CMP Associates Regulation Blog

There is only milder improvement in total private hiring shown in Chart ES2. Private-sector hiring rose in 2010 followed by stability and renewed increase in 2011 but at inadequate level to reduce job stress.

Chart ES2, US, Total Private Hiring Month SA 2011-2011

Source: US Bureau of Labor Statistics

Chart ES3 provides a measure of labor underutilization U6 of the Bureau of Labor Statistics on a monthly basis from 2001 to 2011. U6 combines unemployment, underemployment in part-time jobs because nothing else can be found and people discouraged from searching actively for a job. There was a steep climb of U6 from 2007 into 2009 and then this measure of unemployment and underemployment stabilized at that high level of 16.2 percent of the labor force in Oct.

Chart ES3, US, U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers as % of Labor Force, Month, SA, 2001-2011

Source: US Bureau of Labor Statistics

One of the dramas of the current job market of the US consists of millions of people working part-time for economic reasons, or the failure to find full-time employment. Chart ES4 shows the jump of numbers of people working part-time for economic reasons from 2007 and subsequent stabilization at a very high level.

Chart ES4, US, Working Part-time for Economic Reasons

Thousands, Month SA 2001-2011

Sources: US Bureau of Labor Statistics

People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart ES5 shows the sharp rise in the number unemployed over 27 weeks and stabilization at an extremely high level.

Chart ES5, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2011

Sources: http://www.bls.gov/cps/data.htm

I Recovery without Hiring. An important characteristic of the current fractured labor market of the US is the closing of the avenue for exiting unemployment and underemployment normally available through dynamic hiring. Another avenue that is closed is the opportunity for advancement in moving to new jobs that pay better salaries and benefits again because of the collapse of hiring in the United States. Those who are unemployed or underemployed cannot find a new job even accepting lower wages and no benefits. The employed cannot escape declining inflation-adjusted earnings because there is no hiring. The objective of this section is to analyze hiring and labor underutilization in the United States.

An appropriate measure of job stress is considered by Blanchard and Katz (1997, 53):

The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).

The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):

“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”

The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS.

Hiring in the nonfarm sector (HNF) has declined from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million while hiring in the private sector (HP) has declined from 60.4 million in 2006 to 43.3 million in 2010 or by 17.1 million, as shown in Table 1. The ratio of nonfarm hiring to unemployment (RNF) has fallen from 47.7 in 2006 to 36.4 in 2010 and in the private sector (RHP) from 52.9 in 2006 to 40.3 in 2010 (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html).

Table 1, US, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment

	HNF	Rate RNF	HP	Rate HP
2001	63,766	48.4	59,374	53.6
2002	59,797	45.9	55,665	51.1
2003	57,787	44.5	54,082	49.9
2004	61,624	46.9	57,534	52.4
2005	64,498	48.2	60,444	54.0
2006	64,870	47.7	60,419	52.9
2007	63,326	46.0	58,760	50.9
2008	53,986	39.5	50,286	44.0
2009	45,372	34.7	41,966	38.8
2010	47,234	36.4	43,299	40.3

Source: http://www.bls.gov/jlt/data.htm

Chart 1 provides the yearly levels of total nonfarm hiring (NFH) in Table 1. The fall of hiring during the contraction of 2007 to 2009 was much stronger than in the shallow contraction of 2001 with GDP contraction of only 0.4 percent from Mar 2001 (IQ2001) to Dec 2011 (IVQ 2001) compared with 5.1 percent contraction in the much longer recession from Dec 2007 (IVQ2007) to Jun 2009 (IIQ2009) (http://www.nber.org/cycles/cyclesmain.html).

Chart 1, US, Total Nonfarm Hiring (HNF), Yearly, 2001-2010

Source: US Bureau of Labor Statistics

Chart 2 shows the ratio or rate of nonfarm hiring to unemployment (RNF) that also fell much more in the recession of 2007 to 2009 than in the shallow recession of 2001.

Chart 2, US, Rate Total Nonfarm Hiring (HNF), Yearly, 2001-2010

Source: US Bureau of Labor Statistics

Total nonfarm hiring (HNF) yearly percentage changes are provided in Table 2. There were much milder declines in 2002 of 6.2 percent and 3.4 percent in 2003 followed by strong rebounds of 6.6 percent in 2004 and 4.7 percent in 2005. In contrast, the contractions of nonfarm hiring in the recession after 2007 were much sharper in percentage points: 2.4 in 2007, 14.7 in 2008 and 16 percent in 2009. On a yearly basis, nonfarm hiring grew 4.1 percent in 2010 relative to 2009.

Table 2, US, Annual Total Nonfarm Hiring (HNF), Yearly Percentage Change, 2001-2010

Year	Annual
2002	-6.2
2003	-3.4
2004	6.6
2005	4.7
2006	0.6
2007	-2.4
2008	-14.7
2009	-16.0
2010	4.1

Source: US Bureau of Labor Statistics

Chart 3 plots yearly percentage changes of nonfarm hiring. Percentage declines after 2007 were quite sharp.

Chart 3, US, Annual Total Nonfarm Hiring (HNF), Yearly Percentage Change, 2001-2010

Source: US Bureau of Labor Statistics

Total private hiring (HP) yearly data are provided in Chart 4. There has been sharp contraction of total private hiring in the US and only mild recovery in 2010.

Chart 4, US, Total Private Hiring, Yearly, 2001-2011

Source:

US Bureau of Labor Statistics

Chart 5 plots the rate of total private hiring relative to unemployment (RHP). The rate collapsed during the global recession after 2007.

Chart 5, US, Rate Total Private Hiring, Yearly, 2001-2010

Source:

US Bureau of Labor Statistics

Total nonfarm hiring (HNF), total private hiring (HP) and their respective rates are provided for the month of Sep in the years from 2001 to 2011 in Table 3. There is some recovery in HNF from 4028 in Sep 2009 to 4115 in Sep 2010 and 4456 in Sep 2011 for cumulative gain of 10.6 percent. HP rose from 3654 in Sep 2009 to 4096 in Sep 2011 for cumulative gain of 12.1 percent. HNF has fallen from 5671 in Sep 2005 to 4456 in Sep 2011 or by 21.4 percent. HP has fallen from 5193 in Sep 2005 to 4096 in Sep 2011 or by 21.1 percent. The labor market continues to be fractured, failing to provide an opportunity to exit from unemployment/underemployment or to find an opportunity for advancement away from declining inflation-adjusted earnings.

Table 3, US, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted

	HNF	Rate RNF	HP	Rate HP
2001 Sep	5329	4.0	4844	4.4
2002 Sep	5137	3.9	4696	4.3
2003 Sep	5050	3.9	4640	4.3
2004 Sep	5326	4.0	4794	4.3
2005 Sep	5671	4.2	5193	4.6
2006 Sep	5653	4.1	5015	4.4
2007 Sep	5436	3.9	4860	4.2
2008 Sep	4498	3.3	4065	3.6
2009 Sep	4028	3.1	3654	3.4
2010 Sep	4115	3.2	3752	3.5
2011 Sep	4456	3.4	4096	3.7

Source: US Bureau of Labor Statistics

Chart 6 provides total nonfarm hiring on a monthly basis from 2001 to 2011. Hiring rebounded in early 2010 but then fell and stabilized at a lower level than the early peak in 2010. Nonfarm hiring has increased again in Sep as shown in Chart 6 with SA monthly data.

Chart 6, US, Total Nonfarm Hiring (HNF), 2001-2011 Month SA

Source: US Bureau of Labor Statistics

Similar behavior occurs in the rate of nonfarm hiring plot in Chart 7. Recovery in early 2010 was followed by decline and stabilization at a lower level but with an increase in monthly SA estimates for Sep 2011.

Chart 7, US, Rate Total Nonfarm Hiring, Month SA 2001-2011

Source: US Bureau of Labor Statistics

There is only milder improvement in total private hiring shown in Chart 8. HP rose in 2010 followed by stability and renewed increase in 2011.

Chart 8, US, Total Private Hiring Month SA 2011-2011

Source: US Bureau of Labor Statistics

Chart 9 shows similar behavior in the rate of private hiring. The rate in 2011 in monthly SA data has not risen above the peak in 2010.

Chart 9, US, Rate Total Private Hiring Month SA 2011-2011

Source: US Bureau of Labor Statistics

The JOLTS report of the Bureau of Labor Statistics also provide total nonfarm job openings (TNF JOB), TNF JOB rate and TNF LD (layoffs and discharges) shown in Table 4 for the month of Sep from 2001 to 2011. The final column provides TNF LO for the years from 2001 to 2010. Nonfarm job openings fell from a peak of 4622 in Sep 2007 to 3425 in Sep 2011 or by 25.9 percent while the rate dropped from 3.3 to 2.4. Nonfarm layoffs and discharges (TNF LD) rose from 1793 in Sep 2006 to 2099 in Sep 2008 or by 17 percent. The yearly data show layoffs and discharges rising from 21.5 million in 2006 to 26.3 million in 2009 or by 22.3 percent.

Table 4, US, Job Openings and Total Separations, Thousands NSA

	TNF JOB	TNF JOB Rate	TNF LD SA	TNF LD Year
Sep 2001	4041	3.2	2079	24351
Sep 2002	3295	2.6	1924	23325
Sep 2003	3085	2.4	1880	23959
Sep 2004	3772	2.8	1884	23389
Sep 2005	4234	3.0	1895	22774
Sep 2006	4622	3.3	1793	21468
Sep 2007	4542	3.3	2099	22577
Sep 2008	3184	2.6	1927	23737
Sep 2009	2471	1.7	2121	26318
Sep 2010	2763	2.2	1714	21243
Sep 2011	3425	2.4	1756

Notes: TNF JOB: Total Nonfarm Job Openings; LD: Layoffs and Discharges

Source: US Bureau of Labor Statistics

Chart 10 shows monthly job openings rising from the trough in 2009 to a high in the beginning of 2010. Job openings then stabilized into 2011 but have surpassed the peak of 2010.

Chart 10, US Job Openings, Thousands NSA , 2001-2011

Source: US Bureau of Labor Statistics

The rate of job openings in Chart 11 shows similar behavior. The rate rises from 2009 into the initial part of 2010 and then stabilizes into 2011 but has now surpassed the peak in 2010.

Chart 11, US, Rate of Job Openings, Thousands NSA , 2001-2011

Source: US Bureau of Labor Statistics

Chart 12 shows total separations in the JOLTS report on a monthly basis. Total separations collapsed during the global recession and then stabilized.

Chart 12, US, Total Separations, Month SA 2001-2011

Source: US Bureau of Labor Statistics

Yearly total separations are shown in Chart 13. Separations are much lower in 2010 than before the global recession.

Chart 13, US, Total Separations, Yearly 2001-2010

Source: US Bureau of Labor Statistics

Table 5 provides total nonfarm total separations from 2001 to 2010. Separations fell from 62.7 million in 2006 to 46.3 million in 2010 or by 16.4 million.

Table 5, US, Total Nonfarm Total Separations, Thousands, 2001-2010

Year	Annual
2001	65610
2002	60412
2003	57847
2004	59666
2005	62107
2006	62699
2007	62173
2008	57525
2009	50544
2010	46347

Source: US Bureau of Labor Statistics

Monthly data of layoffs and discharges reach a peak in early 2009, as shown in Chart 14. Layoffs and discharges dropped sharply with the recovery of the economy in 2010 and 2011 once employers reduced their job count to what was required for cost reductions and loss of business.

Chart 14, US, Layoffs and Discharges, Monthly SA 2011-2011

Source: US Bureau of Labor Statistics

Layoffs and discharges in Chart 15 rose sharply to a peak in 2009. There was pronounced drop into 2010.

Chart 15, US, Layoffs and Discharges, Yearly 2001-2010

Source: US Bureau of Labor Statistics

Table 6 provides annual nonfarm layoffs and discharges from 2001 to 2010. Layoffs and discharges peaked at 26.3 million in 2009 and then fell to 21.2 million in 2010, by 5.1 million, or 19.4 percent.

Table 6, US, Total Nonfarm Layoffs and Discharges, 2001-2010

Year	Annual
2001	24351
2002	23325
2003	23959
2004	23389
2005	22774
2006	21468
2007	22577
2008	23737
2009	26318
2010	21243

Source: US Bureau of Labor Statistics

The Bureau of Labor Statistics also provides alternative measures of labor underutilization shown in Table 7. The most comprehensive measure is U6 that consists of total unemployed plus total employed part time for economic reasons plus all marginally attached workers as percent of the labor force. U6 not seasonally annualized has risen from 5.6 percent in 2006 to 15.3 in Sep 2011.

Table 7, US, Alternative Measures of Labor Underutilization %

	U1	U2	U3	U4	U5	U6
Oct 2011 NSA	5.0	4,8	8.5	9.1	10.0	15.3
Sep 2011 NSA	5.2	5.0	8.8	9.4	10.2	15.7
Oct 2010 NSA	5.5	5.4	9.0	9.8	10.6	15.9
2010	5.7	6.0	9.6	10.3	11.1	16.7
2009	4.7	5.9	9.3	9.7	10.5	16.2
2008	2.1	3.1	5.8	6.1	6.8	10.5
2007	1.5	2.3	4.6	4.9	5.5	8.3
2006	1.5	2.2	4.6	4.9	5.5	5.6

Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers

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

Monthly seasonally adjusted measures of labor underutilization are provided in Table 8. U6 has been climbing from 15.9 percent in Apr 2011 to 16.2 percent in Oct 2011. Unemployment is an inaccurate measure of the stress in US job markets. A different calculation in this blog is provided by using the participation rate in the labor force before the global recession. This calculation shows 28.8 million in job stress of unemployment/underemployment in Oct 2011, not seasonally adjusted, corresponding to 18.1 percent of the labor force (http://cmpassocregulationblog.blogspot.com/2011/11/twenty-nine-million-unemployed-or.html Table 3).

Table 8, US, Alternative Measures of Labor Underutilization SA %

	Oct 2011	Sep 2011	Aug 2011	Jul 2011	Jun 2011	May 2011	Apr 2011
U1	5.1	5.4	5.4	5.3	5.3	5.3	5.1
U2	5.2	5.3	5.3	5.4	5.4	5.4	5.3
U3	9.0	9.1	9.1	9.1	9.2	9.1	9.0
U4	9.6	9.7	9.7	9.8	9.8	9.5	9.5
U5	10.5	10.5	10.6	10.7	10.7	10.3	10.4
U6	16.2	16.5	16.2	16.1	16.2	15.8	15.9

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

Chart 16 provides U6 on a monthly basis from 2001 to 2011. There was a steep climb from 2007 into 2009 and then this measure of unemployment and underemployment stabilized at that high level.

Chart 16, US, U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers as % of Labor Force, Month, SA, 2001-2011

Source: US Bureau of Labor Statistics

One of the dramas of the current job market of the US consists of millions of people working part-time for economic reasons, or the failure to find full-time employment. Chart 17 shows the jump of numbers of people working part-time for economic reasons from 2007 and subsequent stabilization at a very high level.

Chart 17, US, Working Part-time for Economic Reasons

Thousands, Month SA 2001-2011

Sources: US Bureau of Labor Statistics

People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart 18 shows the sharp rise in unemployed over 27 weeks and stabilization at an extremely high level.

Chart 18, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2011

Sources: http://www.bls.gov/cps/data.htm

Another segment of U6 consists of people marginally attached to the labor force who continue to seek employment but less frequently. Chart 19 shows the sharp rise in people marginally attached to the labor force after 2007 and subsequent stabilization.

Chart 19, US, Marginally Attached to the Labor Force, SA Month 2001-2011

Sources: US Bureau of Labor Statistics

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

II World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past few weeks. Table 9, updated with every comment in this blog, provides beginning values on Nov 7 and daily values throughout the week ending on Fr Nov 11 of several financial assets. Section V Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Nov 4 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.379/EUR in the first row, first column in the block for currencies in Table 9 for Fri Nov 4, appreciating slightly to USD 1.3769/EUR on Mon Nov 7, or by 0.2 percent. The dollar appreciated because fewer dollars, $1,3769, were required on Nov 7 to buy one euro than $1.379 on Nov 4. Table 9 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention is required to maintain consistency in characterizing movements of the exchange rate in Table 9 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3769/EUR on Nov 7; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Nov 4, to the last business day of the current week, in this case Fri Nov 11, such as appreciation of 0.3 percent for the dollar to USD 1.375/EUR by Nov 4; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (positive sign) by 0.3 percent from the rate of USD 1.379/EUR on Fri Nov 4 to the rate of USD 1.375/EUR on Fri Nov 11 {[(1.375/1.379) – 1]100 = -0.3%} and depreciated by 1.1 percent from the rate of USD 1.3606 on Thu Nov 10 to USD 1.375/EUR on Fri Nov 11 {[(1.375/1.3606) -1]100 = 1.1%}. The dollar appreciated during the week because fewer dollars, $1.375, were required to buy one euro on Fri Nov 11 than $1.379 required to buy one euro on Fri Nov 4. The depreciation of the dollar in the week was caused by increasing risk aversion, largely resulting with the uncertainty on European sovereign risks, with purchases of risk financial investments by reduction of dollar-denominated assets.

Table 9, Weekly Financial Risk Assets Nov 7 to Nov 11, 2011

Fr Nov 04, 2011

M 7

Tu 8

W 9

Th 10

Fr 11

USD/
EUR

1.379

2.5%

1.3769

0.2%

1.3834

-0.3%

-0.5%

1.3547

1.8%

2.1%

1.3606

1.3%

-0.4%

1.375

0.3%

-1.1%

JPY/
USD

78.2125

-3.2%

78.0518

0.2%

77.7080

0.6%

0.4%

77.8228

0.5%

-0.1%

77.6410

0.7%

0.2%

77.14

1.4%

0.6%

CHF/
USD

0.888

-0.2%

0.9009

-1.5%

0.8952

-0.8%

0.6%

0.9092

-2.4%

-1.6%

0.9063

-2.1%

0.3%

0.899

-1.2%

0.8%

CHF/EUR

1.2204

0.0%

1.2405

-1.6%

1.2384

-1.5%

0.2%

1.2317

-0.9%

0.5%

1.2331

-1.0%

-0.1%

1.2387

-1.5%

-0.5%

USD/
AUD

1.037

0.9643

-3.3%

1.0368

0.9645

0.0

1.0389

0.9626

0.2%

1.0147

0.9855

-2.2%

-2.4%

1.0153

0.9849

-2.1%

0.1%

1.0279

0.9729

-0.9%

1.2%

10 Year
T Note

2.066

2.01

2.07

1.96

2.06

2.057

2 Year T Note

0.234

0.23

0.24

0.23

Germany Bond

2Y 0.40 10Y 1.82

2Y 0.38 10Y 1.78

2Y 0.40 10Y 1.80

2Y 0.35 10Y 1.72

2Y 0.38 10Y 1.78

2Y 0.40 10Y 1.89

DJIA

11983.24

-2.0%

0.7%

1.6%

0.8%

-1.7%

-3.2%

-0.7%

0.9%

1.4%

2.2%

DJ Global

1860.04

-5.3%

0.2%

0.9%

0.7%

-1.9%

-2.7%

-2.4%

-0.5%

0.1%

2.6%

DJ Asia Pacific

1230.25

-3.5%

-0.2%

-0.8%

-0.6%

-0.3%

0.5%

-3.3%

-3.0%

-2.3%

1.1%

Nikkei

8801.40

-2.8%

-0.4%

-1.7%

-1.3%

-0.5%

1.2%

-3.4%

-2.9%

-3.3%

0.2%

Shanghai

2528.29

2.2%

-0.7%

-0.9%

-0.2%

-0.1%

0.8%

-1.9%

-1.8%

-1.9%

0.1%

DAX

5973.57

-5.9%

-0.7%

-0.6%

-0.2%

0.6%

-2.4%

-2.2%

-1.8%

0.7%

1.4%

3.2%

DJ UBS Commodities

149.48

-0.9%

0.1%

0.8%

0.7%

-0.5%

-1.3%

-0.9%

-0.4%

0.5%

WTI $ B

94.53

1.1%

95.90

1.4%

96.94

2.5%

1.1%

96.04

1.6%

-0.9%

97.69

3.3%

1.7%

99.05

4.8%

1.4%

Brent $/B

112.32

2.1%

114.80

2.2%

115.28

2.6%

0.4%

112.21

-0.1%

-2.7%

112.88

0.5%

0.6%

114.15

1.6%

1.1%

Gold $/OZ

1756.7

0.5%

1797.0

2.3%

1786.1

1.7%

-0.6%

1770.2

0.8%

-0.9%

1760.2

0.2%

-0.6%

1790.0

1.9%

1.7%

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

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

Sources:

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

Risk aversion returned in the week of Nov 11 because of the uncertainties on rapidly moving political development in Greece and Italy and lack of substantive measures at the G20 meeting. Most currency movements in Table 9 reflect risk aversion. The dollar appreciated 0.3 percent relative to the euro after appreciating 2.5 percent in the prior week. Safe-haven currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY) have been under threat of appreciation. A characteristic of the global recession would be struggle for maintaining competitiveness by policies of regulation, trade and devaluation (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation War (2008c)). Appreciation of the exchange rate causes two major effects on Japan.

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

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

There is a point of explosion of patience with dollar devaluation and domestic currency appreciation. Andrew Monahan, writing on “Japan intervenes on yen to cap sharp rise,” on Oct 31, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204528204577009152325076454.html?mod=WSJPRO_hpp_MIDDLETopStories), analyzes the intervention of the Bank of Japan, at request of the Ministry of Finance, on Oct 31, 2011. Traders consulted by Monahan estimate that the Bank of Japan sold JPY 7 trillion, about $92.31 billion, against the dollar, exceeding the JPY 4.5 trillion on Aug 4, 2011. The intervention caused an increase of the yen rate to JPY 79.55/USD relative to earlier trading at a low of JPY 75.31/USD. The yen depreciated 3.1 percent on Oct 31 to JPY 78.1902/USD, as shown in Table 18. Historically, interventions in yen currency markets have been unsuccessful (Pelaez and Pelaez, The Global Recession Risk (2007), 107-109). Interventions are even more difficult currently with daily trading of some $4 trillion in world currency markets. Table 9 shows that the yen appreciated 1.4 percent from JPY 78.2125 on Nov 4 to JPY77.14/USD on Nov 11, reversing significant part of the depreciation resulting from currency intervention. Risk aversion with zero interest rates in the US diverts hot capital movements toward safe-haven currencies such as Japan, causing appreciation of the yen.

Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc depreciated 1.2 percent relative to the USD in the week of Nov 11 and depreciated 1.5 percent relative to the euro. Risk aversion is evident in the depreciation of the Australian dollar by cumulative 3.3 percent in the week of Fr Nov 4 and additional depreciation by 0.9 percent in the week of Nov 11. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Increasing risk aversion is captured by decrease of the yield of the 10-year Treasury note from 2.326 percent on Oct 28 to 2.066 percent on Fri Nov 4 and stability of this rate through Nov 11 when US bond markets closed in observance of Veterans Day. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.9 percent in the 12 months ending in Sep and 0.3 percent in Sep relative to Aug (http://www.bls.gov/cpi/). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with declining yield of 0.234 percent on Nov 4 from 0.293 percent on Oct 28 and stability at 0.23 percent through the week of Nov 11. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities. A similar risk aversion phenomenon occurs in Europe with lower levels of the yield of the 10-year government bond of Germany on Fri Nov 4 at 0.40 percent for the two-year maturity from 0.60 percent on Fri Oct 28 and 1.82 percent for the 10-year maturity on Fri Nov 4 from 2.18 percent on Fri Oct 28 while the final estimate of euro zone CPI inflation for Sep is at 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14102011-BP/EN/2-14102011-BP-EN.PDF). Although the flash estimate for Oct is also at 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31102011-AP/EN/2-31102011-AP-EN.PDF), the yield of the two-year German government bond remained at 0.40 by Nov 11 and the yield of the 10-year German government bond also remained virtually unchanged at 1.89 percent. Safety overrides inflation-adjusted yield but there could be duration aversion.

World equity markets traded cautiously during the week in the uncertainty of the details and implementation of the deal of the European bank and sovereign debt deal and rapidly moving political development in Greece and especially Italy. Markets in Europe and the US rallied on positive news of fiscal austerity in Italy on Nov 11 but did not reflect in already-closed markets in Asia. The DJIA oscillated during the week but ended with cumulative gain for the week of 1.4 percent. Recession is nowhere in short-term indicators of the overall US economy and companies are supporting earnings with continuing cost restraint. The DJ Global gained 0.1 percent in the week concentrated mostly on Fri Nov 11 and Tue Nov 1 and Germany’s Dax 1.4 percent in the week with major rally of 3.2 percent on Fri Nov 11 because of more hopeful news on Italy. China’s Shanghai Composite dropped 1.9 percent in the week. The Nikkei Average fell 3.3 percent in the week and the DJ Asia Pacific lost 2.3 percent.

Commodities fluctuated but ended with gains in the week of Nov 4. The DJ UBS Commodities index dropped 0.4 percent cumulatively in the week. WTI rose 4.8 percent and Brent gained 1.6 percent in the week as a result of nuclear issues in Iran. Gold gained 1.9 percent in the week, reflecting ambivalence of investors on the implementation of the European plan and political uncertainty in Greece and new international issues regarding Iran’s nuclear program.

There are three factors dominating valuations of risk financial assets that are systematically discussed in this blog.

1. Euro zone survival risk. The fundamental issue of sovereign risks in the euro zone is whether the group of countries with euro as common currency and unified monetary policy through the European Central Bank will (i) continue to exist; (ii) downsize to a limited number of countries with the same currency; or (iii) revert to the prior system of individual national currencies.

2. United States Growth, Employment and Fiscal Soundness. Recent posts of this blog analyze the mediocre rate of growth of the US in contrast with V-shaped recovery in all expansions following recessions since World War II, deterioration of social and economic indicators, unemployment and underemployment of 30 million, decline of yearly hiring by 17 million, falling real wages and unsustainable central government or Treasury debt (http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html).

3. World Economic Slowdown. Careful, detailed analysis of the slowdown of the world economy is provided in Section VI World Economic Slowdown. Data and analysis are provided for regions and countries that jointly account for about three quarters of world output.

Fiscal consolidation is facilitated by higher rates of economic growth as analyzed by Blanchard (2011WEOSep). The President of the ECB finds difficult environment for economic growth in the euro zone that was important in reaching the decision to lower the ECB’s policy rate (http://www.ecb.int/press/pressconf/2011/html/is111103.en.html):

“Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP growth in the euro area, which slowed in the second quarter of 2011 to 0.2% quarter on quarter, is expected to be very moderate in the second half of this year. There are signs that previously identified downside risks have been materialising, as reflected in unfavourable evidence from survey data. Looking forward, a number of factors seem to be dampening the underlying growth momentum in the euro area, including a moderation in the pace of global demand and unfavourable effects on overall financing conditions and on confidence resulting from ongoing tensions in a number of euro area sovereign debt markets. At the same time, we continue to expect euro area economic activity to benefit from continued positive economic growth in the emerging market economies, as well as from the low short-term interest rates and the various measures taken to support the functioning of the financial sector.”

Willem Buiter (2011Oct 31) writing on “EFSF needs bigger bazooka to maximize its firepower,” published on Oct 31 in the Financial Times (http://www.ft.com/intl/cms/s/0/c4886f7a-03d3-11e1-bbc5-00144feabdc0.html#axzz1cMoq63R5) provides tough but enlightened analysis of the needs for resolving the European sovereign risk crisis and the resources committed in the agreement of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES). According to Buiter (2011Oct31) the Oct 26 agreement only provided temporary and incomplete solutions to the three problems of (1) restructuring insolvent sovereigns; (2) recapitalizing multiple European banks; and (3) maintaining market access of sovereigns such as Spain and Italy. Buiter (2011Oct31) find that the “fire power” or “bazooka” of the European Financial Stability Facility (EFSF) (http://www.efsf.europa.eu/about/index.htm) must be somewhere between €2500 and €3000 billion to prevent an assault on Spain and Italy. The crisis is likely to worsen. The ultimate solution may be only through the financing in sale and repurchase agreements (SRP) with the European Central Bank the sovereign debt acquired by the EFSF. The showdown, according to Buiter (2011Oct31), will occur in choosing between the end of the euro area and the fiscal use or “abuse” of the European Central Bank.

Even with leverage of the EFSF, which Buiter (2011Oct 31 finds unfeasible), the solution turns again to taxpayers in Germany and possibly France with tough dimensions of needs versus feasible availability and political restraints. Those same taxpayers would have to recapitalize the European Central Bank if fiscal use or “abuse” of the euro zone central bank is opted versus collapse of the euro zone. The economic issue is not whether Germany should, which would be decided in elections, but whether Germany can pay alone for the profligacy of other sovereigns in the European Monetary Union. The Wriston “doctrine” on sovereign lending was predicated on the argument that countries do not bankrupt (Wriston 1982). Another Wriston idea was that the old Citibank should be more valuable dead than alive: if Citibank followed the model of the old Merrill Lynch and sold the individual components or franchises the value would be higher than that of the unbroken Citibank. There was a rise in leveraged buy outs (LBO) in the 1980s that has been extensively analyzed in academic literature (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 159-66). The debt crisis of the 1980s and many other episodes in history actually proved that a country can bankrupt and that many countries can bankrupt simultaneously.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the following Subsection IIA Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. Throughout the week of Nov 11 the yield of the 2-year bond of the government of Greece was quoted at over 70 percent and the 10-year bond yield traded at over 30 percent. In contrast, the 2-year US Treasury note traded at 0.23 percent and the 10-year at 2.057 percent while the comparable 2-year government bond of Germany traded at 0.40 percent and the 10-year government bond of Germany traded at 1.89 (see Table 9). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. Financial turbulence during the week originated in the jump of the yield of the 10-year government bond of Italy above 7 percent. Markets calmed with the vote on the austerity program in Italy, auction of short-term government debt of Italy and prospects for implementation of austerity measures. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP. Appendix IIA links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy.

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

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

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

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

The prospects of survival of the euro zone are dire. Table 10 is constructed with current IMF World Economic Outlook database for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table 10, World and Selected Regional and Country GDP and Fiscal Situation

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

*Gross Debt

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

The data in Table 10 are used for some very simple calculations in Table 11. The column “Net Debt USD Billions” in Table 11 is generated by applying the percentage in Table 10 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 11. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table 11, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

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

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

There is extremely important information in Table 21 for the current sovereign risk crisis in the euro zone. Table 12 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Sep. German exports to other European Union members are 58.9 percent of total exports in Sep and 59.7 percent in Jan-Sep. Exports to the euro area are 40.0 percent in Sep and 40.1 percent in Jan-Sep. Exports to third countries are only 40.4 percent of the total in Sep and 40.3 percent in Jan-Sep. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone.

Table 12, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

M_tV(i_t, ·) = P_tY_t (5)

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

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

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

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

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

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

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

III Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 13 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Newly available data on inflation is considered below in this section. The data in Table 13 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 13. Data for other countries in Table 13 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section IV World Economic Slowdown following with individual country and regional data tables.

Table 13, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.6	3.9	6.9	9.0
Japan	-1.1	0.0	1.7	4.2
China	9.1	5.5	5.0
UK	0.5	5.2* RPI 5.6	5.7* output 14.1* input 10.5**	8.1
Euro Zone	1.6	3.0	5.8	10.2
Germany	2.8	2.9	5.5	5.2
France	1.6	2.4	6.0	9.9
Nether-lands	1.5	3.0	7.5	4.5
Finland	2.7	3.5	6.2	7.8
Belgium	2.5	3.4	6.9	6.7
Portugal	-0.9	3.5	5.5	12.5
Ireland	-1.0	1.3	4.2	14.2
Italy	0.8	3.6	4.7	8.3
Greece	-4.8	2.9	8.1	17.6
Spain	0.7	3.0	7.1	22.6

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

*Office for National Statistics

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

CPI http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/september-2011/index.html

** Excluding food, beverage, tobacco and petroleum

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

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

“For immediate release

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

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

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

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

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

The FOMC also released the economic projections of governors of the Board of Governors of the Federal Reserve and Federal Reserve Banks presidents shown in Table 14. It is instructive to focus on 2012, as 2011 is almost gone, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC. The first row for each year shows the projection introduced after the meeting of Nov 2 and the second row “Jun PR” the projection of the Jun meeting. There are three major changes in the view.

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

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

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

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

Table 14, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, November 2011

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

Notes: UEM: unemployment; PR: Projection

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inflation in advanced economies has been moderating at the producer price level with moderation of the commodity price shock. Table 15 provides the month and 12 months rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI fell 0.7 percent in Oct and increased 1.7 percent in 12 months. Measured by 12 months rates, CGPI inflation has increased from minus 0.2 percent in Jul 2010 to a high of 2.8 percent in Jul 2011 and now to much lower 1.7 percent in Oct. At the margin, annual equivalent inflation in the quarter Jul to Oct 2011 is minus 2.4 percent compared with annual equivalent inflation in Jan-Set 2011 of 2.7 percent. Moderation of commodity price increases after May 2011, influenced by risk aversion, has caused collapse of monthly inflation toward zero or less.

Table 15, Japan Corporate Goods Price Index (CGPI) ∆%

	Month	Year
Oct 2011	-0.7	1.7
Sep	-0.1	2.5
Aug	-0.2	2.6
Jul	0.2	2.8
AE ∆% Jul-Oct	-2.4
Jun	0.0	2.5
May	-0.2	2.2
Apr	1.0	2.6
Mar	0.6	2.0
Feb	0.1	1.7
Jan	0.6	1.6
AE ∆% Jan-Set	2.7
Dec 2010	0.4	1.2
Nov	0.0	0.9
Oct	0.2	0.9
Sep	0.0	-0.1
Aug	0.0	0.0
Jul	-0.1	-0.2
Fiscal Year
2010	-0.1
2009	-5.2
2008	4.5

AE: annual equivalent

Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1110.pdf

Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table 16. Manufactured products accounting for 91.9 percent of the products in the index fell 0.4 percent in Oct and increased 1.5 percent in 12 months. Petroleum and coal with weight of 5.4 percent fell 2.2 percent in Oct but increased 12.8 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, machinery and equipment, with weight of 10.8 percent, fell 0.2 percent in Oct and fell 0.3 percent in 12 months. In general, most manufactured products experienced negative increases in prices while inflation rates were high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing deteriorated the terms of trade of advanced economies.

Table 16, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%

Oct 2011	Weight	Month ∆%	12 Month ∆%
Total	100.0	-0.7	1.7
Mfg Industry Products	91.9	-0.4	1.5
Processed Food	11.5	0.0	0.6
Petroleum & Coal	5.4	-2.2	12.8
Machinery & Equipment	10.8	-0.2	-0.3
Electric & Electronic	12.9	-0.1	-2.8
Electric Power, Gas & Water	4.7	-2.6	7.1
Iron & Steel	5.3	-0.2	3.6
Chemicals	8.5	-0.7	4.1
Transport Equipment	12.5	-0.1	-0.2

Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1110.pdf

Percentage point contributions to change of the corporate goods price index (CGPI) are provided in Table 17 divided into the domestic, export and import segments. Nonferrous metals contributed minus 0.16 percentage points to the fall of the domestic CGPI of Japan of 0.7 percent in Oct. Petroleum and coal contributed minus 0.15 percentage points. Electric power, gas and water contributed minus 0.13 percentage points. The exports CGPI fell 0.5 percent on the basis of the contract currency and fell 0.7 percent on the basis of the yen with negative contributions of 0.50 percentage points by metals and related products and 0.40 percentage points by chemicals and related products. The imports CGPI fell 0.7 percent on the contract currency basis and 0.7 percent on the yen basis. The most important contributions were minus 0.60 percentage points by metals and related products and minus 0.06 percentage points by other primary products and manufactured products.

Table17, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index

Groups Oct 2011	Contribution to Change Percentage Points
A. Domestic Corporate Goods Price Index	Monthly Change: -0.7%
Nonferrous Metals	-0.16
Petroleum & Coal	-0.15
Electric Power, Gas & Water	-0.13
Chemicals & Related Products	-0.06
Scrap & Waste	-0.06
Information & Telecommunication Equipment	-0.02
B. Export Price Index	Monthly Change: -0.5% contract currency basis -0.7% yen basis
Metals & Related Products	-0.50
Chemicals & Related Products	-0.40
Electric & Electronic Products	-0.02
Transportation Equipment	0.28
General Machinery & Equipment	0.09
C. Import Price Index	Monthly Change: -0.7% contract currency basis -0.7% yen basis
Metals & Related Products	-0.60
Other Primary Products & Manufactured Products	-0.06
Chemicals & Related Products	-0.03
Petroleum, Coal & Natural Gas	0.06

Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1110.pdf

China is experiencing similar inflation behavior as the advanced economies, as shown in Table 18. Oct inflation of the price indexes for industry is minus 0.7 percent but 12 months inflation is still 5.0 percent and inflation in Jan/Oct 2011 relative to the same period in 2010 is 6.8 percent. There were no drivers of inflation in Oct with all components in Table 18 falling on a monthly basis in row “Month Oct ∆%.” This is the case of prices of raw materials which fell 1.1 percent in Sep after increasing 7.9 percent in 12 months and 10.4 percent in the first nine months. Mining prices fell 0.8 percent in Oct after increasing 15.1 percent in 12 months and 16.5 percent in the first ten months relative to a year earlier. Prices of the various categories of inputs in the purchaser price index also fell in Oct.

Table 18, China, Price Indexes for Industry ∆%

	Month Oct ∆%	12 Months Oct ∆%	Jan-Oct 2011/ Jan-Oct 2010 ∆%
I Producer Price Indexes	-0.7	5.0	6.8
Means of Production	-0.8	5.2	7.5
Mining	-0.8	15.1	16.5
Raw Materials	-1.1	7.9	10.4
Processing	-0.7	3.1	5.4
Consumer Goods	0.0	4.2	4.5
Food	0.0	7.4	8.0
Clothing	0.2	4.5	4.3
Daily Use Articles	-0.2	3.9	4.3
Durable Consumer Goods	0.0	-0.3	-0.6
II Purchaser Price Indexes	-0.7	8.0	10.1
Nonferrous Metals	-4.9	7.0	14.3
Fuel and Power	-0.3	11.3	11.2
Ferrous Metals	-0.8	7.2	10.9
Raw Chemical Materials	-0.5	9.9	12.0

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764953.htm

Producer price inflation in China was -0.7 percent in Oct and 5.0 percent in 12 months, as shown in Table 19. In the four months Jul-Oct 2011 annual equivalent inflation is minus 1.8 percent. In contrast, in the first half of the year annual equivalent inflation was 20.4 percent. Inflation has fallen at the margin in China.

Table 19, China, Month and 12 Months Rate of Change of Producer Price Index, ∆%

	12 Month ∆%	Month ∆%
Oct 2011	5.0	-0.7
Sep	6.5	0.0
Aug	7.3	0.1
Jul	7.5	0.0
AE ∆% Jul-Oct		-1.8
Jun	7.1	0.0
May	6.8	0.3
Apr	6.8	0.5
Mar	7.3	0.6
Feb	7.2	0.8
Jan	6.6	0.9
AE ∆% Jan-Jun		20.4
Dec 2010	5.9	0.7

AE: Annual Equivalent

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764953.htm

Chart 20 of the National Bureau of Statistics of China provides monthly and 12 months rates of inflation of the price indexes for the industrial sector. The fall of the monthly rates eventually pulled down the 12 months rates. At the margin since Jun inflation had been almost zero to Sep and fell 0.7 percent in Oct.

Chart 20, China, Producer Prices for the Industrial Sector Month and 12 months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764953.htm

China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in Oct was 0.1 percent, 5.5 percent in 12 months and 5.6 percent in Jan-Oct 2011 relative to Jan-Oct 2010, as shown in Table 20. By far the highest increase occurred in food with decline by 0.2 percent in Oct but increase of 11.9 percent in the 12 months ending in Oct and 12.4 percent in the first ten months relative to a year earlier. Another area of concern is housing with price inflation of 0.1 percent in Oct, 4.4 percent in 12 months and 5.9 percent in the first ten months relative to a year earlier. Prices of services rose 0.2 percent in Oct, 2.8 percent in 12 months and 3.7 percent in the first ten months relative to a year earlier. In contrast with producer prices, there were increases in many components.

Table 20, China, Consumer Price Index

	Oct Month ∆%	12 Month ∆%	Jan/Oct 2011/ Jan/Oct 2010
Consumer Prices	0.1	5.5	5.6
Urban	0.1	5.4	5.5
Rural	0.0	5.9	6.2
Food	-0.2	11.9	12.4
Non-food	0.2	2.7	2.8
Consumer Goods	0.1	6.6	6.5
Services	0.2	2.8	3.7
Commodity Categories:
Food	-0.2	11.9	12.4
Tobacco, Liquor	0.5	3.7	2.6
Clothing	1.6	3.7	1.8
Household	0.1	3.1	2.3
Healthcare and Personal	-0.1	3.5	3.4
Transport Comm.	-0.3	0.8	0.5
Recreation, Education	0.2	0.0	0.4
Housing	0.1	4.4	5.9

Note: Comm.: Communications

Source:

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764943.htm

http://www.stats.gov.cn/enGliSH/

Month and 12 months rates of change of consumer prices are provided in Table 21. In contrast with producer prices, the annual equivalent rate of consumer price inflation rose from 2.0 percent in Apr to Jun to 4.3 percent in Jul to Oct. At the marginal monthly level, consumer prices are increasing at a relatively high rate of 4.3 percent even if lower than 8.3 percent in annual equivalent in Jan-Mar.

Table 21, China, Month and 12 Months Rates of Change of Consumer Price Index ∆%

	12 Month ∆%	Month ∆%
OCT 2011	5.5	0.1
Sep	6.1	0.5
Aug	6.2	0.3
Jul	6.5	0.5
AE ∆% Jul to Oct		4.3
Jun	6.4	0.3
May	5.5	0.1
Apr	5.3	0.1
AE ∆% Apr to Jun	2.0	2.0
Mar	5.4	-0.2
Feb	4.9	1.2
Jan	4.9	1.0
AE ∆% Jan to Mar	8.3	8.3
Dec 2010	4.6	0.5

AE: Annual Equivalent

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764943.htm

Chart 21 of the National Bureau of Statistics of China provides monthly and 12 months rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates but fell to 0.1 percent in Oct.

Chart 21, China, Consumer Prices ∆% Month and 12 Months Aug 2010 to Aug 2011

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111109_402764943.htm

The producer price index of the euro zone increased 0.2 percent in Sep after falling 0.2 percent in Aug relative to Jul, as shown in Table 22. The annual equivalent rate in Jul-Sep is 2.0 percent. Producer price inflation has moderated since May with annual equivalent inflation of only 0.7 percent in May-Sep. Energy inflation has oscillated with the shocks of risk aversion that cause unwinding of carry trade positions from zero interest rates to commodity futures. In the six months Apr to Sep, energy prices fell in three. Annual equivalent energy inflation in Apr-Sep is 4.6 percent. Prices of capital goods have barely moved with annual equivalent inflation in Jul-Sep of only 0.8 percent. Prices of durable consumer goods have accelerated in Jul-Sep at annual equivalent rate of 2.8 percent compared with only 1.2 percent annual equivalent in Apr-Jun.

Table 22, Euro Zone, Industrial Producer Prices Month ∆%

	Sep 2011	Aug 2011	Jul 2011	Jun 2011	May 2011	Apr 2011
Industry ex Construction	0.3	-0.2	0.4	0.0	-0.2	0.9
Industry ex Construction & Energy	0.1	01	0.1	0.1	0.2	0.5
Intermediate Goods	0.0	0.0	0.0	0.0	0.2	0.6
Energy	1.0	-0.8	1.5	-0.3	-1.1	2.0
Capital Goods	0.0	0.1	0.1	0.2	0.0	0.2
Durable Consumer Goods	0.4	0.2	0.1	0.0	0.1	0.2
Nondurable Consumer Goods	0.1	0.2	0.1	0.1	0.3	0.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04112011-AP/EN/4-04112011-AP-EN.PDF

Although moderating in recent months, 12 months rate of increase of producer prices in the euro zone continue at relatively high levels, as shown in Table 23. In both Sep and Aug, producer prices rose 5.8 percent relative to a year earlier. Industrial prices excluding construction and energy rose 3.6 percent in the 12 months ending in Sep while energy prices rose 12.2 percent. There is major vulnerability in producer price inflation that can return together with long positions in commodity futures with carry trades from zero interest during relaxation of risk aversion.

Table 23, Euro Zone, Industrial Producer Prices 12 Months ∆%

	Sep 2011	Aug 2011	Jul 2011	Jun 2011	May 2011	Apr 2011
Industry ex Construction	5.8	5.8	6.1	5.9	6.2	6.8
Industry ex Construction & Energy	3.6	3.9	4.0	4.1	4.2	4.5
Intermediate Goods	5.0	5.7	6.1	6.3	6.6	7.3
Energy	12.2	11.4	11.9	10.7	11.8	13.2
Capital Goods	1.5	1.5	1.5	1.3	1.2	1.4
Durable Consumer Goods	2.5	2.1	1.9	1.8	1.9	2.0
Nondurable Consumer Goods	3.5	3.5	3.5	3.7	3.8	3.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04112011-AP/EN/4-04112011-AP-EN.PDF

Consumer price inflation in Germany in Oct was flat and 2.5 percent in 12 months, as sown in Table 24. Most of the inflation in Germany in 2011 has concentrated in three months: 0.4 percent in Jul, 0.5 percent in Mar and 0.5 percent in Feb. A quarter composed of those three months repeated for an entire year would result in annual equivalent inflation of 5.8 percent. Annual equivalent inflation in the quarter Jul-Oct was at the annual equivalent rate of 1.5 percent, which is lower than the 12 months rate of 2.5 percent in Oct.

Table 24, Germany, Consumer Price Index ∆%

	12 Months ∆%	Month ∆%
Oct 2011	2.5	0.0
Sep	2.6	0.1
Aug	2.4	0.0
Jul	2.4	0.4
AE ∆% Jul-Oct		1.5
Jun	2.3	0.1
May	2.3	0.0
Apr	2.4	0.2
Mar	2.1	0.5
Feb	2.1	0.5
Jan	2.0	-0.4
AE ∆% Jan-Jun		1.8
Dec 2010	1.7	1.0
Nov	1.5	0.1
Oct	1.3	0.1
Sep	1.3	-0.1
Aug	1.0	0.0
Annual Average ∆%
2010	1.1
2009	0.4
2008	2.6

Source:

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__413__611,templateId=renderPrint.psml

Chart 22, of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany from 2003 to 2011. There is an evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in more recent months. If risk aversion decline, new carry trades from zero interest rates to commodity futures could again result in higher inflation.

Chart 22, Germany, Consumer Price Index, Unadjusted, 2005=100

Source: Statistiche Bundesamt Deutschland

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

Chart 23 of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany and trend from 2007 to 2011. Inflation moderated during the global recession but regained the sharper slope with the new carry trades from zero interest rates to commodity futures beginning in 2010.

Chart 23, Germany, Consumer Price Index, Unadjusted and Trend, 2005=100

Source: Statistiche Bundesamt Deutschland

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

Table 25 provides the monthly and 12 months rate of inflation for segments of the consumer price index. Inflation excluding energy was flat in Oct and rose 1.4 percent in 12 months. Excluding household energy inflation fell 0.1 percent in Oct and rose 1.9 percent in 12 months. High increases in Germany’s consumer prices in Oct were 1.4 percent in heating oil, 0.9 percent in household energy and 1.0 percent in medium-term life consumer goods.

Table 25, Germany, Consumer Price Index ∆%

Oct 2011	12 Months ∆%	Month ∆%
Total	2.5	0.0
Excluding heating oil and motor fuels	1.9	0.1
Excluding household energy	1.9	-0.1
Excluding Energy	1.4	0.0
Total Goods	3.8	0.3
Nondurable Consumer Goods	5.3	0.2
Medium-Term Life Consumer Goods	2.4	1.0
Durable Consumer Goods	-0.1	-0.1
Energy Components
Motor Fuels	12.7	-0.8
Household Energy	10.3	0.9
Heating Oil	25.4	1.4
Food	2.9	0.1

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__413__611,templateId=renderPrint.psml

Consumer price inflation is more moderate in France. Table 26 provides monthly and 12 months rates of consumer price inflation in France in 2010 and 2011. The 12 months rate of inflation of consumer prices in France has risen from 1.1 percent in Jan 2010 to 2.4 percent in Oct 2011. The big jump occurred in the quarter of Feb to Apr with monthly rates of 0.5 percent in Feb, 0.8 percent in Mar and 0.3 percent in Apr, equivalent to 6.6 percent per year. With the exception of 0.5 percent in Aug, inflation has been moderate in France in recent months until 0.3 percent in Oct.

Table 26, France, Consumer Price Index, Month and 12 Months ∆%

	Month	12 Months
Oct 2011	0.3	2.4
Sep	-0.1	2.2
Aug	0.5	2.2
Jul	-0.5	1.9
Jun	0.1	2.1
May	0.1	2.0
Apr	0.3	2.1
Mar	0.8	2.0
Feb	0.5	1.6
Jan	-0.2	1.8
Dec 2010	0.4	1.8
Nov	0.1	1.6
Oct	0.1	1.6
Sep	-0.1	1.5
Aug	0.2	1.4
Jul	-0.3	1.7
Jun	0.0	1.5
May	0.1	1.6
Apr	0.3	1.7
Mar	0.5	1.6
Feb	0.6	1.3
Jan	-0.3	1.1

Source: http://www.bdm.insee.fr/bdm2/choixCriteres.action?request_locale=en&codeGroupe=142

Chart 24 of the Institut National de la Statistique et des Études Économiques of France shows the headline and core consumption price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. Unconventional monetary policy with alternations of risk aversion resulted in higher inflation in France that has stabilized in recent months until the increase of 0.3 percent in Oct

Chart 24, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20111110

Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table 27 provides 12 months rate of change of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12 months rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by the output prices for the UK, which was originated in decline of commodity prices but was used as an argument for the unconventional monetary policy of zero interest rates and quantitative easing during the past decade.

Table 27, UK Output Prices 12 Months ∆% NSA

	All Manufactured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Oct 2011	5.7	3.4	5.9
Sep	6.3	3.8	6.4
Aug	6.0	3.6	6.2
Jul	6.1	3.4	6.2
Jun	5.8	3.2	5.9
May	5.4	3.4	5.5
Apr	5.6	3.6	5.8
Mar	5.6	3.1	5.5
Feb	5.3	3.1	5.2
Jan	5.0	3.3	5.0
Dec 2010	4.2	2.7	4.0
Year ∆%		Ex Food
2010	4.2	3.0	3.9
2009	1.6	2.5	0.9
2008	6.7	3.7	6.7
2007	2.3	1.4	2.1
2006	2.0	1.5	2.0
2005	1.9	1.0	1.9
2004	1.0	-0.3	0.6
2003	0.6	0.1	0.5
2002	-0.1	-0.4	-0.3
2001	-0.3	-0.6	-1.1
2000	1.4	-0.5	0.8
1999	0.6	-0.9	-0.3

Source:

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

Chart 25 of the UK Office for National Statistics shows the acceleration of output prices of materials and fuels purchased during the commodity price shock from 2010 into 2011. Output prices excluding foods, beverages and petroleum products rose with a lag. Chart 25 captures the decline of inflation in Oct.

Chart 26, UK, Output Prices 12 Months ∆% NSA

Source: UK Office for National Statistics

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

Monthly and annual equivalent rates of change of output prices are shown in Table 28. There has been significant deceleration of output price inflation from an annual equivalent rate of 12.0 percent in Jan-Apr to 2.0 percent annual equivalent in May-Oct. As in the euro zone producer price index, there was monthly inflation in all three measurements of UK’s output prices. An important characteristic is that output prices excluding food, beverage and petroleum decelerated from an annual equivalent rate of change of 6.5 percent in Jan-Apr to 2.4 percent in May-Oct. Another important characteristic is that prices in all three measurements rose in each and every month of 2011 with the exception of the decline by 0.2 percent in Mar for the index excluding duty.

Table 28, UK Output Prices Month ∆% NSA

	All Manufactured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Oct 2011	0.0	-0.1	0.1
Sep	0.3	0.3	0.2
Aug	0.0	0.2	0.1
Jul	0.3	0.4	0.3
Jun	0.2	0.2	0.2
May	0.2	0.2	0.2
May-Oct ∆% AE	2.0	2.4	2.2
Apr	1.1	0.8	0.9
Mar	1.1	0.5	-0.2
Feb	0.5	0.0	0.5
Jan	1.1	0.8	1.1
Jan-Apr ∆% AE	12.0	6.5	7.1
Dec 2010	0.5	0.0	0.6

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

Input prices in the UK have been more dynamic than output prices, as shown by Table 29. The 12 months rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching revised 17.7 percent in Sep 2011 for materials and fuels purchased and 13.1 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 14.1 in Oct 2011 and 10.5 percent excluding food, tobacco, beverages and petroleum. There is only comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum. UK input and output inflation is sensitive to commodity price increases. The mirage of false deflation is also observed in input prices in 1999 and then again from 2001 to 2003.

Table 29, UK Input Prices 12 Months ∆% NSA

	Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum
Oct 2011	14.1	10.5
Sep	17.7	13.1
Aug	16.2	13.0
Jul	18.4	13.3
Jun	16.8	12.6
May	16.3	11.4
Apr	17.9	12.2
Mar	14.8	10.3
Feb	14.9	10.7
Jan	14.2	10.5
Dec 2010	13.1	9.0
Year ∆%
2010	9.9	5.7
2009	-3.8	1.6
2008	22.2	16.9
2007	2.9	2.3
2006	9.8	7.3
2005	10.9	6.9
2004	3.3	1.6
2003	1.2	-0.6
2002	-4.4	-4.8
2001	-1.2	-1.2
2000	7.4	3.7
1999	-1.3	-3.6

Source:

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

Chart 26 of the UK Office for National Statistics shows input prices of materials and fuels purchased and excluding food, beverage, tobacco and petroleum products. There is persistent inflation of input prices in the UK on an evident upward trend interrupted at the margin in Oct 2011.

Chart 26, UK, Input Prices 12 Months ∆%

Source: UK Office for National Statistics

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

Table 30 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. The carry trade from zero interest rates to commodity futures drove input price inflation to annual equivalent 35.6 percent in Jan-Apr 2011 with input price inflation excluding food, tobacco, beverages and petroleum at annual equivalent of 18.5 percent in Jan-Apr. Risk aversion originating in the sovereign debt crisis in Europe caused unwinding of carry trades with annual equivalent inflation in May-Oct of input price inflation of minus 3.6 percent but a high 3.9 percent excluding foods, tobacco, beverages and petroleum.

Table 30, UK Input Prices Month ∆%

	Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum SA
Oct 2011	-0.8	-0.5
Sep	1.8	0.5
Aug	-1.9	0.3
Jul	0.6	0.8
Jun	0.1	0.9
May	-1.6	-0.1
May-Oct ∆% AE	-3.6	3.9
Apr	2.8	1.9
Mar	3.8	1.2
Feb	1.4	1.2
Jan	2.3	1.4
Jan-Apr ∆% AE	35.6	18.5
Dec 2010	3.9	1.8

Source:

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

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12 months rates of inflation of manufactured products, shown in Table 31. Petroleum is the largest contributor with 1.61 percentage points to the 12 months rate in Oct followed by 1.40 percentage points contributed by food products. There are diversified sources of contributions to 12 months output price inflation such as 0.67 percentage points by clothing, textile and leather and 0.48 percentage points by chemical and pharmaceutical. In general, contributions by products rich in commodities are the drivers of inflation. Food products were the most important contributor to monthly output prices with 0.08 percentage points but most segments were negative or minor.

Table 31, UK, Contributions to Month and 12 Month Change in Prices of All Manufactured Products, Percentage Points

Oct 2011	12 Months % Points	12 Months ∆%	Month % Points	Month ∆%
Total %	5.6	5.6	0.0	0.0
Food Products	1.40	9.0	0.08	0.4
Tobacco & Alcohol	0.60	5.9	0.01	0.1
Clothing, Textile & Leather	0.67	6.2	0.02	0.2
Paper and Printing	0.17	4.7	-0.01	-0.2
Petroleum	1.61	15.0	-0.01	-0.1
Chemical & Pharmaceutical	0.48	5.5	-0.06	-0.7
Metal, Machinery & Equipment	0.13	3.8	0.01	0.3
Computer, Electrical & Optical	-0.05	-0.6	-0.03	-0.4
Transport Equipment	0.12	1.2	-0.01	-0.1
Other Manufactured Products	0.57	3.4	0.01	0.1

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

Table 32, Contributions to Month and 12 Month Change in Prices of Inputs, Percentage Points

Oct 2011	12 Months % Points	12 Months ∆%	Month % Points	Month ∆%
Total	14.1	14.1	-0.8	-0.8
Fuel	0.80	8.3	0.33	3.5
Crude Oil	8.45	36.4	-0.42	-1.4
Domestic Food Materials	0.32	3.1	-0.12	-1.1
Imported Food Materials	0.55	9.9	-0.04	-0.7
Other Domestic Produced Materials	0.13	3.2	0.00	0.0
Imported Metals	0.62	7.3	-0.41	-4.5
Imported Chemicals	0.95	8.2	-0.05	-0.4
Imported Parts and Equipment	1.02	6.2	-0.11	-0.6
Other Imported Materials	1.26	12.2	0.01	0.1

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

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 provides the summary indicators of the US economy and where to locate them in the blog. Indicators released in the week of Nov 4 are discussed after Table USA.

Table USA, US Economic Indicators

Consumer Price Index	Sep 12 months NSA ∆%: 3.9; ex food and energy ∆%: 2.0 Sep month ∆%: 0.3; ex food and energy ∆%: 0.1 Blog 10/23/11
Producer Price Index	Jun 12 months NSA ∆%: 6.9; ex food and energy ∆% 2.5 Sep month SA ∆% 0.8; ex food and energy∆%: 0.2 Blog 10/23/11
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	Sep month SA ∆%: 0.2 Sep 12 months NSA ∆%: 3.2 Capacity Utilization: 77.4 Blog 10/23/11
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 -8.82 Sep to Oct –8.48 New Orders: From -8.0 Sep to 0.16 Oct Blog 10/23/11
Philadelphia Fed Business Outlook Index	General Index from -17.5 Sep to 9.7 Oct New Orders from Sep -11.3 to 7.9 Oct Blog 10/23/11
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	Aug 11/Aug 10 NSA ∆%: Total Business 13.7; Manufacturers 13.4 Retailers 9.3; Merchant Wholesalers 18.2 Blog 10/16/11
Sales for Retail and Food Services	Sep 12 months ∆%: Retail and Food Services: 8.1; Retail ∆% 7.6 Blog 10/16/11
Value of Construction Put in Place	Sep SAAR month SA ∆%: 0.2 Sep 12 months NSA: -2.0 Blog 11/04/11
Case-Shiller Home Prices	Aug 2011/Aug 2010 ∆% NSA: 10 Cities minus 3.5; 20 Cities: minus 3.8 ∆% Aug SA: 10 Cities minus 0.2 ; 20 Cities: minus 0.05 Blog 10/30/11
FHFA House Price Index Purchases Only	Aug SA ∆% minus 0.1; 12 month ∆%: minus 4.0 Blog 10/30/11
New House Sales	Sep month SAAR ∆%: 5.7 Jan/Sep 2011/2010 NSA ∆%: minus 7.9 Blog 10/30/11
Housing Starts and Permits	Sep Starts month SA ∆%: 15.0; Permits ∆%: -5.0 Jan/Sep 2011/2010 NSA ∆% Starts -1.5; Permits ∆% –1.5 Blog 10/23/11
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	Aug Net Foreign Purchases of Long-term Treasury Securities: $57.9 billion Aug versus Jul $9.1 billion Major Holders of Treasury Securities: China $1137 billion; Japan $936.6 billion Blog 10/23/11
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: 11/6/11 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

Sales of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table 33 for Jan-Sep 2011, Jan-Sep 2010 and percentage changes. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 15.0 percent in the first nine months of 2011 relative to the first nine months of 2010. Sales of durable goods rose 12.5 percent with strong performance of 20.5 percent in machinery and 10.4 percent in automotive. Sales of nondurable goods rose 17.2 percent. The influence of commodity prices is revealed in the increase of 23.4 percent in the aggregate of petroleum plus groceries.

Table 33, US, Sales and Inventories of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, Month ∆%

	Sales Sep ∆%	Sales Aug ∆%	INV Sep ∆%	INV Aug ∆%
US Total	0.5	1.0	-0.1	0.1
Durable	-0.4	2.3	0.4	1.0
Automotive	0.7	2.9	0.4	4.3
Prof. Equip.	0.0	1.5	-1.1	-0.2
Computer Equipment	-1.2	0.3	-2.5	0.3
Electrical	1.4	1.9	-0.1	0.7
Machinery	0.5	1.4	2.7	1.0
Not Durable	1.2	-0.1	-0.9	-1.3
Drugs	-1.4	0.6	2.4	-0.2
Apparel	-0.4	1.3	-1.1	-0.7
Groceries	2.1	1.6	2.2	1.4
Farm Products	-4.3	-4.3	-8.2	-5.1
Petroleum	3.9	-0.9	-4.0	-4.4

Note: INV: inventories

Sources: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Monthly percentage changes for sales and inventories of wholesalers are provided in Table 34. US total sales rose 1.0 percent in Aug and 0.5 percent in Sep. Sales of durable goods fell 0.4 percent in Sep but after strong gain of 2.3 percent in Aug. Machinery’s sales performance is strong with 1.4 percent increase in Aug and 0.5 percent in Sep. Nondurable sales recovered from decline of 0.1 percent in Aug to increase 1.2 percent in Sep. Commodity price influences are shown by growth of sales of groceries of 2.1 percent in Sep and of 3.9 percent for petroleum. Fluctuations of commodity prices originate in carry trade from zero interest rates to commodity futures when there is relaxation of risk aversion.

Table 34, US, Sales of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, Billions of Dollars and ∆% SA

	Jan-Sep 2011 $ B	Jan-Sep 2010 $ B	∆%
US Total	3,541	3,078	15.0
Durable	1,578	1,403	12.5
Automotive	244	221	10.4
Prof. Equip.	278	265	4.9
Computer Equipment	148	139	6.5
Electrical	296	267	10.9
Machinery	264	219	20.5
Not Durable	1,964	1,676	17.2
Drugs	306	283	8.1
Apparel	98	96	2.1
Groceries	432	392	10.2
Farm Products	189	132	43.2
Petroleum	539	395	36.5
Petroleum plus Groceries	971	787	23.4

Sources: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table 35. The total for the US has remained almost unaltered at 1.15 in Sep and Aug 2011 relative to 1.18 in Sep 2010. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.49 in Sep 2011 relative to 1.51 in Sep 2010. Computer equipment operates with low inventory/sales ratios of 0.75 in Sep 2011 relative to 0.70 in Sep 2010 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.88 in Sep 2011 almost the same as 0.89 in Aug 2011 and equal to 0.88 in Sep 2010. There are exceptions such as 2.06 in Sep 2011 in apparel that is much higher than 1.76 in Sep 2010.

Table 35, Inventory/Sales Ratios of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, % SA

	Sep 2011	Aug 2011	Sep 2010
US Total	1.15	1.15	1.18
Durable	1.49	1.48	1.51
Automotive	1.49	1.50	1.43
Prof. Equip.	1.01	1.02	0.97
Comp. Equip.	0.75	0.76	0.70
Electrical	1.19	1.21	1.19
Machinery	2.24	2.19	2.37
Not Durable	0.88	0.89	0.88
Drugs	0.93	0.89	0.95
Apparel	2.06	2.08	1.76
Groceries	0.67	0.67	0.64
Farm Products	1.03	1.07	1.13
Petroleum	0.39	0.42	0.48

Sources:

http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Chart 27 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2011 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.

Chart 27, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2002-2011

Source: US Census Bureau

http://www2.census.gov/wholesale/img/mwtsbrf.jpg

There was mild improvement in the balance of international trade in goods and services of the US in Jul and Aug, declining from deficit of $50,182 million in May and $51.579 million in Jun to deficit of $45,625 million in Aug, as shown in Table 36. There was further improvement to $44,919 million in Sep, as shown in Table 1. Exports increased 1.4 percent in Sep while imports increased only 0.3 percent. In the quarter Jul-Sep, exports increased 4.9 percent while imports hardly changed. The trade balance deteriorated from cumulative deficit of $381,278 million in Jan-Sep 2010 to deficit of $418,617 million in Jan-Sep 2011.

Table 36, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%

	Trade Balance	Exports	Month ∆%	Imports	Month ∆%
Sep 2011	-43,107	180,364	1.4	223,472	0.3
Aug	-44,919	177,865	0.1	222,784	-0.2
Jul	-45,625	177,706	3.4	223,331	-0.02
Jun	-51,570	171,802	-2.2	223,372	-1.1
May	-50,182	175,673	-0.3	225,855	2.9
Apr	-43,242	176,267	1.3	219,509	-0.4
Mar	-46,397	173,981	4.9	220,378	4.2
Feb	-45,718	165,727	-1.3	211,444	-1.9
Jan	-47,858	167,849	2.3	215,707	5.5
Dec 2010	-40,454	164,006	1.7	204,459	2.2
Jan-Sep 2011	-418,617	1,567,234		1,985,851
Jan-Sep 2010	-381,278	1,352,830		1,734,108

Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding.

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Chart 28 of the US Bureau of the Census of the Department of Commerce shows that the trade deficit fell during the economic contraction after 2007 but has grown again during the expansion. There has been a slight improvement in the margin in Sep, Aug and Jul.

Chart 28, US Balance, Exports and Imports of Goods and Services $ Billions

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr042.html

The balance of international trade in goods of the US seasonally-adjusted is shown in Table 37. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The balance in international trade of goods deteriorated sharply from $553 billion in Jan-Sep 2010 to $486 billion in Jan-Sep 2011. Deterioration occurred both in the petroleum balance, exports less imports of petroleum, as well as in the non-petroleum balance, exports less imports of non-petroleum goods. Exports rose 18.1 percent with non-petroleum exports growing 15.1 percent. Total imports rose by 16.6 percent with petroleum imports increasing 30.6 percent and non-petroleum imports increasing 13.4 percent.

Table 37, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA

	Jan-Sep 2011	Jan-Sep 2010	∆%
Total Balance	-553,755	-486,612
Petroleum	-246,379	-200,744
Non Petroleum	-299,646	-278,068
Total Exports	1,117,372	946,040	18.1
Petroleum	81,868	50,566	61.9
Non Petroleum	1,021,998	887,638	15.1
Total Imports	1,671,127	1,432,652	16.6
Petroleum	328,247	251,310	30.6
Non Petroleum	1,321,644	1,165,705	13.4

Details may not add because of rounding and seasonal adjustment

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

US exports and imports of goods not seasonally adjusted in Jan-Sep 2010 and Jan-Sep 2011 are shown in Table 38. The rate of growth of exports was 18.3 percent, which is slightly higher than 16.7 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that rose 27.5 percent and of mineral fuels that increased 61.7 percent both because of higher prices of raw materials and commodities. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose only 12.1 percent while imports rose 13.2 percent. Significant part of the US trade imbalance originates in mineral fuels growing by 28.2 percent and crude oil increasing by 28.6 percent. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in deterioration of the terms of trade of the US, export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates.

Table 38, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %

	Jan- Sep 2011 $ Millions	Jan-Sep 2010 $ Millions	∆%
Exports	1,109,690	938,397	18.3
Manu- factured	721,227	643,452	12.1
Agricultural Commodities	99,932	78,378	27.5
Mineral Fuels	92,751	57,351	61.7
Crude Oil	981	1,173	-16.4
Imports	1,661,576	1,423,408	16.7
Manu- factured	1,189,300	1,050,207	13.2
Agricultural Commodities	73,532	60,913	20.7
Mineral Fuels	345,433	269,442	28.2
Crude Oil	253,658	197,288	28.6

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Prices of US imports rose 11.0 percent in the 12 months ending in Oct 2011, as shown in Table 39, but fell at the annual equivalent rate of 2.7 percent in Jul-Oct. At the margin, overall import price inflation is falling in four months annual equivalent rate. An important determinant of lower inflation is fuels and lubricants with share of 26.5 percent in total imports but falling at the annual equivalent rate of 11.4 percent in Jul-Oct 2011 in contrast with increase of 33.8 percent in the 12 months ending in Oct 2011. Inflation appears to have spread throughout the production chain. The index of all imports ex fuels with weight of 73.5 percent rose 4.9 percent in 12 months and 1.2 percent in annual equivalent in Jul-Oct 2011. The index of prices of imported consumer goods ex automotive rose at the annual-equivalent rate of 4.9 percent in Jul-Oct and increased 3.6 percent in 12 months. Export prices fell 4.8 percent in annual equivalent in Jul-Oct but increased 9.5 percent in 12 months. Agricultural exports, which are the US hedge against commodity price increases, rose 11.5 percent in 12 months and increased at the annual- equivalent rate of 19.7 percent in Jul-Oct 2011. Agricultural exports are an imperfect hedge with share of only 11.7 percent in total exports. Industrial supplies and material rose a vigorous 12.5 percent in 12 months but fell at the Jul-Oct annual-equivalent rate of 9.1 percent. Consumer goods ex autos rose at the annual rate of 2.1 percent in Jul-Oct and 4.1 percent in 12 months.

Table 39, US, Prices of Exports and Imports 12 Months Growth and Annual Equivalent %

	% Total	12 Month ∆% Oct 2011	Annual ∆%Equivalent Jul-Oct 2011
Imports	100.0	11.0	-2.7
Fuels & Lubricants	26.5	33.8	-11.4
All Imports ex Fuels	73.5	4.9	1.2
Capital Goods	20.8	0.9	0.0
Automotive vehicles, parts & engines	9.2	3.6	0.0
Consumer Goods Ex Automotive	24.3	3.6	4.9
Nondurable Manufactured	11.9	4.6	7.7
Durables Manufactured	11.3	1.8	0.6
Non-Manufactured Consumer Goods	1.0	11.1	9.0
Exports	100.0	6.3	-4.8
Agricultural	11.7	11.5	19.7
Non-Agricultural	88.3	5.7	-2.4
Industrial Supplies and Materials	35.2	12.5	-9.1
Capital Goods	34.1	1.2	0.0
Automotive vehicles, parts & engines	6.7	2.4	3.7
Consumer Goods Excluding Autos	13.4	4.1	2.1
Nondurable Manufactured	6.7	0.3	-1.2
Durables Manufactured	5.3	2.7	3.7

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

Chart 29 provides US prices of total US imports 2001-2011. Prices fell during the contraction of 2001. Import price inflation accelerated after unconventional monetary policy of near zero interest rates in 2003-2004 and quantitative easing by withdrawing supply with the suspension of 30-Treasury auctions. Slow pace of adjusting fed funds rates from 1 percent by 25 basis points increments in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006 continued to give impetus to carry trades. The reduction of fed funds rates toward zero in 2008 fueled a spectacular hunt for yields that caused commodity price inflation in the middle of a global recession. After risk aversion in 2009 because of the announcement of TARP (Troubled Asset Relief Program) creating anxiety on “toxic assets” in bank balance sheets (see Cochrane and Zingales 2009), prices collapsed after unwinding carry trades. Renewed price increases returned with zero interest rates and quantitative easing. Monetary policy impulses in massive doses have driven inflation and valuation of risk financial assets in wide fluctuations over a decade.

Chart 29, US, Prices of Total US Imports 2001=100, 2001-2011

Chart 30 provides prices of US imports from 1982 to 2011. There is no similar episode to that of the increase of commodity prices in 2008 during a protracted and deep global recession with subsequent collapse during a flight into government obligations. Trade prices have been driven by carry trade created by unconventional monetary policy in the past decade.

Chart 30, US, Prices of Total US Imports, 2001=100, 1982-2011

Chart 31 provides 12 months percentage changes of US total imports from 1982 to 2011. There have not been wide consecutive oscillations as the ones during the global recession of IVQ2007 to IIQ2009.

Chart 31, US, Prices of Total US Imports, 12 Month Percentage Changes, 1982-2011

Chart 32 provides the index of US export prices. There is not much difference between Chart 29 and Chart 30. Import and export prices have driven by impulses of unconventional monetary policy in massive doses.

Chart 32, US, Prices of Total US Exports, 2001=100, 2001-2011

Chart 33 provides US total exports from 1982 to 2011. The rise before the global recession is also unique in the series.

Chart 33, US, Prices of Total US Exports, 2001=100, 1982-2011

Chart 34 provides 12 months percentage changes of total US exports from 1982 to 2011. The uniqueness of the oscillations around the global recession of IVQ2007 to IIQ2009 is clearly revealed.

Chart 34, US, Prices of Total US Exports, 12 Month Percentage Changes, 1982-2011

Twelve months percentage rates of change of US prices of exports and imports are provided in Table 40. Import prices have been driven since 2003 by unconventional monetary policy of near zero interest rates influencing commodity prices according to moods of risk aversion. In a global recession without risk aversion until the panic of Sep 2008 with flight to government obligations, import prices rose 9.1 percent in 2007 and another 4.9 percent in 2008 and fell 5.6 percent when risk aversion developed until mid 2009. Import prices rose again sharply in 2011 until May in the presence of zero interest rates with relaxed mood of risk aversion. There is similar behavior of prices of imports ex fuels and export ex agricultural goods.

Table 40, US, Twelve Months Percentage Rates of Change of Prices of Exports and Imports

	Imports	Imports Ex Fuels	Exports	Exports Non-Ag
Oct 2011	11.0	4.8	6.3	5.7
Oct 2010	3.9	2.7	5.8	4.8
Oct 2009	-5.6	-4.1	-3.6	-2.9
Oct 2008	4.9	4.9	4.0	3.8
Oct 2007	9.1	3.4	5.6	3.9
Oct 2006	-1.0	0.4	2.9	2.6
Oct 2005	8.2	3.8	3.7	3.6
Oct 2004	9.9	2.9	4.4	5.0
Oct 2003	0.8	0.8	1.3	0.6
Oct 2002	1.9	-0.4	0.4	0.0
Oct 2001	-7.4	-3.2	-2.0	-2.2

Source: http://www.bls.gov/mxp/data.htm#

Chart 35 shows the US monthly import price index of all commodities excluding fuels from 2010 to 2011. All curves of nominal values follow the same behavior under the influence of unconventional monetary policy. Zero interest rates without risk aversion result in jumps of nominal values and zero interest rates while strong risk aversion results in declines of nominal values.

Chart 35, US, Import Price Index All Commodities Excluding Fuels, 2001=100, 2001-2011

Source: US Bureau of Labor Statistics

Chart 36 provides 12 month percentage changes of the US import price index excluding fuels between 2001 and 2011. There is the same behavior of carry trades driving up and down prices of raw materials and food in international trade during the global recession of IVQ2007 to IIQ2009 and in previous and subsequent periods.

Chart 36, US, Import Price Index All Commodities Excluding Fuels, 12 Month Percentage Changes, 2001-2011

Source: US Bureau of Labor Statistics

Chart 37 provides the monthly US import price index ex petroleum from 2001 to 2011. Prices including or excluding commodities follow the same fluctuations and trends originating in impulses of unconventional monetary policy of zero interest rates.

Chart 37, US, Import Price Index ex Petroleum, 2001=100, 2001-2011

Source: US Bureau of Labor Statistics

Chart 38 provides the US import price index ex petroleum from 1982 to 2011. There is the same hum in 2008 caused by carry trades from zero interest rates to prices of commodities and raw materials.

Chart 38, US, Import Price Index ex Petroleum, 2001=100, 1982-2011

Source: US Bureau of Labor Statistics

Chart 39 provides 12 months percentage changes of the import price index ex petroleum from 1986 to 2011. The oscillations caused by the carry trade in increasing prices of commodities and raw materials and subsequently decreasing them during risk aversion are quite unique.

Chart 39, US, Import Price Index ex Petroleum, 12 Month Percentage Changes, 1986-2011

Source: US Bureau of Labor Statistics

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

Chart 40 of the US Energy Information Administration provides the price of the crude oil futures contract from 1985 to 2011. There is the same hump 2008 as in all charts caused by the common factor of carry trades from zero interest rates to commodity futures positions and subsequent decline when carry trades were unwound.

Chart 40, US, Crude Oil Futures Contract

Source: US Energy Information Administration

The price index of US imports of petroleum and petroleum products in shown in Chart 41. There is similar behavior of the curves all driven by the same impulses of monetary policy.

Chart 41, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 2001-2011

Source: US Bureau of Labor Statistics

Chart 42 provides the price index of petroleum and petroleum products from 1982 to 2011. The rise in prices during the global recession in 2008 and the decline after the flight to government obligations is unique in the history of the series. Increases in prices of trade in petroleum and petroleum products were induces by carry trades and declines by unwinding carry trades in flight to government obligations.

Chart 42, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 1982-2011

Source: US Bureau of Labor Statistics

Chart 43 provides 12 months percentage changes of the price index of US imports of petroleum and petroleum products from 1982 to 2011. There were wider oscillations in this index from 1999 to 2001 (see Barsky and Killian 2004 for an explanation).

Chart 43, US, Import Price Index of Petroleum and Petroleum Products, 12 Month Percentage Changes, 1982-2011

Source: US Bureau of Labor Statistics

The price index of US exports of agricultural commodities is in Chart 44. There are similar fluctuations and trends as in all other price index originating in unconventional monetary policy repeated over a decade.

Chart 44, US, Exports Price Index of Agricultural Commodities, 2001=100, 2001-2011

Source: US Bureau of Labor Statistics

Chart 45 provides the price index of US exports of agricultural commodities from 1982 to 2011. The increase in 2008 in the middle of deep, protracted contraction was induced by unconventional monetary policy. The decline from 2008 into 2009 was caused by unwinding carry trades in a flight to government obligations. The increase into 2011 and current pause were also induced by unconventional monetary policy.

Chart 45, US, Exports Price Index of Agricultural Commodities, 2001=100, 1982-2011

Source: US Bureau of Labor Statistics

Chart 46 provides 12 month percentage changes of the index of US exports of agricultural commodities from 1986 to 2011. The wide swings in 2008, 2009 and 2011 are only explained by unconventional monetary policy.

Chart 46, US, Exports Price Index of Agricultural Commodities, 12 Months Percentage Changes, 1986-2011

Source: US Bureau of Labor Statistics

Chart 47 shows the export price index of nonagricultural commodities. Unconventional monetary policy of zero interest rates drove price behavior during the past decade. Policy has been based on the myth of stimulating the economy by climbing the negatively slope of an imaginary short-term Phillips curve.

Chart 47, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 2001-2011

Source: US Bureau of Labor Statistics

Chart 48 provides a longer perspective of the price index of US nonagricultural commodities from 1982 to 2011. Increases and decreases around the global contraction after 2007 were caused by carry trade induced by unconventional monetary policy.

Chart 48, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 1982-2011

Source: US Bureau of Labor Statistics

Finally, Chart 49 provides 12 month percentage changes of the price index of US exports of nonagricultural commodities from 1986 to 2011. The wide swings before, during and after the global recession beginning in 2007 were caused by carry trades induced by unconventional monetary policy.

Chart 49, US, Exports Price Index of Nonagricultural Commodities, 12 Months Percentage Changes, 1986-2011

Source: US Bureau of Labor Statistics