months NSA ∆%: 5.7; excluding food, petroleum ∆%: 3.4 Input Prices: Oct 12 months NSA ∆%: 14.1 Excluding ∆%: 10.5 Blog 11/13/11
GDP Growth	IIIQ2011 prior quarter ∆% 05; year earlier same quarter ∆%: 0.5 Blog 11/27/11
Industrial Production	Sep 2011/Sep 2010 NSA ∆%: Industrial Production minus 0.7; Manufacturing 2.0 Blog 11/13/11
Retail Sales	Oct month SA ∆%: 0.6 Oct 12 months ∆%: 0.9 Blog 11/20/11
Labor Market	Aug-Oct Unemployment Rate: 8.3% Blog 11/20/11
Trade Balance	Balance Sep minus ₤3,940 million Exports Sep ∆%: 0.0 Jul/Sep ∆%: 9.8 Imports Sep ∆%: 2.8 Jul/Sep ∆%: 7.4 Blog 11/13/11

Links to blog comments in Table UK: 11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

11/13/11 http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html

11/06/11 http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html

10/30 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data are analyzed here. Table 46 provides quarter on quarter chained value measures of GDP since 2001. Growth in IIQ2011 was reduced to 0.1 percent. The second estimate for IIIQ2011 is higher at 0.5 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table 46, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	0.4	0.1	0.5
2010	0.2	1.1	0.6	-0.5
2009	-1.6	-0.2	0.2	0.7
2008	0.0	-1.3	-2.0	-2.3
2007	1.1	1.2	1.2	0.6
2006	0.8	0.4	0.2	0.7
2005	0.3	0.8	0.8	0.8
2004	0.8	0.4	0.1	0.5
2003	0.7	1.2	1.0	1.2
2002	0.8	0.7	0.8	0.7
2001	1.4	0.4	0.7	0.4
2000	1.4	1.1	0.4	0.7

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224605

Revised annual data in Table 47 show the strong impact of the global recession in the UK with decline of GDP of 4.4 percent in 2009 after dropping 1.1 percent in 2008. Recovery of 1.8 percent is relatively low compared to annual growth rates in 2007 and earlier years.

Table 47, UK, Revised National Accounts GDP Growth ∆%

	∆% on Prior Year
1998	3.8
1999	3.7
2000	4.5
2001	3.2
2002	2.7
2003	3.5
2004	3.0
2005	2.1
2006	2.6
2007	3.5
2008	-1.1
2009	-4.4
2010	1.8

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html

Table 48 provides percentage changes from the prior quarter of UK GDP and gross value added by components. Total indices of production grew at high rates of 1.2 percent in IIQ2010 and 1.3 percent in IQ2010 but there were declines of 1.2 percent in IIQ2011 and 0.1 percent in IQ2011. Services have grown somewhat more consistently, providing an important cushion for generation of economic activity in the UK. Total indices of production grew 0.4 percent in IIIQ2011 and services grew 0.6 percent.

Table 48, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter

	GDP	Total Production	Mfg	CONS	Services
IIIQ11	0.5	0.4	0.2	-0.2	0.6
IIQ11	0.1	-1.2	0.2	1.1	0.2
IQ11	0.4	-0.1	1.1	-2.7	0.7
IVQ10	-0.5	0.1	0.6	-1.8	-0.4
IIIQ10	0.6	0.3	1.3	3.2	0.4
IIQ10	1.1	1.2	1.7	8.2	0.4
IQ10	0.2	1.3	1.3	0.9	-0.1

Note: CONS: construction

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224605

Table 49 provides percentage changes from the same quarter a year earlier of UK GDP and gross value added by components. Growth in IIIQ2011 was driven by growth of manufacturing of 2.1 percent and of services of 1.2 percent with total production falling 0.8 percent and construction declining 3.6 percent. There is deterioration in the rate of growth of manufacturing from over 5 percent in the two final quarters of 2010 to 2.1 percent in IIIQ2011. The rate of growth of services fell only from around 1.6 percent at the end of 2010 to around 1.2 percent in the first three quarter of 2011.

Table 49, UK, GDP and Gross Value Added by Components, ∆% on Same Quarter a Year Earlier

	GDP	Total Production	Mfg	CONS	Services
IIIQ11	0.5	-0.8	2.1	-3.6	1.2
IIQ11	0.6	-0.9	3.2	-0.3	1.0
IQ11	1.6	1.5	4.8	6.7	1.2
IVQ10	1.3	2.9	5.0	10.6	0.4
IIIQ10	2.6	3.2	5.6	13.0	1.6
IIQ10	2.2	1.5	3.3	10.2	1.6
IQ10	0.9	0.0	1.3	-0.7	1.0

Note: CONS: construction

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224605

Chart 43 of the UK Office for National Statistics provides output indices chained value measures (CVM). The contraction in manufacturing was much stronger than in services that softened the impact on overall output.

Chart 43, UK, Output Indices

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/index.html

The breakdown of growth of production and services in IIIQ2011 in the UK relative to the prior quarter and to the same quarter a year earlier is provided in Table 50. While agriculture, forestry and fishing fell 0.5 percent in IIIQ2011 relative to IIIQ2010 and mining and quarrying fell 14.9 percent, manufacturing increased 2.0 percent. There was growth in all categories of services relative to the earlier quarter and to the same quarter a year earlier. While total indices of production fell 0.9 percent in IIIQ2011 relative to IIIQ2010 and construction fell 3.6 percent, services increased 1.2 percent.

Table 50, UK, Gross Domestic Product by Gross Value Added, Chained Volume Measures of Industry Output at Basic Prices, ∆%

IIIQ2011	∆% on Prior Quarter	∆% on Same Quarter Year Earlier
Agriculture, Forestry & Fishing	0.4	-0.5
Mining & Quarrying	0.4	-14.9
Manufacturing	0.2	2.0
Electricity, Gas, Steam & Air	2.3	0.6
Water Supply, Sewerage, etc.	-1.2	0.2
TOTAL INDICES OF PRODUCTION	0.3	-0.9
CONSTRUCTION	-0.2	-3.6
Distribution, Hotels & Restaurants	0.0	0.4
Transport, Storage & Communications	0.7	1.6
Business Services & Finance	1.1	1.2
Government & Other Services	0.6	1.4
TOTAL SERVICES	0.7	1.2
GDP	0.5	0.5

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-236742

Percentage changes on the prior quarter of GDP uses at chained value measures at provided in Table 51. The UK is experiencing weak internal demand as in most advanced economies. While gross fixed capital formation has fluctuated with some good quarters, household expenditure has been negative in four consecutive quarters from IIIQ2010 to IIQ2011 and flat in IIIQ2011.

Table 51, UK, GDP Uses at Chained Volume Measures Quarter on Quarter ∆%

	GDP	Household Expenditure	Gross Fixed Capital Formation
IIIQ2011	0.5	0.0	-0.2
IIQ2011	0.1	-0.8	1.7
IQ2011	0.4	-0.6	-2.8
IVQ2010	-0.5	-0.1	-0.5
IIIQ2010	0.6	-0.2	1.1
IIQ2010	1.1	0.6	-2.1
IQ2010	0.2	0.0	4.3

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/index.html

Growth of UK GDP from the same quarter a year earlier at chained value measures in shown in Table 52. Growth in IIIQ2011 relative to IIIQ2010 was only 0.5 percent and growth in IIQ2011 relative to IIQ2010 was only 0.6 percent. The rates of growth during the recovery in 2010 and 2011 have been much lower than rates of growth in 2007 and earlier years.

Table 52, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	1.6	0.6	0.5
2010	0.9	2.2	2.6	1.3
2009	-6.9	-5.9	-3.8	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q2-2011/tsd-qna-2011-q2.html

VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html

Table 53 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy encouraging carry trade from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table 53 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 13.4 percent by Fri Nov 18, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table 53 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table 53, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	11/25 /2011
Rate	1.1423	1.5914	1.192	1.324
CNY/USD	01/03 2000	07/21 2005	7/15 2008	11/25 2011
Rate	8.2798	8.2765	6.8211	6.3816
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

Sources: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

http://www.census.gov/const/www/newressalesindex_excel.html

http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Table 54 extracts four rows of Table 53 with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 56 below, the dollar has devalued again to USD 1.324/EUR or by 11.1 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3816/USD on Fri Nov 25, 2011, or by an additional 6.4 percent, for cumulative revaluation of 22.9 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table 54 now includes three last rows with the CNY/USD weekly rate. The final row of Table 54 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table 54, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	6/26/03	7/14/08	6/07/10	11/25 /2011
Rate	1.1423	1.5914	1.192	1.324
CNY/USD	01/03 2000	07/21 2005	7/15 2008	11/25 2011
Rate	8.2798	8.2765	6.8211	6.3816
Weekly Rates	11/04/ 2011	11/11/ 2011	11/18/ 2011	11/25/ 2011
CNY/USD	6.341	6.342	6.3568	6.3816
∆% from Earlier Week*	0.3	0.0	-0.2	-0.4

*Negative sign is depreciation, positive sign is appreciation

Source: Table 53 and same table in earlier blog posts.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table 55. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table 55, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 53 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill recession. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table 56, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 11/25/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets. Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. There are now only three assets with positive change in valuation in column “∆% Trough to 11/25/11:” DJIA 15.9 percent, S&P 500 13.3 percent and DJ UBS Commodities index 14.3 percent. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 15.8 percent from the trough and of the S&P 500 by 13.3 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 11/25/11” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations show percentage declines: European stocks index STOXX 50 is now 7.2 percent below the trough on Jul 2, 2010; China’s Shanghai Composite is 0.1 percent below the trough; the NYSE Financial Index is 13.2 percent below the trough on Jul 2, 2010; Japan’s Nikkei Average is 7.5 percent below the trough on Aug 31, 2010 and 22.5 percent below the peak on Apr 5, 2010; Germany’s Dax is 3.1 percent below the trough on May 25, 2010; Dow Asia Pacific is 2.3 percent below the trough on Jul 2; and Dow Global is 0.9 percent below the trough on Jul 2. The Nikkei Average closed at 8160.01 on Fri Nov 25, which is 20.4 percent below 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 11.1 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 11/25/2011” in Table 56 shows sharp losses for all risk financial assets in the week of Nov 25. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table 56 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 11/25/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Nov 18, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 11/25/11” but also relative to the peak in column “∆% Peak to 11/25/11.” The DJIA is the only index above the peak with a gain of merely 0.2 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 30.9 percent, Nikkei Average by 28.4 percent, Shanghai Composite by 24.8 percent, STOXX 50 by 21.4 percent, Dow Global by 19.1 percent and Dow Asia Pacific by 14.5 percent. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. The situation of risk financial assets has worsened.

Table 56, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 11/25 /11	∆% Week 11/ 25/ 11	∆% Trough to 11/25 11
DJIA	4/26/ 10	7/2/10	-13.6	0.2	-4.8	15.9
S&P 500	4/23/ 10	7/20/ 10	-16.0	-4.8	-4.7	13.3
NYSE Finance	4/15/ 10	7/2/10	-20.3	-30.9	-5.8	-13.2
Dow Global	4/15/ 10	7/2/10	-18.4	-19.1	-5.4	-0.9
Asia Pacific	4/15/ 10	7/2/10	-12.5	-14.5	-4.5	-2.3
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-28.4	-2.6	-7.5
China Shang.	4/15/ 10	7/02 /10	-24.7	-24.8	-1.5	-0.1
STOXX 50	4/15/10	7/2/10	-15.3	-21.4	-4.4	-7.2
DAX	4/26/ 10	5/25/ 10	-10.5	-13.3	-5.3	-3.1
Dollar Euro	11/25 2009	6/7 2010	21.2	12.5	2.1	-11.1
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-2.3	-2.2	14.3
10-Year T Note	4/5/ 10	4/6/10	3.986	1.964

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 57 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table 57 for Nov 25 shows that the S&P 500 is now 4.4 percent below the Apr 26, 2010 level and the DJIA is 0.2 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 57, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table 58, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table 58 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 17.8 percent to ZAR 8.529/USD on Nov 25, which is still 26.3 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 2.6 percent stronger at SGD 1.313/USD on Nov 25 relative to the trough of depreciation but still stronger by 15.5 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 8.5 percent relative to the trough to BRL 1.885/USD on Nov 25 but still stronger by 22.4 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The monetary policy committee (COPOM) of the Banco Central do Brasil, Brazil’s central bank, lowered the policy rate by another 50 basis points on Oct 19, 2011 (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.50 percent, without bias. The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of convergence to inflation to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table 58 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table 58, Exchange Rates

	Peak	Trough	∆% P/T	Nov 25, 2011	∆T Nov 25 2011	∆P Nov 25 2011
EUR USD	7/15 2008	6/7 2010		11/25 2011
Rate	1.59	1.192		1.324
∆%			-33.4		9.9	-20.1
JPY USD	8/18 2008	9/15 2010		11/25 2011
Rate	110.19	83.07		77.7
∆%			24.6		6.5	29.5
CHF USD	11/21 2008	12/8 2009		11/25 2011
Rate	1.225	1.025		0.933
∆%			16.3		8.9	23.8
USD GBP	7/15 2008	1/2/ 2009		11/25 2011
Rate	2.006	1.388		1.544
∆%			-44.5		10.1	-29.9
USD AUD	7/15 2008	10/27 2008		11/25 2011
Rate	1.0215	1.6639		0.971
∆%			-62.9		38.1	-0.8
ZAR USD	10/22 2008	8/15 2010		11/25 2011
Rate	11.578	7.238		8.529
∆%			37.5		-17.8	26.3
SGD USD	3/3 2009	8/9 2010		11/25 2011
Rate	1.553	1.348		1.313
∆%			13.2		2.6	15.5
HKD USD	8/15 2008	12/14 2009		11/25 2011
Rate	7.813	7.752		7.767
∆%			0.8		-0.2	0.6
BRL USD	12/5 2008	4/30 2010		11/25 2011
Rate	2.43	1.737		1.885
∆%			28.5		-8.5	22.4
CZK USD	2/13 2009	8/6 2010		11/25 2011
Rate	22.19	18.693		19.65
∆%			15.7		-5.1	11.4
SEK USD	3/4 2009	8/9 2010		11/25 2011
Rate	9.313	7.108		7.001
∆%			23.7		1.5	24.8
CNY USD	7/20 2005	7/15 2008		11/25 2011
Rate	8.2765	6.8211		6.3816
∆%			17.6		6.4	22.9

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Table 59, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table 59. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.964 percent at the close of market on Fri Nov 25 would be equivalent to price of 105.9749 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.7 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table 59. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table 59 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Nov 16, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2805 billion, or $2.8 trillion, with portfolio of long-term securities of $2585 billion, or $2.6 trillion, consisting of $1569 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $106 billion Federal agency debt securities and $842 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1489 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table 59, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

VII Economic Indicators. Crude oil input in refineries increased 0.2 percent to 14,626 thousand barrels per day on average in the four weeks ending on Nov 18 from 14,592 thousand barrels per day in the four weeks ending on Nov 11, as shown in Table 60. The rate of capacity utilization in refineries continues at a relatively high level of 84.5 percent on Nov 18, 2011, which is slightly higher than on Nov 12, 2010 at 83.4 percent and also slightly higher than 84.4 on Nov 11, 2011. Imports of crude oil fell 2.9 percent from 8,842 thousand barrels per day on average in the week of Nov 11 to 8,578 thousand barrels per day. Increasing utilization in refineries with decreasing imports resulted in decrease of commercial crude oil stocks by 6.2 million barrels from 337.0 million barrels on Nov 11 to 330.8 million barrels on Nov 18. Motor gasoline production increased 1.5 percent from 8,992 thousand barrels per day in the week of Nov 11 to 9,125 thousand barrels per day on average in the week of Nov 18. Motor gasoline supplied fell 4.0 percent from 8,579 thousand barrels per day on Nov 11 to 8,602 thousand barrels per day on average on Nov 18. Gasoline stocks increased 4.4 million barrels and stocks of fuel oil fell 0.7 million barrels. Supply of gasoline fell from 8,963 thousand barrels per day on Nov 19, 2010, to 8,602 thousand barrels per day on Nov 18, 2011, or by 4.0 percent, while fuel oil supply rose 5.7 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 60 also shows increase in the WTI price of crude oil by 19.6 percent from Nov 19, 2010 to Nov 18, 2011. Gasoline prices rose 17.1 percent from Nov 22, 2010 to Nov 21, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

Table 60, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	11/18/11	11/11/11	11/19/10
Crude Oil Refineries Input	14,626 Week ∆%: 0.2	14,592	14,131
Refinery Capacity Utilization %	84.5	84.4	83.4
Motor Gasoline Production	9,125 Week ∆%: 1.5	8,992	8,967
Distillate Fuel Oil Production	4,622 Week ∆%: 2.1	4,529	4,292
Crude Oil Imports	8,578 Week ∆%: -2.9	8,842	8,355
Motor Gasoline Supplied	8,602 ∆% 2011/2010= –4.0%	8,579	8,963
Distillate Fuel Oil Supplied	4,249 ∆% 2011/2010 = 5.7%	4,294	4,021
	11/18/11	11/11/11	11/19/10
Crude Oil Stocks Million B	330.8 ∆= -6.2 MB	337.0	358.6
Motor Gasoline Million B	209.6 ∆= 4.4 MB	205.2	209.6
Distillate Fuel Oil Million B	133.0 ∆= -0.7 MB	133.7	158.3
WTI Crude Oil Price $/B	97.67 ∆% 2011/2010 19.6	98.99	81.65
	11/21/11	11/14/11	11/22/10
Regular Motor Gasoline $/G	3.368 ∆% 2011/2010 17.1	3.436	2.876

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

Chart 44 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks.

Chart 44, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Chart 45 of the US Energy Information Administration provides closer view of US crude oil stocks since Dec 2009. Crude oil stocks rose in a clear trend throughout 2010 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower.

Chart 45, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

Chart 46 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 46 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart 46, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table 61. Seasonally adjusted claims increased 2,000 from 391,000 on Nov 12 to 393,000 on Nov 19. Claims not adjusted for seasonality increased 74,214, from 362,835 on Nov 12 to 437,049 on Nov 19.

Table 61, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Nov 19	393,000	437,049	394,250
Nov 12	391,000	362,835	397,500
Change	+2,000	+74,214	-3,250
Nov 5	393,000	402,532	400,750
Prior Year	416,000	464,817	436,750

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Table 62 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 609,128 on Nov 22, 2008 to 437,049 on Nov 12, 2011 and are just slightly lower than 464,817 on Nov 20, 2010, but are much higher than 323,124 on Nov 17, 2007.

Table 62, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Nov 18, 2000	374,160	332,000
Nov 17, 2001	420,259	431,000
Nov 16, 2002	372,829	389,000
Nov 22, 2003	397,990	354,000
Nov 20, 2004	355,954	313,000
Nov 19, 2005	368,859	324,000
Nov 18, 2006	367,690	326,000
Nov 17, 2007	323,124	333,000
Nov 22, 2008	609,128	536,000
Nov 21, 2009	547,022	486,000
Nov 20, 2010	464,817	416,000
Nov 19, 2011	437,049	393,000

Source: http://workforcesecurity.doleta.gov/unemploy/finance.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 63 provides inflation of the CPI. In Jul-Oct 2011, CPI inflation for all items seasonally adjusted was 3.3 percent in annual equivalent, that is, compounding inflation in Jul-Oct and assuming it would be repeated for a full year. In the 12 months ending in Oct, CPI inflation of all items not seasonally adjusted was 3.5 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.1 percent in 12 months and 1.8 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.02 percent for three months, 0.06 percent for six months, 0.11 percent for 12 months, 0.27 percent for two years, 0.41 percent for three years, 0.93 percent for five years, 1.45 percent for seven years, 1.96 percent for ten years and 2.92 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table 63. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.

Table 63, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Oct 2011/Oct 2010 NSA	∆% Annual Equivalent Jul-Oct 2011 SA
CPI All Items	3.5	3.3
CPI ex Food and Energy	2.1	1.8

Source: http://www.bls.gov/news.release/pdf/cpi.pdf

IX Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first three quarters of 1.2 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 29 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. The crucial issue of “let’s twist again “monetary policy is if lowering the yields of long-term Treasury securities would have any impact on investment and consumption or aggregate demand. The decline of long-term yields of Treasury securities would have to cause decline of yields of asset-backed securities used to securitize loans for investment by firms and purchase of durable goods by consumers. The decline in costs of investment and consumption of durable goods would ultimately have to result in higher investment and consumption. It is possible that the decline in yields captured by event studies is ephemeral. The decline in yields just after “let’s twist again” monetary policy was caused by the flight out of risk financial assets into Treasury securities, which is the opposite of the desired effect of encouraging risk-taking in asset-backed securities and lending. The yield curve edged upwardly in spite of “let’s twist again monetary policy” (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10).

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Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html

Blanchard, Olivier. 2011WEOSep. Foreword to IMF 2011WEOSep: XIII-XIV.

Buiter, Willem. 2011Oct31. EFSF needs bigger bazooka to maximize its firepower. Financial Times, Oct 31 http://www.ft.com/intl/cms/s/0/c4886f7a-03d3-11e1-bbc5-00144feabdc0.html#axzz1cMoq63R5

Cochrane, John H. 2011Jan. Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review 55 (1, Jan): 2-30.

Cochrane, John H. and Luigi Zingales. 2009. Lehman and the financial crisis. Wall Street Journal, Sep 15

Cobet, Aaron E. and Gregory A. Wilson. 2002. Comparing 50 years of labor productivity in US and foreign manufacturing. Monthly Labor Review (Jun): 51-65.

Culbertson, J. M. 1960. Friedman on the lag in effect of monetary policy. Journal of Political Economy 68 (6, Dec): 617-21.

Culbertson, J. M. 1961. The lag in effect of monetary policy: reply. Journal of Political Economy 69 (5, Oct): 467-77.

De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.

European Commission. 2011Oct26SS. Euro summit statement. Brussels, European Commission, Oct 26 http://ec.europa.eu/news/economy/111027_en.htm

European Commission. 2011Oct26MRES. Main results of Euro Summit. Brussels, European Commission, Oct 26 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/125645.pdf

Friedman, Milton. 1969. The Euro-dollar market: some first principles. Morgan Guaranty Survey (Oct 1969). Also available at the University of Chicago Booth School of Business, Selected Papers, No. 34 http://www.chicagobooth.edu/faculty/selectedpapers/sp34.pdf

Friedman, Milton. 1970. Controls on interest rates paid by banks. Journal of Money, Credit and Banking 2 (1, Feb): 15-32.

Greenspan, Alan. 2004. Risk and uncertainty in monetary policy. American Economic Review 94 (2, May): 33-40. Also available at http://www.federalreserve.gov/boarddocs/speeches/2004/20040103/default.htm

Hicks, John R. 1975. The scope and status of welfare economics. Oxford Economic Papers 27 (3): 307-26.

IMF. 2011WEOSep. World economic outlook Sep 11: slowing growth, rising risks. Washington, DC, IMF Sep http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf

IMF. 2011JSRNov23. Japan sustainability report. Washington, DC, IMF, Nov 23 http://www.imf.org/external/np/country/2011/mapjapanpdf.pdf

Kydland, Finn E. and Edward C. Prescott. 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85 (3, Jun): 473-92.

McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Washington, DC: Brookings Institution.

Meltzer, Allan H. 2005. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review 87 (2, Part 2, Mar/Apr): 145-72.

Meltzer, Allan H. 2010a. A history of the Federal Reserve, Volume 2, Book 1, 1951-1969. Chicago: University of Chicago Press.

Meltzer, Allan H. 2010b. A history of the Federal Reserve, Volume 2, Book 2, 1970-1986. Chicago: University of Chicago Press.

Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos Manuel. 1986. O Cruzado e o Austral. São Paulo: Editora Atlas.

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Sargent, Thomas J. 1982. The ends of four big inflations. In Robert E. Hall, ed. Inflation: causes and effects. Chicago: Chicago University Press.

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Sargent, Thomas J. and Neil Wallace. 1981. Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3, Fall): 1-17.

Shaw, Edward S. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.

Taylor, John B. 1997. Comment. In Christina Romer and David Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.

Tobin, James. 1974. Monetary policy in 1974 and beyond. Brookings Papers on Economic Activity 1 (1974): 219-32.

Wriston, Walter B. 1982. Banking against disaster. New York Times, Sep 14.

Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf

Appendix I. The Great Inflation

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Chart I1, Brazil, Phillips Circuit 1963-1987

©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982

	∆% GDP	∆% CPI	UNE
1960	2.5	1.4	6.6
1961	2.3	0.7	6.0
1962	6.1	1.3	5.5
1963	4.4	1.6	5.5
1964	5.8	1.0	5.0
1965	6.4	1.9	4.0
1966	6.5	3.5	3.8
1967	2.5	3.0	3.8
1968	4.8	4.7	3.4
1969	3.1	6.2	3.5
1970	0.2	5.6	6.1
1971	3.4	3.3	6.0
1972	5.3	3.4	5.2
1973	5.8	8.7	4.9
1974	-0.6	12.3	7.2
1975	-0.2	6.9	8.2
1976	5.4	4.9	7.8
1977	4.6	6.7	6.4
1978	5.6	9.0	6.0
1979	3.1	13.3	6.0
1980	-0.3	12.5	7.2
1981	2.5	8.9	8.5
1982	-1.9	3.8	10.8
1983	4.5	3.8	8.3
1984	7.2	3.9	7.3
1985	4.1	3.8	7.0
1986	3.5	1.1	6.6
1987	3.2	4.4	5.7
1988	4.1	4.4	5,3
1989	3.6	4.6	5.4
1990	1.9	6.1	6.3

Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series

Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bls.gov/web/empsit/cpseea01.htm

http://data.bls.gov/pdq/SurveyOutputServlet

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

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Sunday, November 27, 2011

US Growth Standstill, Falling Real Disposable Income, Repression of Savings, Euro Zone Survival Risk and World Economic Slowdown