CMP Associates Regulation Blog: Part II: World Inflation Waves

IV 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.

IVA 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	Sep New Orders SA ∆%: -0.8; ex transport ∆%: 1.7 Sep 12 months NSA New Orders ∆%: 7.7; ex transport ∆% : 9.4 Blog 10/30/11
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	Oct 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: 11/13/11 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

Industrial production rose 0.7 percent in Oct and 3.9 percent in the 12 months ending in Oct, as shown in Table 26. In the four months ending in Oct, industrial production grew at the annual equivalent rate of 5.2 percent. Business equipment increased 1.0 percent in Oct, 10.2 percent in the 12 months ending in Oct and at the annual equivalent rate of 14.0 percent in the four months Jul-Oct. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/current/): “Capacity utilization for total industry stepped up to 77.8 percent, a rate 2.1 percentage points above its level from a year earlier but 2.6 percentage points below its long-run (1972--2010) average.” Manufacturing contributed $1,229 billion to US national income of $12,643 billion without capital consumption adjustment in 2010, or 9 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm).

Table 26, US, Industrial Production and Capacity Utilization, SA %

	Oct	Sep	Aug	Jul	Jun	Oct 2011/ Oct 2010
Total	0.7	-0.1	0.0	1.1	0.0	3.9
Market Groups
Final Products	0.6	0.2	0.3	1.1	-0.2	4.2
Consumer Goods	0.5	0.0	-0.1	1.0	-0.2	2.1
Business Equipment	1.0	0.6	1.4	1.4	0.2	10.2
Non Industrial Supplies	0.0	-0.1	-0.3	0.8	-0.2	2.4
Construction	0.1	0.4	-0.4	1.0	0.1	4.0
Materials	0.9	-0.2	-0.2	1.3	0.3	4.2
Industry Groups
Manufacturing	0.5	0.3	0.3	0.7	-0.1	4.1
Mining	2,3	-0.5	1.1	1.6	0.3	6.0
Utilities	-0.1	-2.0	-3.1	3.2	0.4	0.1
Capacity	77.8	77.3	77.4	77.5	76.7	1.1

Sources: http://www.federalreserve.gov/releases/g17/current/

A longer perspective of manufacturing in the US is provided by Table 27. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.

Table 27, US, Monthly and 12 Months Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12 Months NSA ∆%
Oct 2011	0.5	3.9
Sep	0.3	3.9
Aug	0.3	3.6
Jul	0.8	3.7
Jun	-0.1	3.5
May	0.2	3.6
Apr	-0.6	4.5
Mar	0.7	5.9
Feb	0.1	6.2
Jan	0.7	6.2
Dec 2010	1.0	6.4
Nov	0.2	5.5
Oct	0.2	6.2
Sep	0.2	5.9
Aug	0.1	6.6
Jul	0.8	7.6
Jun	-0.1	8.1
May	1.1	7.8
Apr	0.7	6.1
Mar	0.9	5.9
Feb	0.1	0.6
Jan	1.0	6.2
Dec 2009	0.2	-3.2
Nov	0.8	-5.9
Oct	-0.04	-8.9
Sep	0.8	-10.3
Aug	1.0	-13.3
Jul	1.3	-14.9
Jun	-0.3	-17.4
May	-1.2	-17.4
Apr	-0.8	-18.1
Mar	-2.0	-17.1
Feb	0.1	-16.0
Jan	-2.7	-16.5
Dec 2008	-3.1	-14.1
Nov	-2.4	-11.5
Oct	-0.6	-9.2
Sep	-3.4	-9.0
Aug	-1.4	-5.5
Jul	-1.1	-4.1
Jun	-0.6	-3.5
May	-0.6	-2.8
Apr	-1.2	-1.5
Mar	-0.4	-0.9
Feb	-0.5	0.6
Jan	-0.3	1.9
Dec 2007	0.3	1.8
Nov	0.3	3.2
Oct	-0.5	2.8
Sep	0.5	3.2
Aug	-0.5	2.9
Jul	0.3	3.8
Jun	0.3	3.3
May	-0.2	3.5
Apr	0.7	4.0
Mar	0.7	2.8
Feb	0.5	2.0
Jan	-0.3	1.8
Dec 2006		3.2
Dec 2005		1.4
Dec 2004		2.8
Dec 2003		1.7

Source: http://www.federalreserve.gov/releases/g17/current/table1.htm

Chart 33 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart 33, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart 34 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart 34 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression. The bottom left-hand part of Chart 34 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of computers and semiconductors has already surpassed the level before the global recession.

Chart 34, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart 35 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 10 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart 35, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

The general business conditions index of the Federal Reserve Bank of New York Empire State Manufacturing Survey shows significant improvement from minus 8.48 in Sep to 0.61 in Nov, as shown in Table 28. The index had been registering negative changes in the five months from Jun to Oct. The new orders segment fell from 0.16 in Oct to minus 2.07 in Nov, back to contraction territory. There is positive reading in shipments from minus 12.88 in Sep to positive 5.33 in Oct and even higher at 9.43 in Nov. The segment of number of employees fell back into contraction territory from 3.37 in Oct to minus 3.66 in Nov. Expectations for the next six months of the general business conditions index fell from 13.04 in Sep to 6.74 in Oct at levels well below the higher expectations of 22.45 in Jun of 22.45 and 32.22 in Jul but surged to 39.02 in Nov. Expectations of new orders fell from 13.04 in Sep to 12.36 in Oct but jumped to 35.37 in Nov. Expectations of new employees surged from 0.00 in Sep to 6.74 in Oct and jumped to 14.63 in Nov. The average employee workweek rose from the contraction zone at minus 2.25 to the expansion zone at 8.54.

Table 28, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index

	Jun	Jul	Aug	Sep	Oct	Nov
Current Conditions
General Business Conditions	-7.79	-3.76	-7.72	-8.82	-8.48	0.61
New Orders	-3.61	-5.45	-7.82	-8.0	0.16	-2.07
Shipments	-8.02	2.22	3.01	-12.88	5.33	9.43
Unfilled Orders	0.00	-12.22	-15.22	-7.61	-4.49	-7.32
Inventories	1.02	-5.56	-7.61	-11.96	-8.99	-12.2
# Employees	10.20	1.11	3.26	-5.43	3.37	-3.66
Average Employee Workweek	-2.04	-15.56	-2.17	-2.17	-4.49	2.44
Expectations Six Months
General Business Conditions	22.45	32.22	8.70	13.04	6.74	39.02
New Orders	15.31	25.56	6.52	13.04	12.36	35.37
Shipments	17.35	30.00	7.61	13.04	17.98	36.59
Unfilled Orders	-9.18	5.56	-6.52	-6.52	1.12	6.10
Inventories	-9.18	1.1	7.61	-2.17	-15.73	2.44
# Employees	6.12	17.78	6.52	0.00	6.74	14.63
Average Employee Workweek	-2.04	2.22	-4.35	-6.52	-2.25	8.54

Source: http://www.newyorkfed.org/survey/empire/nov2011.pdf

The Philadelphia Business Outlook Survey in Table 29 provides an optimistic reading in Oct with the movement to 8.7 away from the contraction zone of minus 17.5 in Sep but fell to 3.6 in Nov. New orders were signaling increasing future activity, rising from minus 11.3 in Sep to 7.8 in Oct but declined to 1.3 in Nov. Employment is stronger with number of employees increasing from 1.4 in Oct to 12.0 in Nov and average employee workweek rising from minus 13.7 in Sep to 3.1 in Oct and jumping to 11.0 in Nov. All the indexes of expectations for the next six months are showing sharp increases. The general index rose from 27.2 in Oct to 41.9 in Nov and new orders rose from 26.7 in Oct to 39.8 in Nov.

Table 29, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

	Jun	Jul	Aug	Sep	Oct	Nov
Current Conditions
General Index	-7.7	3.2	-30.7	-17.5	8.7	3.6
New Orders	-7.6	0.1	-26.8	-11.3	7.8	1.3
Shipments	4.0	4.3	-13.9	-22.8	13.6	7.3
Unfilled Orders	-16.3	-16.3	-20.9	-10.4	3.4	-1.5
Number Employees	4.1	8.9	-5.2	5.8	1.4	12.0
Average Employee Workweek	1.9	-5.4	-14.4	-13.7	3.1	11.0
Expectation Six Months
General Index	2.5	23.7	1.4	21.4	27.2	41.9
New Orders	7.9	27.8	16.3	21.6	26.7	39.8
Shipments	6.6	23.0	12.6	25.2	27.1	37.3
Unfilled Orders	-9.6	2.9	-3.5	4.7	7.7	9.0
Number Employees	5.5	10.1	7.8	11.2	14.5	25.4
Average Employee Workweek	-1.6	4.1	-5.3	7.4	9.7	3.9

Sources: http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos1111.pdf

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos1011.pdf

http://www.phil.frb.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0911.pdf

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0711.pdf

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2011/bos0611.pdf

Chart 36 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Nov 2011. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now what hopefully could be renewed strength.

Chart 36, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Growth rates and levels of sales in billions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table 30. Total business sales rose 0.6 percent in Sep after 0.4 percent in Aug and were up by 11.5 percent in Sep 2011 relative to Sep 2010. Sales of manufacturers rose 0.3 percent in Sep after increasing 0.1 percent in Aug and rose 10.9 percent in the 12 months to Sep. Retailers experienced strong growth of 1.1 percent in sales in Sep and 8.6 percent in 12 months. Sales of merchant wholesalers rose 0.5 percent in Sep after 1.0 percent in Aug and grew 14.8 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.

Table 30, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Sep 2011 Billions of Dollars NSA	Sep 11/ Aug 11 ∆% SA	Aug 11/ Jul 11 ∆% SA	Sep 11/ Sep 10 ∆% NSA
Total Business	1,217.2	0.6	0.4	11.5
Manufacturers	466.1	0.3	0.1	10.9
Retailers	340.7	1.1	0.3	8.6
Merchant Wholesalers	410.4	0.5	1.0	14.8

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 0.8 percent to inventories in Sep with growth of 4.1 percent in 12 months, as shown in Table 31. Total business increased inventories by 0.5 percent in both Sep and Aug and 10.4 percent in 12 months. Inventories sales/ratios of business continued at a level close to 1.27 under judicious management to avoid costs and risks.

Table 31, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Sep 11 Billions of Dollars NSA	Sep 11/ Aug 11 ∆% SA	Aug 11/ Jul 11 ∆% SA	Sep 11/ Aug 10 ∆% NSA
Total Business	1,532.8	0.5	0.5	10.4
Manufacturers	600.4	0.4	0.6	13.0
Retailers	472.5	0.8	0.1	4.1
Merchant Wholesalers	459.9	0.4	0.8	14.0
Inventory/ Sales Ratio NSA	Sep 11 Billions of Dollars NSA	Sep 2011 SA	Aug 2011 SA	Sep 2010 SA
Total Business	1,532.8	1.27	1.27	1.30
Manufacturers	600.4	1.33	1.33	1.33
Retailers	472.5	1.33	1.34	1.39
Merchant Wholesalers	459.9	1.15	1.15	1.18

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference' in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart 37 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions.

Chart 37, Total Business Inventories/Sales Ratios 2002 to 2011

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif

Markets responded positively to the announcement of growth of sales of retail and food services by 0.5 percent in Oct after increasing 1.1 percent in Sep, as shown in Table 32. Sales of motor vehicles and parts rose 0.4 percent in Oct after 4.2 in Sep and 7.5 percent in Jan-Oct 2011 relative to Jan-Oct 2010. Sales ex motor vehicles and parts rose 0.6 per cent in Oct and 7.5 percent in Jan-Oct 2011 relative to Jan-Oct 2010. Gasoline station sales rose 1.2 percent in fluctuating prices of gasoline.

Table 32, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	Oct/Sep ∆% SA	Sep/Aug ∆% SA	Jan-Oct 2011 Billion Dollars	12 Months Jan to Oct 2011 to Jan to Oct 2010 ∆% NSA
Retail and Food Services	0.5	1.1	3,829.8	7.9
Excluding Motor Vehicles and Parts	0.6	0.5	3,146.6	7.5
Motor Vehicles & Parts	0.4	4.2	683.1	10.4
Retail	0.6	1.1	3,419.4	8.4
Building Materials	1.5	0.1	252.1	5.9
Food and Beverage	1.1	-0.1	506.9	5.6
Grocery	1.1	-0.2	456.0	5.8
Health & Personal Care Stores	0.7	4.4	226.6	5.0
Clothing & Clothing Accessories Stores	-0.7	1.7	174.9	5.9
Gasoline Stations	-0.4	0.7	447.6	19.5

Source: http://www.census.gov/retail/marts/www/marts_current.pdf

Chart 38 of the US Bureau of the Census shows percentage change of retails and food services sales. Sep was strong in multiple categories.

Chart 38, US, Percentage Change of Retail and Food Services Sales

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif

Twelve months rates of growth of US sales of retail and food services in Oct from 2000 to 2011 are shown in Table 33. Nominal sales have been dynamic in 2011 and 2010 after declines in 2009 and 2008.

Table 33, US, Percentage Change in 12 Months Sales for Retail and Food Services, ∆% NSA

Oct	12 Months ∆%
2011	6.7
2010	6.0
2009	-2.9
2008	-4.9
2007	5.7
2006	3.8
2005	5.1
2004	5.2
2003	5.7
2002	-1.4
2001	7.8
2000	4.9

Source: http://www.census.gov/retail/

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table 34. Housing starts fell 0.3 percent in Oct while the increase by 15 percent in Sep was revised down to 7.7 percent. Housing permits, indicating future activity, rose 10.9 percent in Oct after falling 5.8 percent in Sep. Monthly rates in starts and permits fluctuate significantly on a monthly basis as shown in Table 34.

Table 34, US, Housing Starts and Permits SSAR Month ∆%

	Housing Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Oct 2011	628	-0.3	653	10.9
Sep	630	7.7	589	-5.8
Aug	585	-4.9	625	4.0
Jul	615	0.0	601	-2.6
Jun	615	11.2	617	1.3
May	553	0.7	609	8.2
Apr	549	-7.4	563	-1.9
Mar	593	14.5	574	7.5
Feb	518	-18.6	534	-6.0
Jan	636	20.9	568	-9.8
Dec 2010	526	-4.5	630	-9.8
Nov	551	2.3	564	1.6
Oct	539	-9.7	555	-1.2
Sep	597	-1.5	562	-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

http://www.census.gov/const/newresconst.pdf

Cumulative housing starts and permits from Jan to Oct not-seasonally adjusted are provided in Table 35. Housing starts increased 0.1 percent in the cumulative of Jan-Oct 2011 relative to the same period in 2010 and in the same period new permits rose 0.2 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 67.4 percent in Jan-Oct 2011 relative to Jan-Oct 2006 and fell 71.1 percent relative to Jan-Oct 2005. Housing permits fell 68.4 percent from Jan-Oct 2006 to Jan-Oct 2011 and fell 72.2 percent from Jan-Oct 2005.

Table 35, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan-Oct 2011	512.8	511.1
Jan-Oct 2010	512.5	510.1
∆% Jan-Oct 2011/Jan-Oct 2010	0.1	0.2
Jan-Oct 2006	1573.3	1616.0
∆%/Jan-Oct 2011	-67.4	-68.4
Jan-Oct 2005	1771.5	1841.7
∆%/ Jan-Oct 2011	-71.1	-72.2

Source: http://www.census.gov/const/newresconst.pdf

http://www.census.gov/const/newresconst_200710.pdf

http://www.census.gov/const/newresconst_200610.pdf

Chart 39 of the US Bureau of the Census shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart 39 shows a mild downward trend or stagnation from mid 2010 to the present.

Chart 39, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Bureau of the Census

http://www.census.gov/briefrm/esbr/www/esbr020.html

A longer perspective on residential construction in the US is provided by Table 36 with annual data from 1960 to 2010. Housing starts fell 71.6 percent from 2005 to 2010, 62.6 percent from 2000 to 2010 and 53.1 percent relative to 1960. Housing permits fell 71.9 percent from 2005 to 2010, 62.0 percent from 2000 to 2010 and 39.4 percent from 1960 to 2010. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table 36, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,1637.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.7	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

Source: http://www.census.gov/const/www/newresconstindex.html

Weakness in the housing sector is being considered as an important factor of the financial crisis, global recession and slow growth recession. Chairman Bernanke (2011Oct4JEC, 2-3) states:

“Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.”

The answer to these arguments can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

Risk aversion channeled funds toward US long-term and short-term securities as shown in Table 37. Net foreign purchases of US long-term securities (row C in Table 37) in Sep were a high for a month in 2011 of $68.6 billion, incomparably larger than $9.1 billion in Jul and $4.1 billion in May and higher by $10.7 billion than $57.9 billion in Aug. Foreign (residents) purchases less sales of US long-term securities (row A in Table 37) in Aug were $65.8 billion, much higher than $24.1 billion in Jul and minus $10.9 billion in Jun but lower than $66.1 billion in Aug. Net US (residents) purchases of long-term foreign securities (row B in Table 24) in Sep were $2.7 billion. In Sep,

C = A + B = $65.8 billion + $2.7 billion = $68.6 billion

The significant change in Table 37 in Aug is in A1 private purchases by residents overseas of US long-term securities of $74.8 billion of which A11 Treasury securities $69.7 billion and A12 $9.8 billion agency securities. The sovereign risk crisis in Europe diverted foreign private investment away from risk toward the safe haven of US Treasury securities. In Sep A1 private purchases by residents overseas of US long-term securities fell to $28.b billion with declines in all items. A2 official purchases by foreign residents of US long-term securities rose from minus $8.7 billion to $37.3 billion mainly because of $38.8 billion in A21 Treasury securities. Row D shows decrease in Sep in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills increased $25.2 billion (row D11) but foreign official holdings fell $21.9 billion. Risk aversion of principal losses in foreign securities dominated decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.

Table 37, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

2011	Jun	Jul	Aug	Sep
A Foreign Purchases less Sales of US LT Securities	-10.9	24.1	66.1	65.8
A1 Private	-22.5	9.8	74.8	28.5
A11 Treasury	-17.4	1.7	69.7	45.7
A12 Agency	2.1	6.9	9.8	8.8
A13 Corporate Bonds	-10.1	1.6	1.7	-6.8
A14 Equities	2.9	-0.4	-6.5	-19.2
A2 Official	11.5	14.2	-8.7	37.3
A21 Treasury	13.8	13.9	-9.6	38.8
A22 Agency	-2.4	1.3	-1.0	-1.7
A23 Corporate Bonds	-0.7	-0.4	2.0	0.3
A24 Equities	0.8	-0.6	0.0	0.0
B Net US Purchases of LT Foreign Securities	15.1	-15.0	-8.1	2.7
B1 Foreign Bonds	13.4	0.6	-4.9	1.0
B2 Foreign Equities	1.7	-15.6	-3.2	1.7
C Net Foreign Purchases of US LT Securities	4.1	9.1	57.9	68.6
D Increase in Foreign Holdings of Dollar Denominated Short-term	-10.2	-35.2	22.9	-4.8
D1 US Treasury Bills	-10.4	-32.1	28.1	3.3
D11 Private	5.1	-16.6	11.2	25.2
D12 Official	-15.5	-15.4	16.9	-21.9
D2 Other	0.2	-3.2	-5.2	-8.1

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

Sources: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx#1

Table 38 provides major foreign holders of US Treasury securities. China is the largest holder with $1148.3 billion in Sep 2011, slightly lower than $1160.1 billion in Dec 2010. Japan increased its holdings from $882.3 billion in Dec 2010 to $956.8 billion in Sep. The United Kingdom continued to increase its holdings at $421.6 billion in Sep relative to $270.4 billion in Dec. Caribbean banking centers increased their holdings by $32.5 billion from Jul to Aug and by another $11.8 billion from Aug to Sep likely in dedicated wealth-management funds. There was an increase in holdings of Switzerland by $39.1 billion from Jul to Aug also likely in dedicated wealth-management funds but decline by $1.4 billion from Aug to Sep.

Table 38, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Sep 2011	Aug 2011	Dec 2010
China	1148.3	1137.0	1160.1
Japan	956.8	936.6	882.3
United Kingdom	421.6	397.2	270.4
Oil Exporters	229.9	236.3	211.9
Brazil	206.2	210.0	186.1
Caribbean Banking Centers	173.0	161.2	168.4
Taiwan	149.3	150.3	155.1
Switzerland	146.1	147.5	106.8
Hong Kong	109.0	107.9	134.2
Russia	94.6	97.1	151.0

Source:

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

IVB 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	Sep SA ∆% 0.0 Sep 12 months NSA ∆% 0.0 Blog 10/30/11
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	Aug month SA ∆% -0.5 12 months NSA ∆% 0.0 Blog 10/23/11
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 Aug 12 months ∆%: 2.8 Imports Aug 12 months ∆% 19.2 Blog 09/25/11

Links to blog comments in Table JPY: 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

Japan’s GDP grew 1.5 percent in IIIQ2011 relative to IIQ2011, as shown in Table 39. The economy of Japan had already weakened in IVQ2010 when GDP declined 0.7 percent. As in other advanced economies, Japan’s recovery from the global recession has not been robust. GDP fell in IQ2011 by 0.7 percent and fell again 0.3 percent in IIQ2011 as a result of the disruption of the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Recovery was robust in IIIQ2011. The deepest quarterly contractions in the recession were 3.0 percent in IVQ2008 and 4.8 percent in IQ2009.

Table 39, Japan, Real GDP ∆% Changes from the Previous Quarter Seasonally Adjusted ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-0.7	-0.3	1.5
2010	2.5	0.0	0.7	-0.7
2009	-4.8	2.0	-0.6	1.6
2008	0.8	-1.2	-1.3	-3.0
2007	1.2	0.3	-0.3	0.6
2006	0.0	1.1	0.3	0.6
2005	0.7	1.2	0.7	0.3
2004	1.1	-0.3	0.6	-0.4
2003	-0.4	0.6	0.7	1.4
2002	0.3	0.8	0.8	0.1
2001	0.4	-0.6	-1.2	-0.4
2000	1.9	0.2	0.1	1.0

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

Table 40 provides contributions to real GDP at seasonally-adjusted annual rates (SAAR). The SAAR of GDP in IIIQ2011 was a high 6.0 percent. Personal consumption contributed in IIIQ2011 at the SAAR of 2.3 percent and net trade (exports less imports) at 1.7 percent. Gross fixed capital formation contributed at the SAAR of 0.7 percent. Demand has increased in Japan.

Table 40, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %

	GDP	PC	GFCF	Trade	PINV	GOVC
2011
I	-2.7	-1.1	-0.7	-0.8	-0.9	0.7
II	-1.3	0.4	0.2	-3.1	0.7	0.5
III	6.0	2.3	0.7	1.7	0.8	0.3
IV
2010
I	10.2	2.8	1.1	2.2	4.3	-0.3
II	0.1	-0.5	0.5	1.1	-1.8	0.8
III	2.9	1.5	0.2	-0.7	1.7	0.3
IV	-2.7	-2.0	-0.8	-0.2	-0.1	0.3
2009
I	-17.7	-3.3	-3.6	-4.3	-7.3	0.8
II	8.4	2.8	-2.3	8.4	-1.2	0.7
III	-2.3	-0.4	-2.5	1.6	-2.0	1.0
IV	6.4	2.0	0.5	3.1	0.0	0.8

Note: PC: Private Consumption; GFCF: Gross Fixed Capital Formation; PINV: Private Inventory; Trade: Net Exports; GOVC: Government Consumption

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

Japan’s quarterly growth of GDP not seasonally-adjusted relative to the same quarter a year earlier is shown in Table 41. The contraction extended over seven quarters from IIQ2008 through IVQ2009. It was strongest in IQ2009 with output declining 10.3 percent relative to a year earlier. Yearly quarterly rates of growth of Japan were relatively high for a mature economy through the decade with the exception of the contractions in 2001 and after 2007. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 caused decline of GDP in IQ2011 of 1.0 percent relative to the same quarter a year earlier and decline of 1.1 percent in IIQ2011. GDP was flat in IIIQ2011 relative to a year earlier.

Table 41, Japan, Real GDP ∆% Changes from Same Quarter Year Earlier, NSA ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-1.0	-1.1	0.0
2010	5.7	3.2	5.2	2.3
2009	-10.3	-7.0	-6.3	-1.5
2008	1.3	-0.3	-1.1	-4.5
2007	3.5	2.3	1.7	1.9
2006	2.5	2.0	1.6	2.0
2005	1.1	2.0	2.0	2.6
2004	4.2	3.2	2.9	0.8
2003	1.3	1.3	1.1	1.9
2002	-1.9	-0.2	1.5	1.7
2001	2.0	1.0	-0.3	-1.8
2000	3.3	2.5	3.0	2.6

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

IVC China. The HSBC China PMI^™ Composite Output Index registered 52.5 in Oct from 52.6 in Sep, which is the highest since May (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8774). Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC, finds strength in the Chinese economy with the second consecutive month of growth resulting from new orders. Manufacturing strength is likely to be complemented with policy measures to promote growth of services by reduction of value added taxes. 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: 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

IVD Euro Area. The Markit Eurozone PMI^® Composite Output Index of Manufacturing and Services, which is closely associated with euro zone GDP, fell further into contraction territory in Oct to 46.5 from 49.1 in Sep with the highest percentage point drop of 2.6 percent since Nov 2008 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8764). Chris Williamson, Chief Economist at Markit, finds increasing risk of a new recession in the euro zone in the fourth quarter if there is no increase in new business in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8764). Germany is showing signs of stagnation. France, Italy and Spain are showing output decline. The data for Italy suggest GDP contraction in Oct at the quarterly rate in excess of 1.0 percent with France declining at 0.7 percent and Spain at 0.3 percent. Table EUR provides the regional data table for the euro area.

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 11/20/11
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 11/20/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR: 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/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

Euro zone GDP growth relative to the prior quarter and year earlier quarter is shown in Table 42. GDP grew in IIIQ2011 at the same rate of 0.2 percent as in IIQ2011, which is much lower than 0.8 percent in IQ2011. Growth has also decelerated to 1.4 percent in IIIQ2011 relative to the same quarter a year earlier, which is lower than 1.6 percent in IIQ2011 and 2.4 percent in IQ2011. The initial growth momentum of the first quarter of 2011 has not been sustained in IIQ2011 and IIIQ2011.

Table 42, Euro Zone, GDP Growth on Prior Quarter and Year Earlier Quarter, ∆%

	Quarter on Prior Quarter ∆%	Quarter on Same Quarter Year Earlier ∆%
IIIQ2011	0.2	1.4
IIQ2011	0.2	1.6
IQ2011	0.8	2.4
IV2010	0.3	1.9
IIQ2010	0.4	2.0

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15112011-BP/EN/2-15112011-BP-EN.PDF

Euro zone GDP growth of several members of the euro zone is provided in Table 43. Germany continues to grow faster than the rest of the euro area with growth of 0.5 percent in IIIQ2011 and 2.6 percent relative to a year earlier. Weak economic growth constitutes a constraint in fiscal consolidation required in most of the euro zone countries.

Table 43, Euro Zone, GDP, Quarter over Prior Quarter and Quarter over Same Quarter Year Earlier ∆%

Sep 2011	IIIQ2011/ IIQ2011 ∆%	IIIQ2011/ IIQ2011 ∆%
Euro Zone	0.2	1.4
Germany	0.5	2.6
France	0.4	1.6
Netherlands	-0.3	1.1
Finland	0.3	2.8
Belgium	0.0	1.8
Portugal	-0.4	-1.7
Ireland	NA	NA
Italy	NA	NA
Greece	0.1	-2.3
Spain	0.0	0.8
UK	0.5	0.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15112011-BP/EN/2-15112011-BP-EN.PDF

The decline of industrial production by 2.0 percent in Sep interrupted growth of industrial production in the euro zone of 1.0 percent in Jul and 1.4 percent in Aug, as shown in Table 44. Growth in Jan-Sep has been at the annual equivalent rate of 1.2 percent. All segments of industrial production fell in Sep with sharp decline of capital goods by 4.2 percent. Industrial production is highly volatile in larger economies in the euro zone.

Table 44, Euro Zone, Industrial Production Month ∆%

2011	Sep	Aug	Jul	Jun	May	Apr	Mar	Feb	Jan
Total Jan-Sep AE ∆%: 1.2	-2.0	1.4	1.0	-0.6	0.2	0.3	0.0	0.5	0.1
Inter-mediate	-2.2	1.5	0.7	-0.7	-0.1	0.0	0.0	0.5	2.3
Energy	-1.4	1.0	0.3	1.1	0.3	-3.7	-0.3	-1.3	-4.7
Capital Goods	-4.2	2.6	3.1	-1.6	1.2	0.7	-0.6	2.2	-1.8
Durable	-3.8	-0.1	3.8	-2.6	-0.6	1.0	0.0	0.9	1.1
Non Durable	-1.3	1.7	-0.7	-0.7	-0.1	0.4	0.4	0.9	-0.1

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14112011-AP/EN/4-14112011-AP-EN.PDF

Growth rates in 12 months of industrial production for the euro zone in Table 45 are stronger than monthly rates. Industrial production for the euro zone increased 2.2 percent in Sep relative to a year earlier. Capital goods were increasing at a fast rate of two digits relative to a year earlier until the sharp decline in Sep, lowering the 12 month percentage change to 5.7 relative to a year earlier.

Table 45, Euro Zone, Industrial Production 12 Months ∆%

2011	Sep	Aug	Jul	Jun	May	Apr	Mar	Feb	Jan
Total	2.2	6.0	4.4	2.8	4.3	5.4	5.7	7.8	6.2
Inter-mediate	2.0	5.2	4.2	3.1	4.5	5.5	7.5	10.0	9.5
Energy	-2.9	-2.1	-4.0	-3.6	-7.2	-5.3	-2.1	-2.8	-1.9
Capital Goods	5.7	13.0	11.7	6.9	10.6	10.5	11.5	15.1	13.0
Durable	-1.3	3.0	4.5	-2.6	1.2	4.8	2.5	3.5	2.0
Non Durable	0.6	3.2	-0.7	1.0	2.8	3.7	0.7	2.6	0.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14112011-AP/EN/4-14112011-AP-EN.PDF

Growth rates of monthly industrial production in countries in the euro zone were negative in Sep with the exception of Greece where industrial production grew 0.1 percent, as shown in Table 46. The larger economies experienced sharp percentage decline of industrial production in Sep: 2.9 in Germany, 1.9 in France, 4.8 percent in Italy and 1.3 percent in Spain. The UK, which is not a member of the euro zone, had zero growth of industrial production in Sep, according to Eurostat data.

Table 46, Euro Zone, Industrial Production, Month and 12 Months ∆%

Sep 2011	Month ∆%	12 Months ∆%
Euro Zone	-2.0	2.2
Germany	-2.9	5.5
France	-1.9	2.3
Netherlands	-1.2	2.6
Finland	-0.3	-1.1
Belgium	NA	NA
Portugal	-5.8	-2.0
Ireland	-3.5	0.2
Italy	-4.8	-2.7
Greece	0.1	-2.3
Spain	-1.3	-1.8
UK	0.0	-0.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14112011-AP/EN/4-14112011-AP-EN.PDF

More complete data on the structure of GDP growth are not yet available. Euro zone trade growth continues to be strong as shown in Table 47. Exports grew at 14.4 percent and imports at 14.9 percent in the first eight nine months of 2011 relative to 2010. The 12 months rates of growth of exports were 9.7 percent in Sep and 7.9 percent for imports, which are lower than those in Aug of 13.8 percent for exports and 11.6 percent for imports. At the margin, rates of growth of trade are declining.

Table 47, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA

	Exports	Imports
Jan-Sep 2011	1281.3	1303.4
Jan-Sep 2010	1120.3	1133.7
∆%	14.4	14.9
Trade Balance	Jan-Sep 2011	Jan-Sep 2010
€ Billions	-22.1	-13.4
Sep 2011	151.0	148.1
Sep 2010	137.7	137.2
∆%	9.7	7.9
Aug 2011	137.1	141.5
Aug 2010	120.5	126.8
∆%	13.8	11.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-15112011-AP/EN/6-15112011-AP-EN.PDF

The structure of trade of the euro zone in Jan-Aug is provided in Table 48. Data are still not available for trade structure for Sep. Manufactured exports grew 13.7 percent in Jan-Aug 2011 relative to Jan-Aug 2010 while imports grew 11.6 percent.

Table 48, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, ∆%

	Primary	Manu- factured	Other	Total
Exports
Jan-Aug 2011 € B	170.6	929.3	30.4	1130.3
Jan-Aug 2010 € B	136.6	817.4	28.5	982.6
∆%	24.9	13.7	6.7	15.0
Imports
Jan-Aug 2011 € B	405.5	731.1	18.7	1155.3
Jan-Aug 2010 € B	321.6	655.4	19.5	996.5
∆%	26.1	11.6	-4.1	15.9
Trade Balance € B
Jan-Aug 2011	-234.9	198.2	11.7	-25.0
Jan-Aug 2010	-184.9	162.1	8.9	-13.9

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-15112011-AP/EN/6-15112011-AP-EN.PDF

IVE Germany. The Markit Germany PMI^® Composite Output Index, which is closely associated with German GDP, fell to 50.3 in Oct from 50.5 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8751). Growth of the Composite Output Index is the weakest since beginning of the recovery in Aug 2009. Tim Moore, Senior Economist at Markit and author of the report (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8751), finds output close to stagnation. If decline in new orders continues, the economy could ease into contraction. Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.6 Blog 11/20/11
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: 11/13/11 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

Real GDP growth of Germany in a quarter relative to the same quarter a year earlier is provided in Table 49 from 2000 to 2010. There is significant deceleration of growth from 4.7 percent in IQ2011 to 2.6 percent in IIIQ2011. Short-term economic indicators have been consistent with this more aggregate reading of the German economy. Table 49 reveals how the Germany economy came out of the global recession with much stronger growth than has been typical in other advance economies. The higher rate of growth permitted relatively higher levels of employment. The impact of the global recession on German GDP was quite strong as shown by deep contractions of 6.7 percent in IQ2009, 6.2 percent in IIQ2009, 5.1 percent in IIIQ2009 and 2.3 percent in IVQ2009. The economy of Germany grew at high rates of growth of 4.0 percent in IIQ2010, 4.0 percent in IIIIQ2010, 3.7 percent in IVQ2010 and 4.7 percent in IQ2011 but growth moderated in the remainder of 2011. Germany recovered the growth impulse that it had in 2006 and 2007, emerging from slow growth in 2004 and 2003 after the recession of 2001 that was prolonged in Europe relative to other advanced economies (see Pelaez and Pelaez, The Global Recession Risk (2007), 116-46).

Table 49, Germany, GDP Price Adjusted, Chain-Linked, Quarter on Same Quarter Year Earlier ∆%, Calendar Adjusted, 2000-2011

	IQ	IIQ	IIIQ	IVQ
2011	4.7	2.9	2.6
2010	2.5	4.0	4.0	3.7
2009	-6.7	-6.2	-5.1	-2.3
2008	2.9	1.8	0.5	-1.9
2007	4.5	3.4	3.4	2.3
2006	3.0	3.7	3.9	4.9
2005	0.2	0.3	1.3	1.5
2004	0.9	1.2	0.6	0.1
2003	-0.2	-0.7	-0.6	-0.1
2002	-0.3	-0.2	0.5	0.0
2001	2.5	1.4	1.3	1.4
2000	3.6	4.5	3.3	1.9

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Tabellen/Tabellenuebersicht,templateId=renderPrint.psml

Growth of GDP on a quarter relative to the prior quarter is provided for Germany in Table 50. Quarterly growth of GDP in the initial five quarter of expansion from IQ2010 to IQ2011 has been at the average rate of 0.9 percent per quarter, which is equivalent to 4.1 percent per year. Growth in IIQ2011 and IIIQ2011 has been at the annual equivalent rate of 1.6 percent, which is not even one half of the rate of 4.1 percent in the first five quarters of the expansion. The cumulative growth of GDP in the four quarters of 2006 was 5.0 percent. The German economy moved rapidly in the expansion in 2010 and the first quarter of 2011 toward a similar rate as in the recovery in 2006 but has stalled in the second and third quarters of 2011.

Table 50, Germany, GDP Price Adjusted, Chain-Linked, Quarter on Prior Quarter ∆%, Seasonal and Calendar Adjusted, 2000-2011

	IQ	IIQ	IIIQ	IVQ
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
2006	1.2	1.5	1.0	1.2
2005	-0.1	0.7	0.8	0.3
2004	0.0	0.3	-0.2	0.0
2003	-0.8	-0.1	0.5	0.4
2002	-0.4	0.3	0.4	-0.2
2001	1.5	0.1	-0.3	0.2
2000	1.1	1.1	-0.1	-0.1

Yearly rates of growth of GDP of Germany are provided in Table 51. In 2010, the German economy grew at 3.6 percent, which is similar to the annual rates of growth of 3.9 percent in 2006 and 2007. Growth has been moderating in the second and third quarters of 2011.

Table 51, Germany, GDP Price Adjusted, Chain-Linked, Year ∆%, Calendar Adjusted, 1992-2010

1992	1.5
1993	– 1.0
1994	2.5
1995	1.8
1996	0.8
1997	1.8
1998	1.7
1999	1.8
2000	3.3
2001	1.6
2002	0.0
2003	– 0.4
2004	0.7
2005	0.8
2006	3.9
2007	3.4
2008	0.8
2009	– 5.1
2010	3.6

VF France. The Markit France PMI^® Composite Output Index registered the deepest contraction in 30 months, falling from 50.2 in Sep to 45.6 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8775). Jack Kennedy, Senior Economist at Markit and author of the report (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8775), finds that activity of the private sector in France fell for the first time since Jul 2009 as a result of declining demand and effects of the sovereign debt crisis. The economy could be moving toward contraction. Table FR provides the country data table for France.

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 95 Mfg Business Climate 97 Retail Trade 94 Services 94 Building 99 Blog 10/23/11

Links to blog comments in Table FR: 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

Growth of GDP in a quarter relative to the prior quarter is provided for France in Table 52. The French economy contracted 0.1 percent in IIQ2011 but grew 0.4 percent in IIIQ2011. Growth in the first five quarters of expansion from IQ2010 to IQ2011 was at the annual equivalent rate of 1.8 percent while growth in the second and third quarters of 2011 has been at the annual equivalent rate of 0.6 percent. Recovery has been much weaker than the cumulative 2.7 percent in the four quarter of 2006.

Table 52, France, Quarterly Real GDP Growth, Quarter on Prior Quarter ∆%

	IQ	IIQ	IIIQ	IVQ
2011	0.9	-0.1	0.4
2010	0.1	0.5	0.4	0.3
2009	-1.5	0.1	0.3	0.6
2008	0.4	-0.7	-0.3	-1.5
2007	0.6	0.5	0.4	0.2
2006	0.6	1.1	0.2	0.8

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20111115

Growth rates of France’s real GDP in a quarter relative to the same quarter a year earlier are shown in Table 53. France has not recovered the rates of growth prior to the global recession in excess of 2 percent. GDP fell 3.9 percent in IQ2009, 3.2 percent in IIQ2009, 2.7 percent in IIIQ2009 and 0.6 percent in IVQ2009.

Table 53, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	2.1	1.6	1.6
2010	1.0	1.5	1.6	1.4
2009	-3.9	-3.2	-2.7	-0.6
2008	1.5	0.3	-0.5	-2.1
2007	2.7	2.1	2.5	1.8
2006	2.3	3.0	2.6	2.7
2005	2.0	1.7	1.9	1.8
2004	1.9	2.7	2.4	2.5

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20111115

Percentage changes and contributions of segments of GDP in France are provided in Table 54. Internal demand contributed 0.3 percentage points to GDP growth in IIIQ2011 after contributing minus 0.3 percentage points in IIQ2011. Net foreign trade contributed 0.1 percentage points in IIIQ2011 after contributing 0.5 percentage points in IIQ2011.

Table 54, France, Contributions to GDP Growth, Calendar and Seasonally Adjusted, %

∆% from Prior Period	IVQ 2010	IQ 2011	IIQ 2011	IIIQ 2011	2010	2011
GDP	0.3	0.9	-0.1	0.4	1.4	1.7
Imports	-0.3	3.1	-1.2	0.3	8.3	5.0
Family Consump.	0.4	0.3	-0.8	0.3	1.3	0.6
Govt. Consump.	0.1	0.4	0.0	0.2	1.2	0.7
GFCF	0.4	1.2	0.6	0.4	-1.4	2.8
Exports	0.2	1.3	0.5	0.7	9.3	4.1
% Point Contribs.
Internal Demand	0.3	0.5	-0.3	0.3	0.8	1.1
Inventory Changes	-0.1	1.0	-0.2	0.0	0.5	0.9
Net Foreign Trade	0.1	-0.6	0.5	0.1	0.1	-0.3

Notes: Consump.: Consumption; Gvt.: Government; GFCF: Gross Fixed Capital Formation

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20111115

Chart 40 of France’s Institut National de la Statistique et des Études Économiques provides percentage point contributions to GDP growth. GDP grew sharply into IQ2011 and then stalled in IIQ2011. Final consumption was the key negative contributor to GDP growth in IIQ2011. GDP growth strengthened in IIIQ2011 with the impulse originating in final consumption.

Chart 40, France, Percentage Point Contributions to GDP Growth

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20111115

Industrial new orders in France are provided in Table 54b. Manufacturing orders fell 3.1 percent in Sep relative to Aug and grew 7.9 percent relative to the same quarter a year earlier. All components of new orders fell in Sep.

Table 54b, France, Industrial New Orders, ∆%

	Weight	Sep/ Aug	Aug/ Jul	Quarter on Quarter	Year on Year*
Mfg	931	-3.1	0.8	1.3	7.9
Mfg Non-Domestic	477	-2.7	0.0	3.0	6.8
Electric and Electronic	212	-1.6	0.6	0.5	8.6
Motor Vehicles	240	-6.9	1.3	-0.1	1.9
Other Mfg	479	-2.4	0.7	2.0	9.6

Notes: Mfg: Manufacturing; * Last three months/same three months last year

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=91&date=20111118

IVG 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	Aug month ∆%: 0.0 Aug 12 months ∆%: minus 0.3 Blog 10/30/11
Business Confidence	Mfg Oct 94.0, Jun 100.1 Construction Sep 78.6, Jun 74.5 Blog 10/30/11
Consumer Confidence	Consumer Confidence Oct 92.9, Jun 102.0 Economy Aug 75.6, Jun 92.3 Blog 10/30/11
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: 11/13/11 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

Exports and imports of Italy and monthly growth rates are provided in Table 55. There have been significant fluctuations. Exports grew 2.0 percent in Sep and imports fell 1.3 percent. There was significant reduction of the trade deficit from €2405 million in Aug to € 1350 million in Sep. Exports rose 0.2 percent in Aug and imports 0.9 percent.

Table 55, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Sep	32,132	2.0	33,482	-1.3	-1,350
Aug	31,510	0.2	33,915	0.9	-2,405
Jul	31,453	1.4	33,618	2.3	-2,165
Jun	31,018	-0.7	32,878	-4.0	-1,860
May	31,247	0.0	34,244	-0.2	-2,997
Apr	31,233	0.5	34,305	-1.1	-3,072
Mar	31,065	2.0	34,687	4.4	-3,760
Feb	30,456	-1.2	33,216	-0.5	-2,760
Jan	30,812	3.6	33,396	0.9	-2,584
AE ∆%
Dec 2010	29,748	0.4	33,101	0.5	-3,353

AE: annual equivalent

Source: http://www.istat.it/it/archivio/45225

Italy’s trade not seasonally adjusted is provided in Table 56. Values are different because the data are original and not adjusted. Twelve months rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.3 percent relative to a year earlier while imports grew only 3.6 percent. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table 56, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Sep	33,042	10.3	34,882	3.6	-1,840
Aug	24,177	14.9	27,082	12.1	-2,905
Jul	35,264	5.8	33,743	6.1	1,521
Jun	32,605	7.9	34,309	1.6	-1,704
May	33,491	19.8	35,722	18.4	-2,231
Apr	31,045	12.5	33,869	18.0	-2,824
Mar	34,418	14.0	38,203	19.8	-3,785
Feb	29,595	17.7	32,621	16.2	-3,026
Jan	26,146	24.6	32,455	28.4	-6,309
Dec 2010	29,714	20.2	32,732	31.7	-3,018
Year
2010	337,346	15.8	367,390	23.4	-30,034
2009	291,733	-20.9	297,609	-22.1	-5,876
2008	369,016	1.2	382,050	2.3	-13,034

Source: http://www.istat.it/it/archivio/45225

Growth rates of Italy’s trade and major products are provided in Table 57 for the period Jan-Sep 2011 relative to Jan-Sep 2010. Growth rates are high for the total and all segments with the exception of a decline in imports of consumer durables of 5.3 percent.

Table 57, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Sep 2011/ Jan-Sep 2010	Imports Share %	Imports ∆% Jan-Sep 2011/ Jan-Sep 2010
Consumer Goods	29.5	10.0	25.3	8.8
Durable	6.3	6.3	3.5	-5.3
Non Durable	23.2	11.0	21.8	11.0
Capital Goods	32.4	13.1	22.4	3.2
Inter- mediate Goods	33.5	16.2	33.9	19.6
Energy	4.6	19.7	18.4	20.2
Total ex Energy	95.4	13.2	81.6	11.7
Total	100.0	13.5	100.0	13.2

Source: http://www.istat.it/it/archivio/45225

Italy’s structure of regional trade in Jan-Aug 2011 and growth rates is in Table 58. Exports to members of the European Union are 57.3 percent of the total. Exports to the euro zone or European Monetary Union (EMU) are 43.6 percent. Imports to members of the European Union account for 54.8 percent of the total and imports from members of EMU are 44.6 percent of the total. After years of integration, members of EMU are dependent on each other such that the end of the common currency could be disruptive.

Table 58, Italy, Exports and Imports by Regions and Countries, % Share and 12 Months ∆%

	Exports % Share	∆% Jan-Sep 2011/ Jan-Sep 2010	Imports % Share	Imports ∆% Jan-Sep 2011/ Jan-Sep 2010
EU	57.3	11.3	54.8	9.2
EMU 17	43.6	11.6	44.6	8.8
France	11.6	13.6	8.8	5.2
Germany	13.0	15.8	16.1	9.8
Spain	5.8	3.9	4.6	11.6
UK	5.2	-1.3	2.7	12.5
Non EU	42.7	16.6	45.2	18.1
Europe non EU	12.0	25.8	10.3	21.2
USA	6.0	12.6	3.0	20.6
China	2.6	18.5	7.8	13.1
OPEC	5.3	0.2	9.5	0.4
Total	100.0	13.5	100.0	13.2

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/45225

IVH 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 11/04/11
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:

11/13/11 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 labor market report of the UK for the quarter Jun/Aug 2011 is shown in Table 59. The unemployment rate rose to 8.3 percent and the number unemployed increased 129,000 in Aug-Sep, reaching 2.62 million. There are 868,000 unemployed over one year and 422,000 unemployed over two years. The employment rate is 70.2 percent. Earnings growth including bonuses was 2.3 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 5.0 percent. There are 7.80 million people working part time in Jul-Sep. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992.

Table 59, UK, Labor Market Statistics

	Quarter Aug/Oct 2011
Unemployment Rate	8.3% +0.4 % points 0n quarter, highest since Jul 1996
Number Unemployed	(1) +129,000 in Aug-Sep to reach 2.62 million, highest unemployed number since Jul-Aug 1994 (2) Unemployment rate 16 to 24 years of age +1.7 % points to 21.9% of that age group; number unemployed 16 to 24 years up 67,000 to 1.02 million; unemployment rate and number for 16-24 years highest since 1992 when records begin
Number Unemployed > one and two years	(1) Number unemployed over one year: 868,000 Jul-Sep, +31,000 on quarter (2) Number unemployed over two years: 422,000 Jul-Sep, +13,000 on quarter
Inactivity Rate 16-64 Years of Age	(1) 23.3%, up 0.1 % points on quarter (2) Economically inactive 16-64 years +64,000 on quarter to 9.36 million, +75,000 over year earlier
Employment Rate	70.2% Aug-Sep, down 0.4 % points on quarter
Number Employed	(1) Down 197,000 on quarter (2) Down 109,000 on year to reach 29.07 million, lower than peak of 29.57 million in Mar-May 2008 (3) Number of employees down 305,000 on quarter, fastest decline since 1992 (when records begin) (4) Self-employed +100,000 on quarter to 4.09 million, largest number since 1992 (5) Number in other job categories +8,000 to 194,000
Earnings Growth Rates Year on Year	(1) Total +2.3% (including bonuses) over year earlier, down 0.4 on May-Jul; private sector declined from 2.9 to 2.4%, public sector fell from 2.5 to 2.3% (2) Regular +1.7% (excluding bonuses) over year earlier, down 0.1 % points on May-Jul
Full-time and Part-time	(1) Number full-time 21.27 million, down 80,000 on quarter (2) Number part-time 7.80 million in Jul-Sep, down 117,000 relative Apr-Jun
	Oct 2011
Claimant Count (Jobseeker’s Allowance, JSA)	(1) Latest estimate: 1.60 million in Oct; +5,300 since Sep (2) Number claiming JSA for up to six month 962,000 +129,000 from prior year (rate: 5.0% +0.4 percentage points from year earlier)

Source: http://www.ons.gov.uk/ons/dcp171778_241735.pdf

The volume of retail sales in the UK rose 0.6 percent in Oct and 0.9 percent in the 12 months ending in Oct, as shown in Table 60. The annual equivalent rate in Jan-Oct is 2.1 percent. There has been significant volatility in monthly retail sales in the UK.

Table 60, UK, Volume of Retail Sales ∆%

	Month SA ∆%	12 Months ∆%
Oct 2011	0.6	0.9
Sep	0.5	0.5
Aug	-0.5	-0.7
Jul	0.1	-0.4
Jun	0.6	-0.2
May	-1.5	-0.3
Apr	1.3	2.2
Mar	0.3	0.4
Feb	-1.1	0.3
Jan	1.5	3.9
AE ∆% Jan-Out	2.1
Dec 2010	-1.2	-1.8

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-240565

Retail sales in the UK struggle with relatively high inflation. Table 61 provides the 12 month percentage change of the implied deflator of UK retail sales. The implied deflator of all retail sales rose 4.4 percent in the 12 months ending in Oct while that of sales excluding fuel rose 3.2 percent. Both 12 months percentage changes of implied deflators for total sales and excluding fuel were lower in Oct in this new wave of lower commodity prices because of risk aversion. The implied deflator of auto fuel sales rose to 17.0 in Sep, which is the highest 12 month increase in 2011, but then declined to 14.8 percent in Oct. The percentage change of the implied deflator of sales of food stores at 5.0 percent in Oct is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 as shown in Table 61. UK inflation is particularly sensitive to increases in commodity prices.

Table 61, UK, 12 Months Rates Implied Deflator of Retail Sales ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Oct 2011	4.4	3.2	5.0	1.9	14,8
Sep	4.9	3.4	6.0	1.2	17.0
Aug	5.2	3.8	5.9	2.0	16.3
Jul	4.9	3.7	5.9	1.9	14.5
Jun	4.4	3.1	6.0	0.8	14.5
May	4.4	3.2	5.5	1.5	13.2
Apr	4.1	3.1	4.7	1.7	12.3
Mar	4.1	2.7	4.2	1.5	15.0
Feb	4.7	3.4	5.4	1.6	15.1
Jan	3.8	2.6	5.3	0.6	14.5
Dec 2010	3.1	2.4	5.1	0.6	12.4
Dec 2009	3.4	2.0	2.1	1.3	17.0
Dec 2008	-0.5	0.2	6.9	-4.4	9.7
Dec 2007	1.7	0.4	3.9	-2.0	15.4
Dec 2006	1.0	0.8	3.3	-1.1	1.1
Dec 2005	-0.3	-1.0	1.3	-2.6	6.6

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-240565

Chart 41 of the UK Office for National Statistics provides the retail sales index of the UK from Aug 2010 to Oct 2011. Retail sales trended upwardly into Sep and Oct.

Chart 41, UK, Retail Sales Index SA

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/rsi/retail-sales/october-2011/sum.html

UK monthly retail volume of sales is quite volatile, as shown in Table 62. Growth of total volume of sales in Sep and Oct by 0.6 percent interrupted monthly declines such as minus 1.5 percent in May and minus 0.5 percent in Aug. The increase in Oct was broad-based with 0.6 percent in sales excluding auto fuel, 0.6 percent in predominantly food stores, 0.9 percent in nonfood stores and 0.9 percent in auto fuel stores.

Table 62, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Oct 2011	0.6	0.6	0.6	0.9	0.9
Sep	0.5	0.6	-0.1	1.2	-0.5
Aug	-0.5	-0.4	0.0	-0.8	-1.0
Jul	0.1	0.0	0.7	-0.2	0.7
Jun	0.6	0.8	0.5	0.4	-1.2
May	-1.5	-1.7	-3.7	-0.6	0.7
Apr	1.3	1.4	2.6	0.3	-0.1
Mar	0.3	0.4	1.2	-0.2	-0.5
Feb	-1.1	-1.3	-0.9	-1.9	0.9
Jan	1.5	1.0	0.1	1.7	6.3
Dec 2010	-1.2	-0.6	-1.4	-0.5	-6.0

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table 63. Total retail sales grew 0.9 percent in Oct with increase of 0.9 percent in sales excluding auto fuel.

Table 63, UK, Growth of Retail Sales Volume by Component Groups 12 Month ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Oct 2011	0.9	0.9	0.3	0.1	1.1
Sep	0.5	0.3	-0.3	-0.8	2.7
Aug	-0.7	-1.0	-0.5	-2.8	1.7
Jul	-0.4	-0.6	-0.9	-1.9	2.0
Jun	-0.2	-0.5	-3.8	0.0	2.8
May	-0.3	-0.6	-3.2	-0.2	2.2
Apr	2.2	2.0	1.7	0.9	3.7
Mar	0.4	0.0	-1.0	-0.2	3.9
Feb	0.3	-0.1	-2.3	0.2	4.6
Jan	3.9	3.6	-2.4	7.5	7.3
Dec 2010	-1.8	-1.1	-3.8	0.2	-8.1
Dec 2009	1.4	2.1	2.5	1.0	-3.9
Dec 2008	1.3	2.6	-1.1	4,3	-9.0

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-233940

Table 64 provides the analysis of the UK Office for National Statistics of contributions to the growth of the value, instead of volume, of retail sales in the UK. Growth of value of retail sales in the 12 months ending in Oct was 5.4 percent of which significant part consisted of price increases. Mostly or predominantly food stores contributed 2.3 percentage points. The second highest contribution was by automotive fuel stores with 1.6 percentage points.

Table 64, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Oct 2011	Weight % of All Retailing	Value SA 12 Months ∆%	PP Contribution % points
All Retailing	100.00	5.4
Mostly Food Stores	41.7	5.3	2.3
Mostly Nonfood Stores
Total	43.2	1.9	0.8
Non- specialized	7.8	3.1	0.2
Textile, Clothing & Footwear	12.2	2.6	0.3
Household Goods Stores	9.7	1.4	0.2
Other	13.5	1.0	0.1
Non-store Retailing	4.9	13.0	0.7
Automotive Fuel	10.2	16.1	1.6

Source: http://www.ons.gov.uk/ons/dcp171778_241347.pdf

The analysis of the UK Office for National Statistics of contributions to 12 months percentage changes of the volume of retail sales is in Table 65. Total retail sales increased 0.9 percent in the 12 months ending in Oct. Non-store retailing had the largest contribution with 0.6 percentage points even with minute weight of 4.9 percent because of its growth by 11.7 percent. Mostly food stores with 41.7 percent of the total contributed 0.1 percentage points, mostly nonfood stores contributed 0.1 percentage points and automotive fuel stores 0.1 percentage points.

Table 65, UK, Volume of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Oct 2011	Weight % of All Retailing	Volume SA 12 Months ∆%	PP Contribution % points
All Retailing	100.00	0.9
Mostly Food Stores	41.7	0.3	0.1
Mostly Nonfood Stores
Total	43.2	0.1	0.1
Non- specialized	7.8	2.3	0.2
Textile, Clothing & Footwear	12.2	-1.0	-0.1
Household Goods Stores	9.7	0.3	0.0
Other	13.5	-0.3	0.0
Non-store Retailing	4.9	11.7	0.6
Automotive Fuel	10.2	1.1	0.1

Source: http://www.ons.gov.uk/ons/dcp171778_241347.pdf

V 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 66 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 66 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 66 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 66, 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	11/18 /2011
Rate	1.1423	1.5914	1.192	1.352
CNY/USD	01/03 2000	07/21 2005	7/15 2008	11/18 2011
Rate	8.2798	8.2765	6.8211	6.3568
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 67 extracts four rows of Table 66 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 69 below, the dollar has devalued again to USD 1.352/EUR or by 13.4 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 6.3568/USD on Fri Nov 18, 2011, or by an additional 7.0 percent, for cumulative revaluation of 23.4 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 67 now includes three last rows with the CNY/USD weekly rate. The final row of Table 67 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 and the CNY depreciated by 0.2 percent in the week of Nov 18. 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 67, 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	11/18 /2011
Rate	1.1423	1.5914	1.192	1.352
CNY/USD	01/03 2000	07/21 2005	7/15 2008	11/18 2011
Rate	8.2798	8.2765	6.8211	6.3568
Weekly Rates	10/28/ 2011	11/04/ 2011	11/11/ 2011	11/18/ 2011
CNY/USD	6.3588	6.341	6.342	6.3568
∆% from Earlier Week*	0.4	0.3	0.0	-0.2

*Negative sign is depreciation, positive sign is appreciation

Source: Table 66 and same table in earlier blog comments.

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 68. 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 68, 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 66 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 69, 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 11/18/11,” 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. Recovering risk financial assets in column “∆% Trough to 11/18/11” are in the range from 1.4 percent for China’s Shanghai Composite and 21.8 percent for the DJIA. 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 21.8 percent from the trough and of the S&P 500 by 18.9 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 11/18/11” had double digit gains relative to the trough around Jul 2, 2010. There are now several valuations with recovery of less than 10 percent from the trough around Jul 2: European stocks index STOXX 50 is now 2.9 percent below the trough on Jul 2, 2010; China’s Shanghai Composite is 1.4 percent above the trough; the NYSE Financial Index is 7.9 percent below the trough on Jul 2, 2010; Japan’s Nikkei Average is 5.1 percent below the trough on Aug 31, 2010 and 26.5 percent below the peak on Apr 5, 2010; Germany’s Dax is 2.3 percent above the trough on May 25, 2010; Dow Asia Pacific is 2.3 percent above the trough on Jul 2; and Dow Global is 4.8 percent above the trough on Jul 2. The Nikkei Average closed at 8374.91 on Fri Nov 18, which is 18.3 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. Germany’s DAX is 2.3 percent above the trough on Apr 25, 2010. The dollar depreciated by 13.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 11/18/2011” in Table 69 shows losses for all risk financial assets in the week of Nov 11 in column “∆% Week 11/18/11.” 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 69 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 11/18/11” 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 11/18/11” but also relative to the peak in column “∆% Peak to 11/18/11.” The DJIA is the only index above the peak with a gain of 5.3 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 26.7 percent, Nikkei Average by 26.5 percent, Shanghai Composite by 23.6 percent, STOXX 50 by 17.8 percent, Dow Global by 14.5 percent and Dow Asia Pacific by 10.5 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 69, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 11/18 /11	∆% Week 11/ 18/11	∆% Trough to 11/ 18/11
DJIA	4/26/ 10	7/2/10	-13.6	5.3	-2.9	21.8
S&P 500	4/23/ 10	7/20/ 10	-16.0	-0.1	-3.8	18.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-26.7	-5.2	-7.9
Dow Global	4/15/ 10	7/2/10	-18.4	-14.5	-4.2	4.8
Asia Pacific	4/15/ 10	7/2/10	-12.5	-10.5	-2.6	2.3
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-26.5	-1.6	-5.1
China Shang.	4/15/ 10	7/02 /10	-24.7	-23.6	-2.6	1.4
STOXX 50	4/15/10	7/2/10	-15.3	-17.8	-2.7	-2.9
DAX	4/26/ 10	5/25/ 10	-10.5	-8.4	-4.2	2.3
Dollar Euro	11/25 2009	6/7 2010	21.2	10.6	1.7	-13.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-0.1	-2.7	16.9
10-Year T Note	4/5/ 10	4/6/10	3.986	2.003

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 70 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 70 for Nov 18 shows that the S&P 500 is now 3.8 percent below the Apr 26, 2010 level and the DJIA is 5.3 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 70, 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

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

Table 71, 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 71 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 13.1 percent to ZAR 8.185/USD on Nov 18, which is still 29.3 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 3.6 percent stronger at SGD 1.299/USD on Nov 18 relative to the trough of depreciation but still stronger by 16.4 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 2.4 percent relative to the trough to BRL 1.778/USD on Nov 18 but still stronger by 26.9 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 71 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 71, Exchange Rates

	Peak	Trough	∆% P/T	Nov 18, 2011	∆T Nov 18 2011	∆P Nov 18 2011
EUR USD	7/15 2008	6/7 2010		11/18 2011
Rate	1.59	1.192		1.352
∆%			-33.4		11.8	-17.6
JPY USD	8/18 2008	9/15 2010		11/18 2011
Rate	110.19	83.07		76.88
∆%			24.6		7.5	30.2
CHF USD	11/21 2008	12/8 2009		11/18 2011
Rate	1.225	1.025		0.916
∆%			16.3		10.6	25.2
USD GBP	7/15 2008	1/2/ 2009		11/18 2011
Rate	2.006	1.388		1.58
∆%			-44.5		12.2	-26.9
USD AUD	7/15 2008	10/27 2008		11/18 2011
Rate	1.0215	1.6639		1.001
∆%			-62.9		39.9	2.2
ZAR USD	10/22 2008	8/15 2010		11/18 2011
Rate	11.578	7.238		8.185
∆%			37.5		-13.1	29.3
SGD USD	3/3 2009	8/9 2010		11/18 2011
Rate	1.553	1.348		1.299
∆%			13.2		3.6	16.4
HKD USD	8/15 2008	12/14 2009		11/18 2011
Rate	7.813	7.752		7.789
∆%			0.8		-0.5	0.3
BRL USD	12/5 2008	4/30 2010		11/18 2011
Rate	2.43	1.737		1.778
∆%			28.5		-2.4	26.9
CZK USD	2/13 2009	8/6 2010		11/18 2011
Rate	22.19	18.693		18.811
∆%			15.7		-0.6	15.2
SEK USD	3/4 2009	8/9 2010		11/18 2011
Rate	9.313	7.108		6.782
∆%			23.7		4.6	27.2
CNY USD	7/20 2005	7/15 2008		11/18 2011
Rate	8.2765	6.8211		6.3568
∆%			17.6		6.8	23.2

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 72, 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 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 72. 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 2.0503 percent at the close of market on Fri Nov 18 would be equivalent to price of 105.6113 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.3 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. 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 72 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 $2814 billion, or $2.8 trillion, with portfolio of long-term securities of $2597 billion, or $2.6 trillion, consisting of $1580 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $107 billion Federal agency debt securities and $842 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1575 billion or $1.6 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 II World Financial Turbulence, has been affecting financial markets for several weeks. 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 72, 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

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

VI Economic Indicators. Crude oil input in refineries increased to 14,592 thousand barrels per day on average in the four weeks ending on Nov 11 from 14,524 thousand barrels per day in the four weeks ending on Nov 4, as shown in Table 73. The rate of capacity utilization in refineries continues at a relatively high level of 84.4 percent on Nov 11, 2011, which is slightly higher than on Nov 12, 2010 at 83.0 percent and also slightly higher than 83.9 on Nov 4, 2011. Imports of crude oil rose from 8,681 thousand barrels per day on average to 8,842 thousand barrels per day. Increasing utilization in refineries with increasing imports resulted in decrease of commercial crude oil stocks by 1.1 million barrels from 338.1 million barrels on Nov 4 to 337.0 million barrels on Nov 11. Gasoline stocks increased 1.0 million barrels and stocks of fuel oil fell 2.2 million barrels. Supply of gasoline fell from 9,095 thousand barrels per day on Nov 12, 2010, to 8,579 thousand barrels per day on Nov 11, 2011, or by 5.7 percent, while fuel oil supply rose 5.1 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 73 also shows increase in the world price of crude oil by 31.7 percent from Nov 5, 2010 to Nov 4, 2011. Gasoline prices rose 16.5 percent from Nov 12, 2010 to Nov 11, 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 73, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	11/11/11	11/04/11	11/12/10
Crude Oil Refineries Input	14,592	14,524	14,094
Refinery Capacity Utilization %	84.4	83.9	83.0
Motor Gasoline Production	8,992	9,036	9,035
Distillate Fuel Oil Production	4,529	4,437	4,294
Crude Oil Imports	8,842	8,681	8,465
Motor Gasoline Supplied	8,579 ∆% 2011/2010= –5.7%	8,572	9,095
Distillate Fuel Oil Supplied	4,294 ∆% 2011/2010 = 5.1%	4,292	4,086
	11/11/11	11/04/11	11/12/10
Crude Oil Stocks Million B	337.0 ∆= -1.1 MB	338.1	357.6
Motor Gasoline Million B	205.2 ∆= 1.0 MB	204.2	207.7
Distillate Fuel Oil Million B	133.7 ∆= -2.2 MB	135.9	158.8
World Crude Oil Price $/B	98.99 ∆% 2011/2010 16.6	94.26	84.89
	11/14/11	11/07/11	11/15/10
Regular Motor Gasoline $/G	3.436 ∆% 2011/2010 18.8	3.424	2.892

B: barrels; G: gallon

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

Chart 42 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 42, 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 43 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 43, US, Crude Oil Stocks

Source: US Energy Information Administration

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

Chart 44 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 44 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 44, 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 74. Seasonally adjusted claims fell 5,000 from 393,000 on Nov 5 to 388,000 on Nov 12. Claims not adjusted for seasonality fell 42,355, from 402,494 on Nov 5 to 360,139 on Nov 12.

Table 74, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Nov 12	388,000	360,139	396,750
Nov 5	393,000	402,494	400,750
Change	-5,000	-42,355	-4,000
Oct 29	400,000	369,647	405,250
Prior Year	441,000	409,548	441,500

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

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

Table 75 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 513,047 on Nov 15, 2009 to 360,139 on Nov 12, 2011 and are virtually equal to 351,760 on Nov 10, 2007, but are much higher than 286,151 on Nov 11, 2006.

Table 75, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Nov 11, 2000	294,727	318,000
Nov 10, 2001	456,366	428,000
Nov 09, 2002	427,078	400,000
Nov 15, 2003	347,719	370,000
Nov 13, 2004	311,901	337,000
Nov 12, 2005	283,564	309,000
Nov 11, 2006	286,151	311,000
Nov 10, 2007	351,760	332,000
Nov 15, 2008	513,047	542,000
Nov 14, 2009	479,350	513,000
Nov 13, 2010	409,548	441,000
Nov 12, 2011	360,139	388,000

Source

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

VII 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 76 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 0.00 percent for three months, 0.04 percent for six months, 0.10 percent for 12 months, 0.28 percent for two years, 0.41 percent for three years, 0.96 percent for five years, 1.44 percent for seven years, 1.98 percent for ten years and 2.96 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 76. 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 76, 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

VIII Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first three quarters of 1.4 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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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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Monday, November 21, 2011

Part II: World Inflation Waves

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