Twenty Nine Million in Job Stress, Unemployment/Underemployment Rate at 18.2 Percent, Falling Real Wages, Euro Zone Survival Risk and World Economic Slowdown

 

Twenty Nine Million in Job Stress, Unemployment/Underemployment Rate at 18.2 Percent, Falling Real Wages, Euro Zone Survival Risk and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011

Executive Summary

I Twenty Nine Million in Job Stress

II Falling Real Wages

III Falling Real Hourly Labor Compensation

IV World Financial Turbulence

IVA Appendix on Sovereign Bond Valuation

V Global Inflation

VI World Economic Slowdown

VIA United States

VIB Japan

VIC China

VID Euro Area

VIE Germany

VIF France

VIG Italy

VIH United Kingdom

VII Valuation of Risk Financial Assets

VIII Economic Indicators

IX Interest Rates

X Conclusion

References

Appendix I The Great Inflation

Executive Summary

The monthly employment situation report of the Bureau of Labor Statistics (BLS) is rich in useful information on the state of the economy. Table ES1 summarizes the report released on Dec 2 for the months of Nov. Nonfarm payroll jobs in the survey of employing establishments registered an increase in Nov in total nonfarm new jobs of 120,000 and of 140,000 in private jobs. There were significant upward revisions in job creation for Oct and Sep. The earlier report provided joint nonfarm job creation in Oct and Sep of 238,000, which has now been revised to 310,000 or a gain of 72,000. Revised data for Oct and Sep show combined private job creation of 308,000 compared with 263,000 in the earlier report for a revised gain of 45,000 jobs. The establishment survey also provides average hourly earnings and average weekly hours worked. Average hourly earnings (AHE) without adjustment for inflation rose 1.8 percent in Nov 2011 relative to Nov 2010 but fell 0.1 percent relative to Oct 2011. Table ES1 also provides the BLS calculation of AHEs in constant dollars, or adjusted for inflation, which fell 1.6 percent in Oct 2011 relative to Oct 2010. Inflation is not yet available for Nov. Average weekly hours were 34.3 in both Nov and Oct. The wage bill or number of hours worked times average hourly earnings fell 1.6 percent adjusted for inflation in Oct 2011 relative to Oct 2010. The remuneration to labor is falling after adjusting for inflation. The BLS also conducts a survey of households that provides the rate of unemployment, or unemployed as percent of the labor force, which was 8.6 percent in Nov and 9.0 percent in Oct. The rate of job creation would have to exceed around 125,000 per month of new entrants in the labor force to reduce the rate of unemployment.

Seasonality and sampling are clouding the Nov employment situation report as evident in three important additional facts in the employment situation report.

(1) The labor force in the US not seasonally adjusted fell from 154.080 million in Oct to 153.683 in Nov or by 405,000. The unemployment rate is the number unemployed divided by the labor force such that with lower denominator the ratio fell.

(2) There was a sharp increase in job creation in the retail sector. As the Bureau of Labor Statistics (BLS) informs (http://www.bls.gov/news.release/pdf/empsit.pdf 1):

“Employment in retail trade rose by 50,000 in November, with much of the increase occurring in clothing and clothing accessories stores (+27,000) and in electronics and appliances stores (+5,000). Since reaching an employment trough in December 2009, retailers have added an average of 14,000 jobs per months.”

The increase of retail jobs by 50,000 in Nov quoted by the BLS is adjusted for seasonality. Without adjustment for seasonality the number of retail trade jobs rose from 14.604 million in Oct 2011 to 15.028 million in Nov 2011 or by 424,000 (http://www.bls.gov/news.release/pdf/empsit.pdf line “Retail Trade”) in just one month, which is largely for sales during the year-end holiday season when retailers earn most of the year’s profit.

(3) The number employed part-time for economic reasons because they could not find full-time employment fell from 8.896 million in Oct to 8.518 million in Nov, seasonally adjusted, or decline of 378.000 in just one month. Without seasonal adjustment, as shown in Table 3 in the text, the number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.258 million in Oct to 8.271 million in Nov or by 13,000 (see Table A-8, page 20 in (http://www.bls.gov/news.release/pdf/empsit.pdf).

This blog provides with release of every employment situation report an estimate of the number in job stress, which is 28.8 million in Oct and 29.4 million in Aug. The number of people in job stress as percent of the labor force is estimated at 18.2 percent in Nov 2011 and 18.2 percent in Oct 2011. The average rate of 2.4 percent of economic growth in the current recovery is mediocre relative to 6.2 percent average GDP SAARs in past recoveries (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html). As a result there are around 29 million people unemployed, working part-time for economic reasons because they cannot find full-time employment or marginally attached to the labor force. The rate of economic growth in the first three quarters of 2011 is equivalent to 1.2 percent for a full year. The fractured job market of the US is not improving.

Table ES1, US, Summary of the Employment Situation Report SA

	Nov 2011	Oct 2011
New Nonfarm Payroll Jobs	120,000	100,000
New Private Payroll Jobs	140,000	117,000
Average Hourly Earnings	$23.18 ∆% Nov 11/Nov 10:  1.8 ∆% Nov 11/Oct11: -0.1	$23.20 ∆% Oct11/Oct 10: 1.9 ∆% Oct 11/Sep 11: 0.3
Average Hourly Earnings in Constant Dollars	NA	$10.23 ∆% Oct 11/Oct 10: –1.6% ∆% Oct 11/Sep 11: 0.4
Average Weekly Hours	34.3	34.3
Unemployment Rate Household Survey % of Labor Force SA	8.6	9.0
Number in Job Stress Unemployed and Underemployed Blog Calculation	28.9 million NSA	28.9 million NSA
In Job Stress as % Labor Force	18.2	18.2

Source: Tables 2, 3, 4, 8, 9, 10 and 11.

The civilian labor force participation rate, or labor force as percent of population, is provided in Chart ES1 for the period from 1948 to 2011. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart ES1 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.

Chart ES1, US, Civilian Labor Force Participation Rate, 1948-2011, %

Source: US Bureau of Labor Statistics

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

The number of unemployed in the US jumped from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The number of unemployed jumped from 6.7 million in Mar 2007 to 15.6 million in Oct 2009, by 8.9 million, or 132.8 percent. These are the two episodes with steepest increase in the level of unemployment in Chart ES2.

Chart ES2, US, Unemployed, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

Chart ES3 provides the rate of unemployment of the US from 1948 to 2011. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.1 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009.

Chart ES3, US, Unemployment Rate, 1948-2011

Source: US Bureau of Labor Statistics

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

The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.7 million in Jun 2010, by 5.6 million, or 509 percent. These are the two peaks in Chart ES4.

Chart ES4, US, Unemployed for 27 Weeks or More, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

The employment-population ratio in Chart ES5 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.4 in Dec 2006 to 58.1 in Jul 2011 and stands at 58.7 in Nov 2011. There is no comparable decline during an expansion in Chart ES5.

Chart ES5, US, Employment-Population Ratio, 1948-2011

Source: US Bureau of Labor Statistics

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

There is a socio-economic disaster in the US. The economy did not grow in the early phase of expansion after the contraction at the high average rate of 6.2 percent of past expansions but rather at only 2.4 percent on average in the nine consecutive quarters of growth beginning in IIIQ2009. Growth is now occurring by financial repression forcing consumption out of savings by controlling interest rates at zero, harming the most people of modest means without access to sophisticated investment advice. As a result, unemployment and underemployment have remained at extremely high levels with some 29 million people in job stress. The fractured labor market has also resulted in fewer opportunities to escape declining earnings after inflation and taxes.

I Twenty Nine Million in Job Stress. The Bureau of Labor Statistics (BLS) of the Department of Labor released two critically important reports on US labor markets: the employment situation report (http://www.bls.gov/news.release/pdf/empsit.pdf) and the revised report on labor productivity and costs (http://www.bls.gov/news.release/pdf/prod2.pdf). Section I Twenty Nine Million Unemployed or Underemployed analyzes employment and unemployment in the household and establishment surveys. Section II Falling Real Wages provides data and analysis on hours worked and earnings from the establishment survey. The quarterly report on labor productivity and costs is analyzed in Section III Falling Real Hourly Labor Compensation.

The monthly employment situation report of the BLS is rich in useful information on the state of the economy. Table 1 summarizes the report released on Dec 2 for the months of Nov. Nonfarm payroll jobs in the survey of employing establishments registered an increase in Nov in total nonfarm new jobs of 120,000 and of 140,000 in private jobs. There were significant upward revisions in job creation for Oct and Sep. The earlier report provided joint nonfarm job creation in Oct and Sep of 238,000, which has now been revised to 310,000 or a gain of 72,000. Revised data for Oct and Sep show combined private job creation of 308,000 compared with 263,000 in the earlier report for a revised gain of 45,000 jobs. The establishment survey also provides average hourly earnings and average weekly hours worked. Average hourly earnings (AHE) without adjustment for inflation rose 1.8 percent in Nov 2011 relative to Nov 2010 but fell 0.1 percent relative to Oct 2011. Table 1 also provides the BLS calculation of AHEs in constant dollars, or adjusted for inflation, which fell 1.6 percent in Oct 2011 relative to Oct 2010. Inflation is not yet available for Nov. Average weekly hours were 34.3 in both Nov and Oct. The wage bill or number of hours worked times average hourly earnings fell in real terms. The remuneration to labor is falling after adjusting for inflation. The BLS also conducts a survey of households that provides the rate of unemployment, or unemployed as percent of the labor force, which was 8.6 percent in Nov and 9.0 percent in Oct. The rate of job creation would have to exceed around 125,000 per month of new entrants in the labor force to reduce the rate of unemployment.

Seasonality and sampling are clouding the Nov employment situation report as evident in three important additional facts in the employment situation report.

(1) The labor force in the US not seasonally adjusted fell from 154.080 million in Oct to 153.683 in Nov or by 405,000. The unemployment rate is the number unemployed divided by the labor force such that with lower denominator the ratio fell.

(2) There was a sharp increase in job creation in the retail sector. As the Bureau of Labor Statistics (BLS) informs (http://www.bls.gov/news.release/pdf/empsit.pdf 1):

“Employment in retail trade rose by 50,000 in November, with much of the increase occurring in clothing and clothing accessories stores (+27,000) and in electronics and appliances stores (+5,000). Since reaching an employment trough in December 2009, retailers have added an average of 14,000 jobs per months.”

The increase of retail jobs by 50,000 in Nov quoted by the BLS is adjusted for seasonality. Without adjustment for seasonality the number of retail trade jobs rose from 14.604 million in Oct 2011 to 15.028 million in Nov 2011 or by 424,000 (http://www.bls.gov/news.release/pdf/empsit.pdf line “Retail Trade”) in just one month, which is largely for sales during the year-end holiday season.

(3) The number employed part-time for economic reasons because they could not find full-time employment fell from 8.896 million in Oct to 8.518 million in Oct, seasonally adjusted, or decline of 378.000 in just one month. Without seasonal adjustment, as shown in Table 3 below, the number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.258 million in Oct to 8.271 million in Nov or by 13,000 (see Table A-8, page 20 in (http://www.bls.gov/news.release/pdf/empsit.pdf).

This blog provides with release of every employment situation report an estimate of the number in job stress, which is 28.8 million in Oct and 29.4 million in Aug. The number of people in job stress as percent of the labor force is estimated at 18.2 percent in Nov 2011 and 18.2 percent in Oct 2011. The average rate of 2.4 percent of economic growth in the current recovery is mediocre relative to 6.2 percent average GDP SAARs in past recoveries (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html). As a result there are around 29 million people unemployed, working part-time for economic reasons because they cannot find full-time employment or marginally attached to the labor force. The rate of economic growth in the first three quarters of 2011 is equivalent to 1.2 percent for a full year. The fractured job market of the US is not improving.

Table 1, US, Summary of the Employment Situation Report SA

	Nov 2011	Oct 2011
New Nonfarm Payroll Jobs	120,000	100,000
New Private Payroll Jobs	140,000	117,000
Average Hourly Earnings	$23.18 ∆% Nov 11/Nov 10:  1.8 ∆% Nov 11/Oct11: -0.1	$23.20 ∆% Oct11/Oct 10: 1.9 ∆% Oct 11/Sep 11: 0.3
Average Hourly Earnings in Constant Dollars	NA	$10.23 ∆% Oct 11/Oct 10: –1.6% ∆% Oct 11/Sep 11: 0.4
Average Weekly Hours	34.3	34.3
Unemployment Rate Household Survey % of Labor Force SA	8.6	9.0
Number in Job Stress Unemployed and Underemployed Blog Calculation	28.9 million NSA	28.9 million NSA
In Job Stress as % Labor Force	18.2	18.2

Source: Tables 2, 3, 4, 8, 9, 10 and 11.

The BLS released the employment situation report on Fri Dec 2 showing reduction of the seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, to 8.6 percent in Nov 2011, which is lower than 9.0 percent in Oct (http://www.bls.gov/news.release/pdf/empsit.pdf). There are two approaches to calculating the number of people in job stress. The first approach of calculating the number of people in job stress unemployed or underemployed in Table 2 is 24.4 million seasonally-adjusted in Nov, compared with 25.3 million in Oct and 25.8 million in Sep. The number in job stress unemployed or underemployed of 24.4 million in Nov is composed of 13.3 million unemployed (of whom 5.7 million, or 42.8 percent, unemployed for 27 weeks or more) compared with 13.9 million unemployed in Oct (of whom 5.9 million, or 42.3 percent, unemployed for 27 weeks or more), 8.5 million employed part-time for economic reasons in Nov (who suffered reductions in their work hours or could not find full-time employment) compared with 8.9 million in Oct and 2.6 million who were marginally attached to the labor force in Nov (who were not in the labor force but wanted and were available for work) compared with 2.6 million in Oct.

Table 2, US, People in Job Stress, Millions and % SA

2011	Nov	Oct	Sep
Labor Force Millions	153.883	154.198	154.017
Unemployed Millions	13.303	13.897	13.992
Unemployment Rate (unemployed as % labor force)	8.6	9.0	9.1
Unemployed ≥27 weeks Millions	5.691	5.876	6.242
Unemployed ≥27 weeks %	42.8	42.3	44.6
Part Time Economic Reasons Millions ∆ Nov/Oct: -378 thousand	8.518	8.896	9.270
Marginally Attached to Labor Force Millions ∆ Nov/Oct: -36 thousand	2.591	2.555	2.511
Job Stress Millions ∆% Sep/Aug: +405 thousand	24.412	25.348	25.773
In Job Stress as % Labor Force	15.6	16.4	16.7

Source

Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force

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

Additional information provides deeper insight on the fractured job market of the US. Table 3 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.4 percent and the number of people in job stress could be around 29 million, which is 18.2 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Nov 2010 and Oct and Nov 2011 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The objective of Table 3 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Oct 2010 and Oct and Sep 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 64.4 percent by Nov 2010 and was 64.1 percent in Oct 2011 and 63.9 percent in Nov 2011, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 5.489 million unemployed who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 18.102 million (Total UEM) and not 12.613 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 11.4 percent (Total UEM%) and not 8.2 percent, not seasonally adjusted, or 8.6 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 5.489 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table 3 provides the number of people in job stress not seasonally adjusted at 28.964 million in Nov 2011, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table 3 shows that the number of people in job stress is equivalent to 18.2 percent of the labor force. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.4 percent in Nov 2010, 58.7 percent in Oct 2011 and 58.7 percent in Nov 2011 and the number employed (EMP) dropped from 144 million to 141 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html (http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html see section IV Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html http://cmpassocregulationblog.blogspot.com/2011/06/increasing-risk-aversion-analysis-of.html).

Table 3, US, Population, Labor Force and Unemployment, NSA

	2006	Nov 2010	Oct 2011	Nov 2011
POP	229	238,715	240,269	240,441
LF	151	153,698	154,088	153,683
PART%	66.2	64.4	64.1	63.9
EMP	144	139,415	140,987	141,070
EMP/POP%	62.9	58.4	58.7	58.7
UEM	7	14,282	13,102	12,613
UEM/LF Rate%	4.6	9.3	8.5	8.2
NLF	77	85,017	86,181	86,757
LF PART 66.2%		158,029	159,058	159,172
∆NLF UEM		4,331	4,970	5,489
Total UEM		18,613	18,072	18,102
Total UEM%		11.8	11.4	11.4
Part Time Economic Reasons		8,679	8,258	8,271
Marginally Attached to LF		2,531	2,555	2,591
In Job Stress		29,823	28,885	28,964
People in Job Stress as % Labor Force		18.9	18.2	18.2

Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF

Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted

The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%

Growth and employment creation have been mediocre in the expansion beginning in Jul IIIQ2009 from the contraction between Dec IVQ2007 and Jun IIQ2009 (http://www.nber.org/cycles.html). A series of charts from the database of the Bureau of Labor Statistics (BLS) provides significant insight. Chart 1 provides the monthly employment level of the US from 1948 to 2011. The number of people employed has trebled. There are multiple contractions throughout the more than six decades but followed by resumption of the strong upward trend. The contraction after 2007 is deeper and followed by a flatter curve of job creation. Much lower average economic growth in the current expansion of 2.4 percent relative to average 6.2 percent in earlier contractions (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html) explains the fractured labor market.

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

Chart 1, US, Employment Level, Thousands, 1948-2011

Source: US Bureau of Labor Statistics

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

The steep and consistent curve of growth of the US labor force is shown in Chart 2. The contraction beginning in Dec 2007 flattened the path of the US civilian labor force and is now followed by a flatter curve during the expansion.

Chart 2, US, Civilian Labor Force, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

The civilian labor force participation rate, or labor force as percent of population, is provided in Chart 3 for the period from 1948 to 2011. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart 3 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.

Chart 3, US, Civilian Labor Force Participation Rate, 1948-2011, %

Source: US Bureau of Labor Statistics

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

The number of unemployed in the US jumped from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The number of unemployed jumped from 6.7 million in Mar 2007 to 15.6 million in Oct 2009, by 8.9 million, or 132.8 percent. These are the two episodes with steepest increase in the level of unemployment in Chart 4.

Chart 4, US, Unemployed, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

Chart 5 provides the rate of unemployment of the US from 1948 to 2011. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.1 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009.

Chart 5, US, Unemployment Rate, 1948-2011

Source: US Bureau of Labor Statistics

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

The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.7 million in Jun 2010, by 5.6 million, or 509 percent. These are the two peaks in Chart 6.

Chart 6, US, Unemployed for 27 Weeks or More, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

The employment-population ratio in Chart 7 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.4 in Dec 2006 to 58.1 in Jul 2011 and stands at 58.7 in Nov 2011. There is no comparable decline during an expansion in Chart 7.

Chart 7, US, Employment-Population Ratio, 1948-2011

Source: US Bureau of Labor Statistics

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

The number of people at work part-time for economic reasons because they cannot find full-time employment is provided in Chart 8. The number of people at work part-time for economic reasons jumped from 4.1 million in Sep 2006 to a high of 9.5 million in Sep 2010 and 9.3 million in Sep 2011, or by 5.2 million, or 127 percent. Earlier increases in the 1980s and after the tough recession of 1991 were followed by rapid decrease that is still absent in the current expansion. The drop by 378,000 of the seasonally-adjusted data from Oct to Nov while actual data without seasonal adjustment show an increase by 13,000 is not very credible.

Chart 8, US, Part-Time for Economic Reasons, 1948-2011, Thousands

Source: US Bureau of Labor Statistics

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

These eight charts confirm the view that the comparison of the current expansion should be with that in the 1980s because of similar dimensions. Chart 9 provides the level of employment in the US between 1979 and 1989. Employment surged after the contraction and grew rapidly during the decade.

Chart 9, US, Employed, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

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

The number employed in the US fell from 146.584 million in Nov 2007 to 140.302 million in Oct 2011, by 6.282 million, or 4.3 percent. Chart 10 shows tepid recovery early in 2010 followed by near stagnation.

Chart 10, US, Employed, Thousands, 2001-2011

Source: US Bureau of Labor Statistics

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

There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart 11. There were fluctuations but strong long-term dynamism over an entire decade.

Chart 11, US, Civilian Labor Force, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

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

The civilian labor force in Chart 12 grew steadily on an upward trend in the 2000s until it contracted together with the economy after 2007. There has not been recovery during the expansion but rather decline.

Chart 12, US, Civilian Labor Force, Thousands, 2001-2011

Source: US Bureau of Labor Statistics

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

The rate of participation of the labor force in population stagnated during the stagflation and conquest of inflation in the late 1970s and early 1980s, as shown in Chart 13. Recovery was vigorous during the expansion and lasted through the remainder of the decade.

Chart 13, US, Civilian Labor Force Participation Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

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

The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart 14. The rate of participation in the labor force continued to decline both during the contraction after 2007 and the expansion after 2009.

Chart 14, US, Civilian Labor Force Participation Rate, 2001-2011, %

Source: US Bureau of Labor Statistics

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

The rate of unemployment peaked at 10.8 percent in Nov-Dec 1983, as shown in Chart 15. The rate of unemployment dropped sharply during the expansion after 1984 and continued to decline during the rest of the decade.

Chart 15, US, Unemployment Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

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

The rate of unemployment in the US jumped from 4.4 percent in May 2007 to 10.1 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009, as shown in Chart 16. The rate of unemployment has fluctuated at around 9.0 percent in 2011 with the somewhat less credible 8.6 percent in Nov 2011 because of the decrease in the labor force by 405,000 from Oct to Nov.

Chart 16, US, Unemployment Rate, 2001-2011, %

Source: US Bureau of Labor Statistics

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

The employment population ratio fell from around 60 in 1979 to around 57 in 1983, as shown in Chart 17. The employment population ratio rose back to 60 in 1984 and reached 63 later in the decade.

Chart 17, US, Employment Population Ratio, 1979-1989, %

Source: US Bureau of Labor Statistics

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

The US employment-population ratio has fallen from 62.6 in 2006 to 58.7 in Nov 2011, as shown in Chart 18. The employment population-ratio has stagnated during the expansion.

Chart 18, US, Employment Population Ratio, 2001-2011, %

Source: US Bureau of Labor Statistics

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

The number unemployed for 27 weeks or over peaked in 1984 as shown in Chart 19. The number unemployed for 27 weeks or over fell sharply during the expansion and continued to decline throughout the 1980s.

Chart 19, US, Number Unemployed for 27 Weeks or More 1979-1989, Thousands

Source: US Bureau of Labor Statistics

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

The number unemployed for 27 weeks or over rose sharply during the contraction as shown in Chart 20. The number of unemployed for 27 weeks remained at around 6 million during the expansion compared with somewhat above 1 million before the contraction.

Chart 20, US, Number Unemployed for 27 Weeks or More, 2001-2011, Thousands

Source: US Bureau of Labor Statistics

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

The number of persons working part-time for economic reasons because they cannot find full-time work peaked during the contraction in 1983, as shown in Chart 21. The number of persons at work part-time for economic reasons fell sharply during the expansion and continued to fall throughout the decade.

Chart 21, US, Part-Time for Economic Reasons, 1979-1989, Thousands

Source: US Bureau of Labor Statistics

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

The number of people working part-time because they cannot find full-time employment rose sharply during the contraction as shown in Chart 22. The number of people working part-time because of failure to find an alternative occupation stagnated at a very high level during the expansion.

Chart 22, US, Part-Time for Economic Reasons, 2001-2011, Thousands

Source: US Bureau of Labor Statistics

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

Total nonfarm payroll employment seasonally adjusted (SA) rose 120,000 in Nov and private payroll employment rose by 140,000. Table 4 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. All revisions have been incorporated in Table 4. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 4 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent.. Growth has been mediocre in the nine quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html 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/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/06/financial-risk-aversion-slow-growth.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 25 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 4 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

Table 4, US, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	13	-820	-39	-42
Feb	67	-6	-78	-83	-726	-35	-21
Mar	104	-129	173	-72	-796	192	144
Apr	74	-281	276	-185	-660	277	229
May	10	-45	277	-233	-386	458	48
Jun	196	-243	378	-178	-502	-192	65
Jul	112	-343	418	-231	-300	-49	93
Aug	-36	-158	-308	-267	-231	-59	110
Sep	-87	-181	1114	-434	-236	-29	109
Oct	-100	-277	271	-509	-221	171	143
Nov	-209	124	352	-802	-55	93	128
Dec	-278	-14	356	-619	-130	152	167
			1984			2011	Private
Jan			447			68	94
Feb			479			235	261
Mar			275			194	219
Apr			363			217	241
May			308			53	99
Jun			379			20	75
Jul			312			127	173
Aug			241			104	72
Sep			311			210	191
Oct			286			100	117
Nov			349			120	140
Dec			127

Source: http://www.bls.gov/data/#employment http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

http://www.bls.gov/webapps/legacy/cesbtab1.htm

http://www.bls.gov/schedule/archives/empsit_nr.htm#2010

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

Charts numbered from 23 to 26 provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart 23 provides total nonfarm payroll jobs from 2001 to 2011. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then tepid growth.

Chart 23, US, Total Nonfarm Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Total nonfarm payroll jobs grew rapidly during the expansion in 1983 and 1984 as shown in Chart 24. Nonfarm payroll jobs continued to grow at high rates during the remainder of the 1980s.

Chart 24, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

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

Most job creation in the US is by the private sector. Chart 25 shows the sharp destruction of jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rate, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.

Chart 25, US, Total Private Payroll Jobs SA 2001-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart 26. Rapid growth of creation of private jobs continued throughout the 1980s.

Chart 26, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Important aspects of growth of payroll jobs from Nov 2010 to Nov 2011, not seasonally adjusted (NSA), are provided in Table 5. Total nonfarm employment increased by 1,588,000 (row A), consisting of growth of total private employment by 1,859,000 (row B) and decline by 271,000 of government employment (row C). Monthly average growth of private payroll employment has been 154,917, which is mediocre relative to 25 to 30 million in job stress, while total nonfarm employment has grown on average by only 132,333 per month. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 291,000 while private service providing employment grew by 1,568,000. The employment situation report of the Bureau of Labor Statistics informs that (http://www.bls.gov/news.release/pdf/empsit.pdf 2): “Employment in professional and business services continued to trend up in October (+33,000).” This type of employment has grown by 519,000 over the past 12 months. Within the industry, there have been modest job gains in recent months in temporary help services and in management and technical consulting services.” An important feature in Table 5 is that jobs in temporary help services increased by 166,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. An important characteristic is that the losses of government jobs have been high in local government, 172,000 jobs lost in that past twelve months (row C3 Local), because of the higher number of employees in local government, 14.4 million relative to 5.3 million in state jobs and 2.8 million in federal jobs.

Table 5, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands

	Nov 2010	Nov 2011	Change
A Total Nonfarm	131,371	132,959	1,588
B Total Private	108,623	110,482	1,859
B1 Goods Producing	17,992	18,283	291
B1a Manu-facturing	11,604	11,803	199
B2 Private service providing	90,631	92,199	1,568
B2a Professional and Business Services	17,012	17,531	519
B2b Temporary help services	2,278	2,444	166
C Government	22,748	22,477	-271
C1 Federal	2,839	2,807	-32
C2 State	5,322	5,255	-67
C3 Local	14,587	14,415	-172

Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3

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

The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table 6 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.780 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.

Table 6, US, Total Nonfarm Employment in Thousands

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,528	2000	131,785
1981	91,289	2001	131,826
1982	89,677	2002	130,341
1983	90,280	2003	129,999
1984	94,530	2004	131,435
1985	97,511	2005	133,703
1986	99,474	2006	136,086
1987	102,088	2007	137,598
1988	105,345	2008	136,790
1989	108,014	2009	130,807
1990	109,487	2010	129,818

Source: http://www.bls.gov/webapps/legacy/cesbtab1.htm

The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained in 1939 at 29 percent below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).

The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):

“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments.  Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking.  Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”

The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table 7 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 7 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.

Table 7, US, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent

	Total Nonfarm Jobs	Total Private Jobs
06/1981 #	92,288	75,969
11/1982 #	89,482	73,260
Change #	-2,806	-2,709
Change ∆%	-3.0	-3.6
12/1982 #	89,383	73,185
05/1984 #	94,471	78,049
Change #	5,088	4,864
Change ∆%	5.7	6.6
11/2007 #	139,090	116,291
05/2009 #	131,626	108,601
Change %	-7,464	-7,690
Change ∆%	-5.4	-6.6
12/2009 #	130,178	107,338
05/2011 #	131,753	108,494
Change #	1,575	1,156
Change ∆%	1.2	1.1
05/1983 #	90,005	73,667
05/1984 #	94,471	78,049
Change #	4,466	4,382
Change ∆%	4.9	5.9
05/2010 #	130,801	107,405
05/2011 #	131,753	109,203
Change #	952	1,798
Change ∆%	0.7	1.7
Change # by ∆% as in 05/1984 to 05/1985	6,409*	6,337**
Difference in Jobs that Would Have Been Created	5,457 = 6,409-952	4,539 = 6,337-1,798

*[(130,801x1.049)-130,801] = 6,409 thousand

**[(107,405)x1.059 – 107,405] = 6,337 thousand

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

II Falling Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table 8 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, increasing from $22.76/hour in Nov 2010 to $23.18/hour in Nov 2011, or by 1.8 percent. There has been disappointment in valuation of stocks about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for 70 percent of GDP. Growth of consumption by decreasing savings by means of controlling interest rates in what is called financial repression may not be lasting and sound for personal finances (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Average hourly earnings fell by 0.1 percent from $23.20 in Oct 2011 to $23.18 in Nov 2011. Average private weekly earnings increased slightly by $16.68 from $778.39 in Nov 2010 to $795.07 in Nov 2011 or by 2.1 percent but fell by 0.1 percent from Oct 2011 to Nov 2011. The inflation-adjusted wage bill can only be calculated for Oct, which is the most recent month for which there are estimates of the consumer price index. Earnings per hour rose from $22.77 in Oct 2010 to $23.13 in Oct 2011 or by 1.9 percent (http://www.bls.gov/data/; see Table 10 below). Average weekly hours were 34.3 in both Oct 2010 and Oct 2011 (http://www.bls.gov/data/; see Table 9 below). The wage bill rose 1.9 percent in the 12 months ending in Oct 2011:

{[(wage bill in Oct 2011)/(wage bill in Oct 2010)]-1}100 =

{[($23.20x34.3)/($22.76x34.3)]-1]}100

= {[($795.76/$$780.67)]-1}100 = 1.9%

CPI inflation was 3.5 percent in the 12 months ending in Oct 2011 (http://www.bls.gov/news.release/pdf/cpi.pdf) for an inflation-adjusted wage-bill decline of 1.6 percent :{[(1.019/1.035)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov 2010 with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/). Renewed risk aversion because of the sovereign risks in Europe has reduced the rate of increase of the DJ UBS commodity index to 17.9 percent on Dec 2, 2011, relative to Jul 2, 2010. Inflation has been rising in waves with carry trades driven by zero interest rates to commodity futures during periods of risk appetite with interruptions during risk aversion (http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html).

Table 8, US, Earnings per Hour and Average Weekly Hours SA

Earnings per Hour	Nov 2010	Sep 2011	Oct 2011	Nov 2011
Total Private	$22.76	$23.13	$23.20	$23.18
Goods Producing	$24.18	$24.50	$24.58	$24.51
Service Providing	$22.43	$22.80	$22.88	$22.87
Average Weekly Earnings
Total Private	$778.39	$793.36	$795.76	$795.07
Goods Producing	$962.36	$977.55	$983.20	$980.40
Service Providing	$742.43	$756.96	$759.62	$759.28
Average Weekly Hours
Total Private	34.2	34.3	34.3	34.3
Goods Producing	39.8	39.9	40.0	40.0
Service Providing	33.1	33.2	33.2	33.2

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

Table 9 provides average weekly hours of all employees in the US from 2006 to 2011. Average weekly hours fell from 34.7 in Jun 2007 to 33.7 in Jun 2009, which was the last month of the contraction. Average weekly hours rose to 34.3 in Nov 2011.

Table 9, US, Average Weekly Hours of All Employees 2006-2011

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov
2006			34.4	34.5	34.5	34.6	34.5	34.5	34.5	34.6	34.5
2007	34.4	34.6	34.6	34.6	34.6	34.7	34.6	34.5	34.6	34.5	34.5
2008	34.5	34.6	34.6	34.5	34.5	34.6	34.5	34.5	34.4	34.4	34.3
2009	34.1	34.1	34.0	33.9	33.8	33.7	33.8	33.9	33.9	33.8	34.0
2010	34.0	34.0	34.1	34.1	34.2	34.1	34.2	34.2	34.2	34.3	34.2
2011	34.2	34.3	34.3	34.4	34.4	34.3	34.3	34.2	34.3	34.3	34.3

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Chart 27 provides average weekly hours monthly from Mar 2006 to Nov 2011. Average weekly hours remained relatively stable in the period before the contraction and fell sharply during the contraction as business could not support lower production with the same labor input. Average weekly hours rose rapidly during the expansion but have stabilized at a level below that prevailing before the contraction.

Chart 27, US, Average Weekly Hours of All Employees 2006-2011

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Calculations with BLS data of inflation-adjusted average hourly earnings are shown in Table 10. The final column of Table 10 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in five months in 2010 and in all but one month in 2011 and the loss has accelerated to 1.6 percent in Oct 2011, which is the most recent month for which there are consumer price index data.

Table 10, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.78	3.6	2.8	0.8
Apr	$20.85	3.5	2.6	0.7
May	$20.89	3.8	2.7	1.1
Jun	$21.00	3.8	2.7	1.1
Jul	$21.04	3.7	2.4	1.3
Aug	$21.03	3.5	1.9	1.6
Sep	$21.12	3.5	2.8	0.7
Oct	$21.11	3.1	3.5	-0.4
Nov	$21.17	3.3	4.3	-0.9
Dec	$21.27	3.4	4.1	-0.7
2010
Jan	$22.44	1.9	2.6	-0.7
Feb	$22.48	1.9	2.1	-0.2
Mar	$22.48	1.8	2.3	-0.5
Apr	$22.52	1.8	2.2	-0.4
May	$22.57	1.9	2.0	-0.1
Jun	$22.57	1.8	1.1	0.7
Jul	$22.61	1.8	1.2	0.6
Aug	$22.67	1.8	1.1	0.7
Sep	$22.70	1.7	1.1	0.6
Oct	$22.77	1.9	1.2	0.7
Nov	$22.76	1.7	1.1	0.6
Dec	$22.77	1.7	1.5	0.2
2011
Jan	$22.86	1.9	1.6	0.3
Feb	$22.88	1.8	2.1	-0.3
Mar	$22.89	1.8	2.7	-0.9
Apr	$22.93	1.8	3.2	-1.4
May	$23.02	2.0	3.6	-1.6
Jun	$23.01	1.9	3.6	-1.6
Jul	$23.12	2.3	3.6	-1.3
Aug	$23.08	1.8	3.8	-1.9
Sep	$23.13	1.9	3.9	-1.9
Oct	$23.20	1.9	3.5	-1.6
Nov	$23.18	1.8

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees

Source: http://data.bls.gov/cgi-bin/surveymost?bls

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

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table 11. Average hourly earnings fell 1.6 percent after adjusting for inflation in the 12 months ending in Oct 2011. Table 11 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011. Those who still work bring back home a paycheck that buys fewer goods than a year earlier.

Table 11, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984

Year	May	Jun	Jul	Aug	Sep	Oct
2006	10.00	10.02	10.00	9.97	10.06	10.14
2007	10.10	10.14	10.13	10.13	10.13	10.09
2008	10.00	9.95	9.88	9.93	9.96	10.06
2009	10.39	10.34	10.34	10.33	10.33	10.32
2010	10.39	10.41	10.39	10.40	10.39	10.40
2011	10.24	10.26	10.26	10.20	10.19	10.23
∆% 20011 /2010	-1.4	-1.4	-1.3	-1.9	-1.9	-1.6

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

The deterioration of purchasing power of the average hourly earnings of US workers is shown by Chart 28 of the US Bureau of Labor Statistics. Chart 28 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2011.

Chart 28, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Chart 29 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011.

Chart 29, Average Hourly Earnings of All Employees 12-Month Percent Change, 1982-1984 Dollars, 2007-2011

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table 12. Average hourly earnings fell 1.9 percent after adjusting for inflation in the 12 months ending in Aug 2011 and 1.6 percent in the 12 months ending in Sep and Oct 2011. Table 11 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011. Those who still work bring back home a paycheck that buys fewer goods than a year earlier.

Table 12, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984

Year	May	Jun	Jul	Aug	Sep	Oct
2006	345.00	346.86	344.83	343.82	347.21	350.80
2007	349.49	351.75	350.57	349.34	350.54	348.21
2008	344.83	344.35	341.01	342.67	342.66	346.01
2009	351.20	348.43	349.52	350.14	350.21	348.86
2010	355.19	354.89	355.32	355.54	355.42	356.67
2011	352.26	351.86	351.79	348.85	349.57	350.92
∆% 20011 /2010	-0.8	-0.9	-1.0	-1.9	-1.6	-1.6

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Chart 30 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall from 2010 to 2011.

Chart 30, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

Chart 31 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011.

Chart 31, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984 12-Month Percent Change 2007-2011

Source: US Bureau of Labor Statistics

http://data.bls.gov/cgi-bin/surveymost?bls

III Falling Real Hourly Labor Compensation. The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used is (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table 13 provides revised data for nonfarm business sector productivity and unit labor costs for the first three quarters of 2011 in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increases in output of 3.2 percent and of 0.8 percent in hours worked, nonfarm business sector labor productivity rose at a lower revised SAAE rate of 2.3 percent in IIIQ2011, as shown in column 2 “IIIQ2011 SAEE.” The increase of labor productivity from IIIQ2010 to IIIQ2011 was 0.9 percent, reflecting increases in output of 2.4 percent and of hours worked of 1.4 percent, as shown in column 3 “IIIQ2011 YoY.” The BLS defines unit labor costs as (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs fell at the SAAE rate of 2.5 percent in IIIQ2011 and rose 0.4 percent in IIIQ2011 relative to IIIQ2010. Hourly compensation in IIIQ2011 fell at the SAAE rate of 0.2 percent, which deflating by the estimated consumer price increase SAAE rate in IIIQ2011 results in a decline of real hourly compensation by 3.2 percent. Unit labor costs and real hourly compensation are declining.

Table 13, US, Nonfarm Business Sector Productivity and Costs %

	IIIQ 2011 SAAE	IIIQ 2011 YoY	IIQ 2011 SAAE	IIQ 2011 YoY	IQ 2011 SAAE	IQ 2011 YoY
Produc-tivity	2.3	0.9	-0.1	0.9	-0.6	1.2
Output	3.2	2.4	1.8	2.5	0.9	3.2
Hours	0.8	1.4	2.0	1.6	1.5	1.9
Hourly Comp.	-0.2	1.4	-0.2	1.9	5.6	2.6
Real Hourly Comp.	-3.2	-2.3	-4.1	-1.4	0.3	0.4
Unit Labor Costs	-2.5	0.4	-0.1	1.0	6.2	1.4
Unit Nonlabor Payments	9.3	4.7	6.7	2.9	-3.1	2.0
Implicit Price Deflator	2.3	2.2	2.7	1.8	2.2	1.7

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

The revised increases in productivity in Table 14 of 4.1 percent in the 2010 annual average and 2.3 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.1 percent in 2010 and 7.2 percent in 2009. The contraction period and the recovery period have been characterized by savings of labor inputs. The report on productivity and costs confirms a weak economy in IIQ2011 and losses in real hourly compensation of labor with likely adverse effects on consumption. The GDP report with growth of only 1.3 percent at SAAE rate in IIQ2011 or 0.32 percent in the quarter is consistent with these data. The economy improved in IIIQ2011 with GDP growth at the revised SAAE rate of 2.0 percent significantly because of consumption resulting from reducing savings by financial repression in the form of controlling interest rates at zero (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Increase in hours used at the SAAE rate of 0.8 percent with increase in output by 3.2 percent resulted in an increase in nonfarm business productivity of 2.3 percent.

Table 14, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average ∆% Annual Average 

	2010 Annual Average ∆%	2009 Annual Average ∆%	2008 Annual Average ∆%
Productivity	4.1	2.3	0.6
Output	4.0	-5.1	-1.5
Hours	-0.1	-7.2	-2.1
Hourly Comp.	2.1	1.6	3.4
Real Hourly Comp.	0.4	2.0	-0.4
Unit Labor Costs	-2.0	-0.7	2.8
Unit Nonlabor Payments	5.7	3.8
Implicit Price Deflator	1.1	1.1

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (http://www.nber.org/cycles.html). Table 15 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 2001 to 2011. The annual average jumped from 2.9 percent in 2001 to 4.6 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 8.8 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html) and increased during the first phase of expansion.

Table 15, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 2001-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
2001	-1.3	7.4	2.5	5.8	2.9
2002	8.8	0.5	3.8	-0.2	4.6
2003	3.7	5.5	9.5	1.5	3.7
2004	0.6	3.3	0.7	0.5	2.6
2005	4.2	-0.8	3.1	-0.2	1.6
2006	2.5	0.4	-2.2	2.7	0.9
2007	-0.1	3.3	4.7	2.1	1.5
2008	-2.4	2.2	-0.7	-3.4	0.6
2009	1.3	8.0	6.5	5.5	2.3
2010	4.6	1.2	2.1	2.2	4.1
2011	-0.6	-0.1	2.3

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart 32 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 2001 to 2011. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of sales.

Chart 32, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table 16. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table 16 shows continuing subdued unit labor costs.

Table 16, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 2001-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
2001	10.9	-5.8	-1.1	-1.7	1.5
2002	-4.1	3.4	-1.6	2.2	-1.3
2003	2.8	1.4	-3.5	1.8	1.0
2004	-2.5	2.4	5.8	2.7	0.7
2005	-1.0	3.5	2.6	2.6	2.3
2006	2.9	1.3	3.6	6.8	2.8
2007	4.0	-1.9	-1.9	4.4	2.4
2008	8.7	-3.5	4.3	5.7	2.8
2009	-4.0	-1.2	-3.9	-4.1	-0.7
2010	-3.1	1.4	-0.2	-1.6	-2.0
2011	6.2	-0.1	-2.5

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart 33 provides percentage changes quarter on quarter at SAAE rates of nonfarm business unit labor costs. With the exception of a jump of 6.2 percent in IQ2011, 2.8 percent in IIQ2011 and 1.4 percent in IIQ2010, changes in nonfarm business unit labor costs have been negative.

Chart 33, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Table 17 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 0.3 percent in IQ2011 but fell at annual rates of 4.1 percent in IIQ2011 and at 3.2 percent in IIIQ2011.

Table 17, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 2001-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
2001	5.4	-1.5	0.2	4.5	1.6
2002	2.8	0.6	0.0	-0.6	1.5
2003	2.4	7.7	2.5	1.8	2.4
2004	-5.2	2.6	3.7	-1.1	0.6
2005	1.3	-0.1	-0.3	-1.3	0.6
2006	3.1	-1.8	-2.6	11.6	0.5
2007	0.0	-3.3	0.2	1.6	1.1
2008	1.4	-6.3	-2.7	12.5	-0.4
2009	-0.4	4.7	-1.3	-1.5	2.0
2010	0.2	3.1	0.4	-2.1	0.4
2011	0.3	-4.1	-3.2

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart 34 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation from 2001 to 2011. There are significant fluctuations in quarterly percentage changes oscillating between positive and negative. There is no clear pattern in the two contractions in the 2000s.

Chart 34, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart 35 provides percentage change from prior quarter at annual rate for nonfarm business output per hour from 1947 to 2011. The average would be represented by a horizontal line above zero. There is an increase in the rate of improvement of productivity in the 1990s that was not continued into the 2000s.

Chart 35, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/home.htm

Chart 36 provides percentage changes from prior quarter at annual rate for US nonfarm business unit labor costs from 1947 to 2011. The most remarkable period is the 1970s in which stagflation occurred in fluctuating but high positive percentage changes of unit labor costs. There was significant moderation of increases in unit labor costs in the 1980s. Fluctuation has characterized the 2000s.

Chart 36, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart 37 provides percentage changes from the prior quarter at annual rate of nonfarm business real hourly compensation from 1947 to 2011. Negative changes have occurred more frequently and pronounced in the 2000s than during the Great Inflation of the 1970s.

Chart 37, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

IV World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past few weeks. Table 18, updated with every comment in this blog, provides beginning values on Fr Nov 25 and daily values throughout the week ending on Fri Dec 2 of several financial assets. Section VII 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 25 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.324/EUR in the first row, first column in the block for currencies in Table 18 for Fri Nov 25, depreciating to USD 1.3313/EUR on Mon Nov 28, or by 0.6 percent. The dollar depreciated because more dollars, $1.3313, were required on Nov 28 to buy one euro than $1.324on Nov 25. Table 18 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 18 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 1.3313/EUR on Nov 28; 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 25, to the last business day of the current week, in this case Fri Dec 2, such as depreciation of 1.1 percent for the dollar to USD 1.339/EUR by Dec 2; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (negative sign) by 1.1 percent from the rate of USD 1.324/EUR on Fri Nov 25 to the rate of USD 1.339/EUR on Fri Dec 2 {[(1.339/1.324) – 1]100 = 1.1%} and appreciated by 0.5 percent from the rate of USD 1.346 on Thu Dec 1 to USD 1.339/EUR on Fri Dec 2 {[(1.339/1.346) -1]100 = -0.5%}. The dollar appreciated during the week because more dollars, $1.339, were required to buy one euro on Fri Dec 2 than $1.324 required to buy one euro on Fri Nov 25. The depreciation of the dollar in the week was caused by decreasing risk aversion, largely resulting with declining uncertainty on European sovereign risks, with purchases of risk financial investments by reduction of dollar-denominated assets. Funds moved away from the safety of dollar investments to higher yield risk financial assets.

Table 18, Weekly Financial Risk Assets Nov 28 to Dec 2, 2011

Fri Nov 25	M 28	Tu 29	W 30	Th 1	Fr 2
USD/ EUR 1.324 2.0%	1.3313 -0.6% -0.6%	1.3332 -0.7% -0.1%	1.3442 -1.5% -0.8%	1.346 -1.7% -0.1%	1.339 -1.1% 0.5%
JPY/ USD 77.7 -1.1%	77.9845 -0.4% -0.4%	77.8562 -0.2% 0.2%	77.5665 0.2% 0.4%	77.688 0.0% -0.2%	77.96 -0.3% -0.3%
CHF/ USD 0.933 -1.9%	0.9226 1.1% 1.1%	0.9199 1.4% 0.3%	0.9135 2.1% 0.7%	0.911 2.4% 0.3%	0.919 1.5% -0.9%
CHF/EUR 1.2317 0.6%	1.2283 0.3% 0.3%	1.2264 0.4% 0.1%	1.2279 0.3% -0.1%	1.2301 0.1% -0.2%	1.2343 -0.2% -0.3%
USD/ AUD 0.971 1.0299 -3.1%	0.9897 1.0104 1.9% 1.9%	1.0032 0.9968 3.2% 1.4%	1.0275 0.9732 5.5% 2.4%	1.024 0.9766 5.2% -0.3%	1.021 0.9794 4.9% -0.3%
10 Year T Note 1.964	1.97	2.01	2.08	2.089	2.042
2 Year T Note 0.275	0.25	0.25	0.25	0.256	0.252
Germany Bond 2Y 0.46 10Y 2.26	2Y 0.45 10Y 2.30	2Y 0.44 10Y 2.33	2Y 0.34 10Y 2.28	2Y 0.30 10Y 2.18	2Y 0.31 10Y 2.13
DJIA 11231.78 -4.8%	2.6% 2.6%	2.9% 0.3%	7.2% 4.2%	7.0% -0.2%	7.0% -0.01%
DJ Global 1689.11 -5.4	3.5% 3.5%	4.2% 0.6%	7.9% 3.6%	8.5% 0.5%	8.8% 0.2%
DJ Asia Pacific 1117.98 -4.5%	1.8% 1.8%	3.6% 1.8%	4.0% 0.4%	6.9% 2.8%	7.4% 0.5%
Nikkei 8160.01 -2.6%	1.6% 1.6%	3.9% 2.3%	3.4% -0.5%	5.4% 1.9%	5.9% 0.5%
Shanghai 2380.22 -1.5%	0.1% 0.1%	1.3% 1.2%	-2.0% -3.3%	0.3% 2.3%	-0.8% -1.1%
DAX 5492.87 -5.3%	4.6% 4.6%	5.6% 0.9%	10.8% 5.0%	10.0% -0.9%	10.7% 0.7%
DJ UBS Commodities 141.74 -2.2%	143.02 0.9% 0.9%	144.410 1.9% 0.9%	146.16 3.1% 1.2%	145.90 2.9% -0.2%	146.29 3.2% 0.3%
WTI $ B 96.77 -1.1%	97.72 0.9% 0.9%	99.85 3.2% 2.2%	100.19 3.5% 0.3%	100.07 3.4% -0.1%	100.99 4.4% 0.9%
Brent $/B 106.40 -1.1%	108.54 2.0% 2.0%	110.86 4.2% 2.1%	110.22 3.6% -0.6%	109.05 2.5% -1.1%	110.17 3.5% 1.0%
Gold $/OZ 1688.5 -2.0	1716.1 1.6% 1.6%	1720.3 1.9% 0.2%	1749.6 3.6% 1.7%	1747.6 3.5% -0.1%	1748.7 3.6% 0.1%

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

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

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

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

The flow of cash from safe havens to risk financial assets is processed by carry trades from zero interest rates that are frustrated by episodes of risk aversion or encouraged with return of risk appetite. The dominance of risk appetite over risk aversion during the week of Dec 2 is explained as follows.

· Bank Fears. European sovereign risk crises are closely linked to the exposures of regional banks to government debt. An important form of financial repression consists of changing the proportions of debt held by financial institutions toward higher shares in government debt. The financial history of Latin America, for example, is rich in such policies. Bailouts in the euro zone have sanctioned bailing in the private sector, which means that creditors such as banks will participate by “voluntary” reduction of the principal in government debt. David Enrich, Sara Schaeffer Muñoz and Patricia Knowsmann, writing on “European nations pressure own banks for loans,” on Nov 29, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204753404577066431341281676.html?mod=WSJPRO_hpp_MIDDLETopStories), provide important data and analysis on the role of banks in the European sovereign risk crisis. They assemble data from various sources showing that domestic banks hold 16.2 percent of Italy’s total government securities outstanding of €1,617.4 billion, 22.9 percent of Portugal’s total government securities of €103.9 billion and 12.3 percent of Spain’s total government securities of €535.3 billion. Capital requirements force banks to hold government securities to reduce overall risk exposure in balance sheets. Enrich, Schaeffer Muñoz and Knowsmann find information that governments are setting pressures on banks to acquire more government debt or at least to stop selling their holdings of government debt.

· Bond Auctions. An important inflexion occurred on Nov 29. Jack Farchy, writing on “Italian bond sale boosts stock rally,” on Nov 29, 2011, published in the Financial Times (http://www.ft.com/intl/cms/s/0/2168664e-196b-11e1-92d8-00144feabdc0.html#axzz1f5gvxb00) informs on the boost to stock markets from the placement by Italy of the auction of €7.5 billion of bonds. Although the yields of 7.89 percent for three-year bonds and 7.56 percent for ten-year bonds were above the fear level of 7.0 percent, the euro gained 0.7 percent and stock markets rose.

· China Lowers Reserve Requirements. Yajun Zhang and Prudence Ho, writing on “China cuts reserve requirement ratio,” on Nov 30, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204012004577069804232647954.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the People’s Bank of China (PBOC), or Chinese central bank, announced the reduction of the reserve requirement of bank by 0.50 percentage points effective Dec 5. This is the first such reduction since Dec 2008. The PBOC increased the reserve requirement six times in 2011 and increased deposit rates five times since Oct 2010. Market participants are more hopeful that China will attain the elusive soft landing to lower inflation but with economic growth.

· Central Bank Dollar Swaps. The biggest boost to financial markets was provided by the return of central bank dollar swaps that were used during the financial crisis. The objective of the measure is to prevent deterioration of financial markets that could worsen the European sovereign debt crisis. The statement by the Federal Reserve is as follows ():

“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. 

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.“

· European Central Bank. The European Central Bank (ECB) has been pressured to assist in the bailouts by acquiring sovereign debts. The ECB has been providing liquidity lines to banks under pressure and has acquired sovereign debts but not in the scale desired by authorities. In an important statement to the European Parliament, the President of the ECB Mario Draghi (2011Dec1) opened the possibility of further ECB actions but after a decisive “fiscal compact:”

“What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.”

· French and Spanish Bond Auctions. Jack Farchy, writing on “French and Spanish auctions calm nerves,” on Dec 1, 2011, published in the Financial Times (http://www.ft.com/intl/cms/s/0/2168664e-196b-11e1-92d8-00144feabdc0.html#axzz1fIVz4kv1), analyzes the significant improvement in bond markets. Yields of government bonds of “peripheral countries” fell significantly and the yields of Italian government bonds fell below 7 percent. Spain placed the auction of €3.75 billion of government bonds and France placed €4.35 billion of government bonds.  Brazilian Interest Rate Cut. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Copom reduces the Selic rate to 11.00 percent · 30/11/2011 7:47:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.

The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”

A worldwide easing movement by central banks contributed to the boom in valuation of risk financial assets. Much depends on the insistence of strong fiscal measures that could be revealed in the meeting of European leaders on Dec 9.

The combination of these policies explains the surge of valuations of risk financial assets in Table 18. Risk aversion returned in the earlier three weeks because of the uncertainties on rapidly moving political development in Greece, Italy, Spain and perhaps even in France and Germany. Most currency movements in Table 18 reflect reduction of risk aversion because of the policies of central banks worldwide. The dollar depreciated 1.1 percent relative to the euro after appreciating 2.0 percent in the prior week. Safe-haven currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY) have been under threat of appreciation. A characteristic of the global recession would be struggle for maintaining competitiveness by policies of regulation, trade and devaluation (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation War (2008c)). Appreciation of the exchange rate causes two major effects on Japan.

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

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

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

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

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

Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc appreciated 1.5 percent relative to the USD in the week of Dec 2 and depreciated 0.2 percent relative to the euro, as shown in Table 18. Risk courage is evident in the appreciation of the Australian dollar by cumulative 4.9 percent in the week of Fr Dec 2 after depreciation by 3.1 percent in the week of Nov 25. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Increasing risk aversion is captured by decrease of the yield of the 10-year Treasury note from 2.326 percent on Oct 28 to 1.964 percent on Fri Nov 25 and 2042 on Dec 2. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.5 percent in the 12 months ending in Oct (http://www.bls.gov/cpi/). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with declining yield of 0.275 on Nov 25. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities.

A similar risk aversion phenomenon occurred in Germany. The estimate of euro zone CPI inflation is at 3.0 percent for the 12 months ending in Oct (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16112011-AP/EN/2-16112011-AP-EN.PDF) and the flash estimate for Nov is also 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-30112011-AP/EN/2-30112011-AP-EN.PDF) but the yield of the two-year German government bond fell to 0.31 percent by Dec 2. The yield of the 10-year German government bond rose to 2.26 percent on Fri Nov 25 but fell to 2.13 percent on Fri Dec 2. Safety overrides inflation-adjusted yield but there could be duration aversion. Turbulence also affected the market for German sovereign bonds. Emese Bartha, Art Patnaude and Nick Cawley, writing on “German bond auction falls flat,” on Nov 23, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204630904577055590007145230.html?mod=WSJPRO_hpp_LEFTTopStories), find decrease in risk appetite even for the highest quality financial assets in the euro zone. The auction of €6 billion of 10-year bunds on Nov 23 placed only €3.664 billion, or 60.7 percent. Although inflation of consumer prices in the UK at 5.0 percent exceeds euro zone inflation at 3.0 percent, David Oakley, Tracy Alloway, Alex Barker and Gerrit Wiesmann, writing on “UK borrowing costs drop below Germany,” on Nov 24, published in the Financial Times (http://www.ft.com/intl/cms/s/0/78994200-15c2-11e1-8db8-00144feabdc0.html#axzz1eWzvlRSp), inform that on Thu Nov 24 the UK 10-year gilt traded at 2.20 percent, which was lower than the yield of 2.23 percent of the German 10-year bond. Richard Milne, writing on “Italian bond yields rise above 8%,” on Nov 25, published in the Financial Times (http://www.ft.com/intl/cms/s/0/07079856-1754-11e1-b20e-00144feabdc0.html#axzz1eoXVrMVL), provides a quote of 8.13 percent for two-year Italian government bonds registered by Reuters’ data. Emese Bartha, writing on “Italy leads busy week of euro-zone bond sales,” on Nov 25, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060002367158964.html?mod=WSJPRO_hpp_LEFTTopStories), informs that Italy, Belgium, Spain and France are auctioning bonds in the week of Nov 28. Stacy Meichtry and Jonathan Cheng, writing on Nov 26, on “New strains hit euro, global markets,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060660416404298.html?mod=WSJPRO_hpp_LEFTTopStories), inform that the planned auction of bonds by five euro zone governments is for €19 billion. European sovereign risk successfully navigated turbulence in the week of Dec 2 but these earlier eruptions of yields illustrate the troubled road ahead.

World equity markets registered substantial gains during the week as a result of easing monetary policy worldwide. All the equity indexes in Table 18 had major gains during the week of Dec 2 with the exception of decline by 0.8 percent by the Shanghai Composite. Germany’s Dax jumped 10.7 percent, Dow Global rose 8.8 percent, DJIA gained 7.0 percent, Nikkei jumped 5.9 percent and DJ Asia Pacific increased 7.4 percent.

Financial risk assets increase during moderation of risk aversion in carry trades from zero interest rates and fall during increasing risk aversion. Commodities increased together with equity indexes. The DJ-UBS commodities index gained 3.2 percent in the week of Dec 2, Brent rose 3.5 percent and WTI increased 4.4 percent. Gold gained 3.6 percent in the week of Dec 2.

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 IVA 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 Dec 2 the yield of the 2-year bond of the government of Greece was quoted mostly above 90 percent, exceeding 99 percent on Dec 1, and the 10-year bond yield traded between 28 and 33 percent. In contrast, the 2-year US Treasury note traded at 0.252 percent and the 10-year at 2.042 percent while the comparable 2-year government bond of Germany traded at 0.31 percent and the 10-year government bond of Germany traded at 2.13 percent (see Table 18). 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 with decline toward 6.7 percent as a result of coordinated monetary policy. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IVA 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 19 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 19, 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 19 are used for some very simple calculations in Table 20. The column “Net Debt USD Billions” in Table 20 is generated by applying the percentage in Table 19 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 16. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table 20, 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 21 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 21, 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

IVA 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.

V. Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 22 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 22 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 22. Data for other countries in Table 22 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section VI World Economic Slowdown following with individual country and regional data tables.

Table 22, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.5	3.5	5.9	8.6
Japan	0.0	-0.2	1.7	4.5
China	9.1	5.5	5.0
UK	0.5	5.0* RPI 5.4	5.7* output 14.1* input 10.5**	8.3
Euro Zone	1.4	3.0	5.5	10.3
Germany	2.5	2.9	5.3	5.5
France	1.6	2.5	5.8	9.8
Nether-lands	1.1	2.8	6.8	4.8
Finland	2.8	3.2	5.8	7.8
Belgium	1.8	3.4	6.2	6.6
Portugal	-1.7	4.0	5.5	12.9
Ireland	NA	1.5	4.4	14.3
Italy	NA	3.8	4.7	8.5
Greece	-5.2	2.9	7.9	18.3
Spain	0.8	3.0	6.5	22.8

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

*Office for National Statistics

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

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

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

Table 22 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.5 percent in IIIQ2011 relative to IIIQ2010 (Table 8, p 11 in http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_2nd.pdf); Japan’s GDP is flat in IIIQ2011 relative to IIIQ2010 but contracted 1.1 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011; the UK grew at 0.5 percent in IIIQ2011 relative to IIIQ2010; and the Euro Zone grew at 1.4 percent in IIIQ2011 relative to IIIQ2010. These are stagnating or “growth recession” rates, which are positive growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.6 percent in the US but 18.2 percent for unemployment/underemployment (see Table 3 in this blog comment), 4.5 percent for Japan, 8.3 percent for the UK with high rates of unemployment for young people and 10.3 percent in the Euro Zone. Twelve months rates of inflation have been quite high, even when some are moderating at the margin: 3.5 percent in the US, minus 0.2 percent for Japan, 3.0 percent for the Euro Zone and 5.0 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section II in this post http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html) (2) the tradeoff of growth and inflation in China; (3) slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html), weak hiring (see Section I Recovery without Hiring, Section I United States Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/11/recovery-without-hiring-world-financial.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I Twenty Nine Million in Job Stress); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see II Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.

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

“For immediate release

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

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

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

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

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

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

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

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

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

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

Table 23, 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 1.2 percent for the first three quarters of 2011 (http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html). Recent recovery has been driven by decline in the savings rate from 5.2 percent in Dec 2010 to 3.5 percent in Oct 2011 while real disposable income has fallen. Labor markets continue to be fractured with unemployment or underemployment of 29 million, weak hiring and falling real wages. Inflation has been moving on waves with acceleration in more recent months relative to moderation in May-Jul (http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html). The translation of current trends or appearance of trends into forecasts with statistical predictive value is very difficult or nearly impossible. FOMC policy in the statement is to increase economic growth to reduce the rate of unemployment in accordance with its statutory dual mandate (http://www.federalreserve.gov/aboutthefed/mission.htm):

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The producer price index of the euro zone increased 0.1 percent in Oct after increasing 0.3 percent in Sep, as shown in Table 24. The annual equivalent rate in Jul-Oct is 1.8 percent. Producer price inflation has moderated since May with annual equivalent inflation of only 0.8 percent in May-Oct. 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 May to Oct, energy prices fell in three. Annual equivalent energy inflation in May-Oct is 2.2 percent. Prices of capital goods have barely moved with annual equivalent inflation in Jul-Oct of only 1.2 percent. Prices of durable consumer goods have accelerated in Jul-Oct at annual equivalent rate of 3.0 percent compared with only 1.2 percent annual equivalent in Apr-Jun.

Table 24, Euro Zone, Industrial Producer Prices Month ∆%

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

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

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 25. In both Sep and Aug, producer prices rose 5.8 percent relative to a year earlier but the rate fell to 5.4 percent in Oct. Industrial prices excluding construction and energy rose 3.2 percent in the 12 months ending in Oct while energy prices rose 12.4 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 25, Euro Zone, Industrial Producer Prices 12 Months ∆%

	Oct 2011	Sep 2011	Aug 2011	Jul 2011	Jun 2011	May 2011	Apr 2011
Industry ex Construction	5.5	5.8	5.8	6.1	5.9	6.2	6.8
Industry ex Construction & Energy	3.2	3.6	3.9	4.0	4.1	4.2	4.5
Intermediate Goods	4.2	5.0	5.7	6.1	6.3	6.6	7.3
Energy	12.4	12.2	11.4	11.9	10.7	11.8	13.2
Capital Goods	1.5	1.5	1.5	1.5	1.3	1.2	1.4
Durable Consumer Goods	2.5	2.5	2.1	1.9	1.8	1.9	2.0
Nondurable Consumer Goods	3.5	3.4	3.5	3.5	3.7	3.8	3.5

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

Consumer price inflation in Germany in Oct was flat and 2.5 percent in 12 months, as shown in Table 26. 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 1.5 percent, which is lower than the 12 months rate of 2.5 percent in Oct.

Table 26, Germany, Consumer Price Index ∆%

	Month ∆%	12 Months ∆%
Oct 2011	0.0	2.5
Sep	0.1	2.6
Aug	0.0	2.4
Jul	0.4	2.4
AE ∆% Jul-Oct	1.5
Jun	0.1	2.3
May	0.0	2.3
Apr	0.2	2.4
Mar	0.5	2.1
Feb	0.5	2.1
Jan	-0.4	2.0
AE ∆% Jan-Jun	1.8
Dec 2010	1.0	1.7
Nov	0.1	1.5
Oct	0.1	1.3
Sep	-0.1	1.3
Aug	0.0	1.0
Jul	0.3	1.2
Jun	0.1	0.9
May	0.1	1.2
Apr	-0.1	1.0
Mar	0.5	1.1
Feb	0.4	0.6
Jan	-0.6	0.8
		12 Months Ending in Dec ∆%
2010		1.7
2009		0.9
2008		1.1
2007		3.1
2006		1.4
2005		1.4
2004		2.3
2003		1.0
2002		1.2

Source: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/Preise/CPI,templateId=renderPrint.psml

Chart 38, 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 38, 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 39 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 39, 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/Prices/Content100/kpre510graf0.psml

Table 27 provides the monthly and 12 months rate of inflation for segments of the consumer price index of Germany. 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 27, 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: Statistiche Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/Preise/CPI,templateId=renderPrint.psml

There have been fluctuations in producer price inflation in France for the French market as shown in Table 28. There was a wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trade from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 11.4 percent. Producer prices fell 0.5 percent in May and another 0.1 percent in Jun. In the months from Jul to Oct, annual equivalent producer price inflation was 3.4 percent. The bottom part of Table 28 shows producer price inflation at 6.4 percent in the 12 months ending in Dec 2005 and again at 5.2 percent in the 12 months ending in Dec 2007. Producer prices fell in 2008 and 2009 during the global contraction and decline of commodity prices but returned at 5.4 percent in the 12 months ending in Dec 2010.

Table 28, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Oct 2011	0.5	5.8
Sep	0.2	6.1
Aug	0.0	6.2
Jul	0.4	6.3
AE ∆% Jul-Oct	3.4
Jun	-0.1	6.1
May	-0.5	6.2
Apr	1.0	6.7
Mar	0.9	6.7
Feb	0.8	6.3
Jan	0.9	5.6
AE ∆% Jan-Apr	11.4
Dec 2010	0.8	5.4
Dec 2009	0.1	-2.9
Dec 2008	-1.5	-0.2
Dec 2007	0.6	5.2
Dec 2006	-0.2	2.9
Dec 2005	0.2	6.4

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20111130

Chart 40 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components exhibit the rise to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices.

Chart 40, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20111130

France’s producer price index for the domestic market is shown in Table 29 for Oct 2011. The segment of prices of coke and refined petroleum increased 0.4 percent in Oct and 26.4 percent in 12 months. Manufacturing prices, with the highest weight in the index, was flat in Oct and rose 5.4 percent in 12 months. Mining prices increased 3.5 percent in the month and 7.5 percent in 12 months.

Table 29, France, Producer Price Index for the Domestic Market, %

Oct 2011	Weight	Month ∆%	12 Months ∆%
Total	1000	0.5	5.8
Mining	130	3.5	7.5
Mfg	870	0.0	5.5
Food	188	0.3	5.4
Coke, Refined Petroleum	70	0.4	26.4
Electrical, Electronic	92	0.0	1.8
Transport	79	0.2	2.8
Other Mfg	441	-0.2	3.1

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20111130

Italy’s producer price inflation in Table 30 also has the same waves in 2011 observed for many countries (http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html). The annual equivalent producer price inflation in Jan-Apr was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to financial risk assets, in particular leveraged positions in commodities. Producer price inflation fell 0.2 percent in Oct and rose 4.7 percent in 12 months. Producer price inflation moderated with decline by 0.2 percent in May and zero change in Jun. Annual equivalent consumer price inflation was 1.2 percent in Jul-Oct.

Table 30, Italy, Industrial Prices, Internal Market

	Month ∆%	12 Months ∆%
Oct 2011	-0.2	4.7
Sep	0.2	4.7
Aug	0.1	4.8
Jul	0.3	4.9
AE ∆% Jul-Oct	1.2
Jun	0.0	4.6
May	-0.2	4.8
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Dec 2010	0.7	4.7
Year
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/47110

Chart 41 of the Istituto Nazionale di Statistica of Italy shows percentage changes in 12 months of Italy’s consumer price index. The commodity shock accelerated 12 months inflation rates that peaked in Mar. Inflation then fell but stability at a still relatively high level.

Chart 41, Italy, Producer Prices for the Internal Market 12 Months ∆%

Source: Istituto Nazionale di Statistica http://www.istat.it/en/

Monthly and 12 month inflation of the producer price index of Italy and individual components is provided in Table 31. Energy fell 0.7 percent in Oct and rose 10.7 percent in 12 months.

Table 31, Italy, Industrial Prices, Internal Market, ∆%

	Oct 2011/    Sep 2011	Oct 2011/    Oct 2010
Total	-0.2	4.7
Consumer Goods	0.1	3.4
Durable Goods	-0.3	2.4
Nondurable	0.3	3.8
Intermediate	-0.4	4.2
Energy	-0.1	10.7

Source: http://www.istat.it/it/archivio/47110

The wave of commodity price increases (http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html) in the first four months of 2011 also influenced the surge of consumer price inflation in Italy shown in Table 32. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in Jun and May at 0.1 percent. Annual equivalent inflation in the five months Jul-Nov jumped again to 2.7 percent.

Table 32, Italy, Consumer Price Index

	Month	12 Months
Nov 2011	-0.1	3.3
Oct	0.6	3.4
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Nov	2.7
Jun	0.1	2.7
May	0.1	2.6
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9

Source: http://www.istat.it/it/archivio/47085

Chart 42 of the Istituto Nazionale di Statistica of Italy shows 12 months percentage change of the consumer price index of Italy. The 12 month rates of consumer price inflation also show the acceleration in the beginning of 2011 followed by more moderate inflation and the resurgence after Jul.

Chart 42, Italy, Consumer Prices 12 Months ∆%

Source: Istituto Nazionale di Statistica http://www.istat.it/en/

VI World Economic Slowdown. The JP Morgan Global Manufacturing PMI^™ produced by JP Morgan and Markit in association with ISM and IFPSM registered 49.6 in Nov compared with 49.9 in Oct, which means that global manufacturing is contracting at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The JP Morgan Global Manufacturing PMI^™ fell for a third consecutive month. The proximity of the index to 50 suggests near stagnation of world manufacturing but it masks that growth in the US with share of 28.2 percent in the index was the sharpest in seven months. World manufacturing excluding the US fell at the fastest rhythm in 36 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The table “World-Wide Factory Activity, by Country,” of Real Time Economics produced by WSJ Research and published in the Wall Street Journal on Dec 1 (http://blogs.wsj.com/economics/2011/12/01/world-wide-factory-activity-by-country-20/tab/interactive/) shows only six countries with manufacturing indexes above 50 in Nov: Canada (53.3), India (51.0), Russia (52.6), South Africa (51.6), Turkey (52.3) and the US (52.7). The HSBC Industrial Production PMI^™ for Brazil increased from 46.5 in Oct to 48.7 in Nov, which means contraction at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Andre Loes, Principal Economist of HBSC in Brazil, finds that the index registered the highest level since Jun and the fastest rate of monthly change since Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Inventory adjustment in response to expectations on the economy may have caused the decline of industrial production. Loes finds that if this interpretation is valid industry may improve performance in 2012. Services indexes will be released in the following week.

VIA United States. The Manufacturing ISM Report on Business^® purchasing managers’ index jumped 1.9 percentage points from 50.8 in Oct to 52.7 in Nov, indicating continuing growth for 28 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 4.3 percentage points, from 52.4 in Oct to 56.7 in Nov, indicating growth at a faster rate. The employment index fell 1.7 percentage points from 53.5 in Oct to 51.8 in Nov, indicating growth at slower rate of change. Prices paid or costs of inputs rose 4.0 percentage points from 41.0 in Oct to 45.0 in Oct, which is the second reading below 50 since May. Table USA provides the indicators for the US economy.

Table USA, US Economic Indicators

Consumer Price Index	Oct 12 months NSA ∆%: 3.5; ex food and energy ∆%: 2.1 Oct month ∆%: -0.1; ex food and energy ∆%: 0.1 Blog 11/20/11
Producer Price Index	Oct 12 months NSA ∆%: 5.9; ex food and energy ∆% 2.8 Oct month SA ∆% = -0.3; ex food and energy ∆%: 0.0 Blog 11/20/11
PCE Inflation	Sep 12 months NSA ∆%: headline 2.9; ex food and energy ∆% 1.6 Blog 10/30/11
Employment Situation	Household Survey: Oct Unemployment Rate SA 9.0% Blog calculation People in Job Stress Oct: 28.8 million NSA Establishment Survey: Oct Nonfarm Jobs 80,000; Private +104,000 jobs created  Sep 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.8% Blog 11/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Aug 2011 4.026 million lower by 1.461 million than 5.487 million in Aug 2005 Blog 10/11/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 2.5 First three quarters AE ∆% 1.4  Blog 10/30/11
Personal Income and Consumption	Sep month ∆% SA Real Disposable Personal Income (RDPI) 0.1 Sep month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 0.2; RPCE ∆%: 2.2 Blog 10/30/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIIQ2011 SA ∆%: 0.3 Sep 12 months ∆%: 2.0 Blog 10/30/11
Industrial Production	Oct month SA ∆%: 0.7 Oct 12 months NSA ∆%: 3.9 Capacity Utilization: 77.8 Blog 11/20/11
Productivity and Costs	Nonfarm Business Productivity IIIQ2011∆% SAAE 3.1; IIIQ2011/IIIQ2010 ∆% 1.1; Unit Labor Costs IIIQ2011 ∆% -2.4; IIIQ2011/IIIQ2010 ∆%: 1.2 Blog 11/04/11
New York Fed Manufacturing Index	General Business Conditions From -8.48 Oct to Nov 0.61 New Orders: From 0.16 Oct to minus 2.07 Nov Blog 11/20/11
Philadelphia Fed Business Outlook Index	General Index from 8.7 Oct to 3.6 Nov New Orders from 7.8 Oct to 1.3 Nov Blog 11/20/11
Manufacturing Shipments and Orders	Sep/Aug New Orders SA ∆%: minus 0.3; ex transport ∆%: 1.3 12 months Jan-Aug NSA ∆%: 12.6; ex transport ∆% 12.9 Blog 11/04/11
Durable Goods	Oct New Orders SA ∆%: -0.7; ex transport ∆%: 0.7 Jan-Oct months NSA New Orders ∆%: 9.2; ex transport ∆% : 9.2 Blog 11/27/11
Sales of New Motor Vehicles	Jan-Nov 2011 11.532 million; Jan-Oct 2011 10.444 million; Jan-Nov 2010 12.28 million. Nov SAAR 13.62 million, Oct SAAR 13.25, Nov 2010 SAAR 12.28 million Blog 12/02/11
Sales of Merchant Wholesalers	Jan-Sep 2011/2010 ∆%: Total 15.0; Durable Goods: 12.5; Nondurable Goods 17.2 Blog 11/13/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Sep 11/Sep 10 NSA ∆%: Total Business 11.5; Manufacturers 10.9 Retailers 8.6; Merchant Wholesalers 14.8 Blog 11/20/11
Sales for Retail and Food Services	Jan-Oct 2011/Jan-Oct 2010 ∆%: Retail and Food Services: 7.9; Retail ∆% 8.4 Blog 11/20/11
Value of Construction Put in Place	Oct SAAR month SA ∆%: 0.8 Oct 12 months NSA: 0.3 Blog 12/02/11
Case-Shiller Home Prices	Sep 2011/Sep 2010 ∆% NSA: 10 Cities minus 3.3; 20 Cities: minus 3.6 ∆% Sep SA: 10 Cities minus 0.4 ; 20 Cities: minus 0.6 Blog 12/02/11
FHFA House Price Index Purchases Only	Sep SA ∆% 0.9; 12 month ∆%: minus 2.1 Blog 12/02/11
New House Sales	Oct month SAAR ∆%: 1.3 Jan/Oct 2011/2010 NSA ∆%: minus 6.9 Blog 12/02/11
Housing Starts and Permits	Sep Starts month SA ∆%: -0.3; Permits ∆%: 10.9 Jan/Oct 2011/2010 NSA ∆% Starts 0.1; Permits  ∆% 0.2 Blog 11/20/11
Trade Balance	Balance Sep SA -$43,107 million versus Aug -$44,919 million Exports Sep SA ∆%: 1.4 Imports Sep SA ∆%: 0.3 Exports Jan-Sep 2011/2010 NSA ∆%: 18.3 Imports Jan-Sep 2011/2010 NSA ∆%: 16.7 Blog 11/13/11
Export and Import Prices	Oct 12 months NSA ∆%: Imports 11.0; Exports 6.3 Blog 11/13/11
Consumer Credit	Sep ∆% annual rate: 3.6% Blog 11/13/11
Net Foreign Purchases of Long-term Treasury Securities	Sep Net Foreign Purchases of Long-term Treasury Securities: $68.6 billion Sep versus Aug $10.7 billion Major Holders of Treasury Securities: China $1148 billion; Japan $957 billion  Blog 11/20/11
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 8.8; Outlays -8.7; Individual Income Taxes 21.5 Deficit Fiscal Year 2011 $1,298,614 million Deficit Fiscal Year 2011 Oct $98,466 million Blog 11/13/11
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIQ2011 -121B %GDP 3.2 Blog 09/18/11

Links to blog comments in Table USA: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

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

Motor vehicle sales and production in the US have been in long-term structural change. Table 33 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. Domestic car production fell from 6,231 thousand in 1990 to 2,840 thousand in 2010 or 54.4 percent. In the first eleven months of 2011, light vehicle sales accumulated to 11.534 million, which is higher by 10.4 percent relative to 10.444 million a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 13.63 million in Nov 2011, higher than 13.26 million in Oct 11 and higher than 12.28 million in Nov 2010 (http://www.motorintelligence.com/m_frameset.html).

Table 33, US, New Motor Vehicle Sales and Car Production, Thousand Units

	New Motor Vehicle Sales	New Car Sales and Leases	New Truck Sales and Leases	Domestic Car Production
1990	14,137	9,300	4,837	6,231
1991	12,725	8,589	4,136	5,454
1992	13,093	8,215	4,878	5,979
1993	14,172	8,518	5,654	5,979
1994	15,397	8,990	6,407	6,614
1995	15,106	8,536	6,470	6,340
1996	15,449	8,527	6,922	6,081
1997	15,490	8,273	7,218	5,934
1998	15,958	8,142	7,816	5,554
1999	17,401	8,697	8,704	5,638
2000	17,806	8,852	8,954	5,542
2001	17,468	8,422	9,046	4,878
2002	17,144	8,109	9,036	5,019
2003	16,968	7,611	9,357	4,510
2004	17,298	7,545	9,753	4,230
2005	17,445	7,720	9,725	4,321
2006	17,049	7,821	9,228	4,367
2007	16,460	7,618	8,683	3,924
2008	13,494	6,814	6.680	3,777
2009	10,601	5,456	5,154	2,247
2010	11,772	5,729	6,044	2,840

Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Oct was the third good month in a row for construction spending in the US, as shown in Table 34. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $789.5 billion in Oct, which was higher by 0.8 percent than in the prior month of Sep. Residential investment rose a high 3.2 percent in the month and nonresidential investment fell slightly by 0.2 percent. Public construction fell 1.8 percent while private construction grew 2.3 percent. Data in Table 34 show that nonresidential construction at $551.2 billion is much higher in value than residential construction at $247.3 billion while total private construction at $518.6 billion is much higher than public construction at $279.9 billion, all in SAAR.

Table 34, US, Value of Construction Put in Place in the United States Billion Dollars and Month and 12 Months ∆%  

	Oct 2011 SAAR $ Billions	Month ∆%	12 Month ∆%
Total	798.5	0.8	-0.4
Residential	247.3	3.2	0.6
Nonresidential	551.2	-0.2	-0.9
Total Private	518.6	2.3	5.2
Private Residential	238.9	3.4	1.7
New Single Family	107.5	0.6	1.0
New Multi-Family	14.9	-0.8	6.7
Private Nonresidential	279.6	1.3	8.4
Total Public	279.9	-1.8	-9.4
Public Residential	8.3	-2.0	-24.0
Public Nonresidential	271.6	-1.8	-24.0

SAAR: seasonally adjusted annual rate; B: billions

Source: http://www.census.gov/const/C30/release.pdf

Further information on construction spending is provided in Table 35. The original monthly estimates not-seasonally adjusted and their 12 months rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011. On a monthly basis, construction fell four consecutive months from Dec 2010 to Mar 2011, increasing in six of the seven months from Apr to Oct, with decline of 3.3 percent in Jul. The 12 months rates of change improved from minus 6.9 percent in Apr to the first positive 12 months percentage change of 0.3 percent in Oct.

Table 35, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%

	Value NSA Month $ Millions	12 Months ∆% NSA	Value SAAR $ Millions	Month ∆% SA*
Oct 2011	73,622	0.3	798,530	0.8
Sep	73,628	-1.4	792,107	0.2
Aug	75,838	-0.4	790,277	2.2
Jul	70,562	-3.8	773,296	-3.3
Jun	72,357	1.5	799,568	1.5
May	67,296	-1.8	787,396	2.5
Apr	61,817	-6.9	768,226	0.7
Mar	56,731	-5.8	762,557	-0.2
Feb	51,412	-4.5	764,198	-1.0
Jan	52,278	-5.6	771,982	-1.4
AE ∆%				0.6
Dec 2010	60,066	-6.3	782,880	-2.5

*Percentages are calculated with values without numbers and may differ from rounded numbers

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

The strong contraction of the value of construction in the US is revealed by Table 36. Construction spending in the first ten months of 2011, not seasonally adjusted, reached $655.5 billion, which is lower by 2.9 percent than $675.4 billion in the same period in 2010. The depth of the contraction is shown by the decline of construction spending from $1,005.3 billion in the first ten months of 2006 to only $655.5 billion in the same period in 2011, or fall by minus 34.8 percent. The comparable decline from Jan-Oct 2005 to Jan-Oct 2011 is minus 31.2 percent. Construction spending in the first ten months of 2011 fell by 14.2 percent relative to the same period in 2003. Construction spending is lower by 12.4 percent in the first ten months of 2011 relative to the same period in 2009. Construction has been weaker than the economy as a whole.

Table 36, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan-Oct 2011 $ B	655.5
Jan-Oct 2010 $ B	675.4
∆% to 2011	-2.9
Jan-Oct 2009	770.6
∆% to 2011	-12.4
Jan-Oct 2006 $ B	1,005.3
∆% to 2011	-34.8
Jan-Oct 2005 $ B	952.5
∆% to 2011	-31.2
Jan-Oct 2003	763.6
∆% to 2011	-14.2

Source: http://www.census.gov/const/C30/release.pdf

http://www.census.gov/const/C30/pr201010.pdf

http://www.census.gov/const/C30/pr200710.pdf

http://www.census.gov/const/C30/pr200610.pdf

http://www.census.gov/const/C30/pr200410.pdf

Monthly construction spending in the US in the quarter Aug to Oct not seasonally adjusted is shown in Table 4 for the years between 2002 and 2011. The values of $73.4 billion in Oct 2010 and $73.6 billion in Oct 2011 are lower than $75.7 billion in Oct 2002. The data are not adjusted for inflation or changes in quality.

Table 37, US, Value of Construction Spending NSA Millions of Dollars

Year	Aug	Sep	Oct
2002	79,460	76,542	75,710
2003	85,191	83,841	83,133
2004	96,164	92,538	90,582
2005	106,706	103,269	102,339
2006	110,434	104,191	101,582
2007	110,430	105,150	103,847
2008	99,786	96,755	95,612
2009	84,368	81,213	79,949
2010	76,170	74,669	73,379
2011	75,838	73,628	73,622

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Chart 43 of the US Bureau of the Census shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages became unviable with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession.

Chart 43, US, Construction Expenditures SAAR 1993-2011

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr050.html

Construction spending at SAARs in the quarter Aug to Oct is shown in Table 38 for the years between 2002 and 2011. There is a peak in 2006 to 2007 with subsequent collapse of SAARs.

Table 38, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars

Year	Aug	Sep	Oct
2002	839,008	832,134	839,690
2003	901,839	911,589	925,732
2004	1,013,724	1,012,290	1,015,562
2005	1,119,782	1,131,739	1,145,663
2006	1,158,193	1,151,104	1,139,292
2007	1,160,593	1,165,162	1,152,511
2008	1,057,459	1,056,666	1,050,690
2009	889,643	880,259	869,374
2010	791,749	797,259	801,995
2011	790,277	792,107	798,530

Source: http://www.census.gov/const/www/c30index.html

Annual available data for the value of construction put in place in the US between 1993 and 2010 are provided in Table 39. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 65.5 percent between 1993 and 2010 but most of the growth, 65.3 percent, concentrated in 1993 to 2000 with growth of only 0.1 percent between 2000 and 2010. Total value of construction fell 5.2 percent between 2002 and 2010 with value of nonresidential construction increasing 24.4 percent while value of residential construction fell 38.1 percent. Value of total construction fell 29.5 percent between 2005 and 2010, with value of residential construction declining 38.1 percent while value of nonresidential construction rose 14.0 percent. Value of total construction fell 31.2 percent between 2006 and 2010, with value of nonresidential construction increasing 1.4 percent while value of residential construction fell 59.9 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2010, the share of nonresidential construction in total value rose to 69.1 percent while that of residential construction fell to 30.9 percent.

Table 39, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars and ∆% 

	Total	Private Nonresidential	Private Residential
1993	485,548	150,006	208,180
1994	531,892	160,438	241,033
1995	548,666	180,534	228,121
1996	599,693	195,523	257,495
1997	631,853	213,720	264,696
1998	688,515	237,394	296,343
1999	744,551	249,167	326,302
2000	802,756	275,293	346,138
2001	840,249	273,922	364,414
	Total	Total Nonresidential	Total Private Residential
2002	847,874	445,914	401,960
2003	891,497	440,246	451,251
2004	991,356	452,948	538,408
2005	1,140,136	486,629	617,507
2006	1,167,222	547,408	619,814
2007	1,152,351	651,883	500,468
2008	1,067,564	709,818	357,746
2009	903,201	649,273	253,928
2010	803,621	554,915	248,706
∆% 1993-2010	65.5
∆% 1993-2000	65.3
∆% 2000-2010	0.1
∆% 2002-2010	-5.2	24.4	-38.1
∆% 2005-2010	-29.5	14.0	-59.7
∆% 2006-2010	-31.2	1.4	-59.9

Source: http://www.census.gov/const/www/c30index.html

Data and other information continue to provide depressed conditions in the US housing market. Table 40 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). There is good news in the increase of sales of new houses in Oct by 1.3 percent and in Sep by 3.4 percent, revised down from the initial estimate of 5.7 percent. The cumulative percentage from Jan to Oct is minus 7.3 percent and becomes positive by 6.9 percent when including the 15.3 percent increase in Dec.

Table 40, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Oct 2011	307	1.3
Sep	303	3.4
Aug	293	-0.7
Jul	295	-2.6
Jun	303	-1.6
May	308	-2.5
Apr	316	3.6
Mar	305	8.5
Feb	281	-9.4
Jan	310	-6.3
Cumulative ∆% Jan-Oct		-7.3
Dec 2010	331	15.3

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

There is additional information of the report of new house sales in Table 41. The stock of unsold houses stabilized in Apr-Aug at 6.6 monthly equivalent sales at current sales rates and then dropped to 6.4 in Sep and 6.3 in Oct. Median and average house prices oscillate. In Oct, median and average prices of new houses sold without seasonal adjustment fell 0.5 percent and 2.5 percent, respectively. There are only two months with price increases in both median and average house prices: Jun with 8.2 percent in median prices and 3.9 percent in average prices and Apr with 1.9 percent in median prices and 3.1 percent in average prices.

Table 41, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Oct 2011	6.3	212,300	-0.5	242,300	-2.5
Sep	6.4	213,300	-2.0	248,400	-3.6
Aug	6.7	217,600	-5.4	257,600	-4.7
Jul	6.8	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.5	222,000	-1.2	262,700	-2.3
Apr	6.6	224,700	1.9	268,900	3.1
Mar	7.0	220,500	0.2	260,800	-0.8
Feb	7.8	220,100	-8.3	262,800	-4.7
Jan	7.2	240,100	-0.5	275,700	-5.5
Dec 2010	6.9	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

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

The depressed level of residential construction and new house sales in the US is evident in Table 42 providing new house sales in the first ten months of various years. Sales of new houses in the first ten months of 2011 are substantially lower than in any year between 1995 and 2011. Sales of new houses in the first ten months of 2011 are lower by 6.9 percent in relation to the same period in 2010 and 19.8 percent below the level in the same period in 2009. The housing boom peaked in 2005 and 2006 when increases in fed funds rates affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in the first ten months of 2011 relative to the same period in 2005 fell 76.6 percent and 71.4 percent relative to the same period in 2006. Similar percentage declines are also observed for 2011 relative to years from 2000 to 2004. Sales of new houses in the first ten of 2011 fell 54.9 per cent relative to the same period in 1995.

Table 42, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Oct 2011	260
Jan-Oct 2010	279
∆%	-6.9*
Jan-Oct 2009	324
∆% Jan-Oct 2011/ Jan-Oct 2009	-19.8
Jan-Oct 2008	432
∆% Jan-Oct 2011/ Jan-Oct 2008	-39.8
Jan-Oct 2007	687
∆% Jan-Oct 2011/ Jan-Oct 2007	-62.2
Jan-Oct 2006	909
∆% Jan-Oct 2011/Jan-Oct 2006	-71.4
Jan-Sep 2005	1,110
∆% Jan-Oct 2011/Jan-Oct 2005	-76.6
Jan-Oct 2004	1,036
∆% Jan-Oct 2011/Jan-Oct 2003	-74.9
Jan-Oct 2003	935
∆% Jan-Oct 2011/ Jan-Oct  2003	-72.2
Jan-Oct 2002	829
∆% Jan-Oct 2011/ Jan-Oct 2001	-68.6
Jan-Oct 2001	775
∆% Jan-Oct 2011/ Jan-Oct 2001	-66.5
Jan-Oct 2000	749
∆% Jan-Oct 2011/ Jan-Oct 2000	-65.3
Jan-Oct 1995	576
∆% Jan-Oct 2011/ Jan-Oct 1995	-54.9

*Computed using unrounded data

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

Table 43 provides the entire available series of new house sales from 1963 to 2010. The level of 323 thousand new houses sold in 2010 is the lowest since 1963 in the 47 years of available data. In that period, the population of the US rose from 179 million in 1960 to 309 million in 2010, or 72.6 percent. In fact, there is no year from 1963 to 2010 in Table 4 with sales of new houses below 400 thousand.

Table 43, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323

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

Chart 44 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart 44, US, New One-Family Houses Sold in the US, SAAR (Seasonally-Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr051.html

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table 44. The percentage change of new house sales from 1963 to 2010 is minus 42.3 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). The sales of new houses sold in the first ten months of 2011 fell 54.9 percent relative to the same period in 1995.

Table 44, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2010	-42.3	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2010	-51.6	NA
2000-2010	-63.2	NA
2005-2010	-74.8	NA

NA: Not Applicable

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

The available historical data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table 45. On a yearly basis, median and average prices reached a peak in 2007 and the fell substantially.

Table 45, US, Median and Average Prices of New Houses Sold, Annual Data

Period	Median	Average
1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900

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

Percentage changes of median and average prices of new houses sold in selected years are shown in Table 46. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between Oct 2006 and Oct 2011, median prices of new houses sold fell 15.2 percent and average prices fell 21.0 percent. Between Oct 2010 and Oct 2011, median prices rose 4.0 percent and average prices declined 4.8 percent.

Table 46, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New  Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% Oct 2000 to Oct 2003	10.1	12.9
∆% Oct 2000 to Oct 2005	38.3	36.5
∆% Oct 2000 to Oct 2011	20.4	12.6
∆% Oct 2005 to Oct 2011	-13.0	-17.5
∆% Oct 2000 to Oct 2006	42.0	42.6
∆% Oct 2006 to Oct 2011	-15.2	-21.0
∆% Oct 2009 to Oct 2011	-1.3	-8.2
∆% Oct 2010 to Oct 2011	4.0	-4.8

Source: http://www.census.gov/econ/currentdata/ressales/?programCode=RESSALES&geoLevelCode=US&yearStart=1963&yearEnd=2011&categoryCode=SOLD&dataTypeCode=TOTAL&adjusted=1&notadjusted=0&errorData=0&submit=GET+DATA

Table 47 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 95.5 percent in the 10-city composite of the Case-Shiller home price index and 80.5 percent in the 20-city composite between Sep 2000 and Sep 2005. Prices rose around 100 percent from Sep 2000 to Sep 2006, increasing 102.9 percent for the 10-city composite and almost doubled, increasing by 88.2 percent for the 20-city composite. House prices rose 39.2 percent between Sep 2003 and Sep 2005 for the 10-city composite and 34.9 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC). Similarly, between Sep 2003 and Sep 2006 the 10-city index gained 44.5 percent and the 20-city increased 40.7 percent. House prices have fallen 30.8 percent since 2006 for the 10-city composite and 31.0 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Sep 2011, house prices fell 3.3 percent in the 10-city composite and fell 3.6 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US. The final row in Table 1 shows that house prices increased 29.4 percent between Sep 2000 and Sep 2011 for the 10-city composite and increased 28.9 percent for the 20-city composite.

Table 47, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Sep 2000 to Sep 2003	40.5	33.8
∆% Sep 2000 to Sep 2005	95.5	80.5
∆% Sep 2003 to Sep 2005	39.2	34.9
∆% Sep 2000 to Sep 2006	102.9	88.2
∆% Sep 2003 to Sep 2006	44.5	40.7
∆% Sep 2000 to Sep 2011	40.4	29.8
∆% Sep 2005 to Sep 2011	-28.2	-28.1
∆% Sep 2006 to Sep 2011	-30.8	-31.0
∆% Sep 2009 to Sep 2011	-1.9	-3.2
∆% Sep 2010 to Sep 2011	-3.3	-3.6
∆% Sep 2000 to Sep 2011	40.4	29.8

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

With the exception of Apr, house prices have declined in every month for both the 10-city and 20-city Case-Shiller composites, as shown in Table 48. In Sep, house prices of the 10-city composite fell 0.4 percent and fell 0.6 percent for the 20-city composite. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table 48, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
Sep 2011	-0.4	-0.6
Aug	-0.2	-0.3
Jul	-0.2	-0.2
Jun	-0.1	-0.1
May	-0.04	-0.04
Apr	0.5	0.5
Mar	-0.6	-0.8
Feb	-0.4	-0.3
Jan	-0.3	-0.2
Dec 2010	-0.3	-0.3

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae- and Freddie Mac-acquired mortgages” (http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf). Table 49 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index. House prices catapulted from 2000 to 2003, 2005 and 2006. From IIIQ2000 to IIIQ2006, the index for the US as a whole rose 57.3 percent and by close or higher than 70 percent for New England, Middle Atlantic and South Atlantic but only by 32.5 percent for East South Central. Prices fell relative to 2011 from all years since 2005. From IIIQ2000 to IIIQ2011, prices rose for the US and the four regions in Table 49.

Table 49, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
3Q2000 to 3Q2003	23.5	40.5	35.3	25.0	10.8
3Q2000 to 3Q2005	49.7	69.7	68.6	60.2	22.3
3Q2000 to 3Q2006	57.3	68.6	75.9	71.5	32.5
3Q2005 t0 3Q2011	-14.0	-12.8	-3.9	-19.5	0.9
3Q2006 to 3Q2011	-18.1	-12.3	-7.9	-24.8	-5.8
3Q2007 to 3Q2011	-18.0	-10.8	-8.9	-24.7	-8.8
3Q2009 to 3Q2011	-6.4	-2.9	-3.1	-9.6	-4.8
3Q2010 to 3Q2011	-3.6	-2.3	-2.2	-4.1	-2.6
3Q2000 to 3Q2011	28.7	47.9	62.0	30.0	24.8

Source: http://www.fhfa.gov/webfiles/22802/3q2011HPI.pdf

Data of the FHFA HPI for the remaining US regions are provided in Table 50. Behavior is not very different than in Table 3 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2011, there was still appreciation relative to 2000.

Table 50, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
3Q2000 to 3Q2003	11.7	18.5	14.6	18.4	42.3
3Q2000 to 3Q2005	22.8	31.4	24.7	55.1	108.1
3Q2000 to 3Q2006	31.4	35.8	26.1	69.1	117.1
3Q2005 t0 3Q2011	9.8	-4.8	-14.9	-23.9	-35.8
3Q2006 to 3Q2011	2.6	-7.9	-15.9	-30.2	-38.4
3Q2007 to 3Q2011	-2.2	-8.8	-14.3	-31.2	-34.8
3Q2009 to 3Q2011	-1.4	-3.8	-5.8	-13.0	-9.2
3Q2010 to 3Q2011	-1.7	-2.3	-2.8	-6.8	-6.8
3Q2000 to  3Q2011	34.8	25.1	6.0	18.1	33.7

Source: http://www.fhfa.gov/webfiles/22802/3q2011HPI.pdf

Chart 45 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IIIQ1998 to IIIQ2011. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIIQ2008 but there was another decline after IIIQ2010. The rate of decline improved in IIIQ2011.

Chart 45, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change

Source: Federal Housing Finance Agency

http://www.fhfa.gov/Default.aspx?Page=14

Monthly and 12 months percentage changes of the FHFA House Price Index are provided in Table 51. In contrast with the Case-Shiller house price index, percentage monthly increases of the FHFA index were positive from Apr to Jul while 12 months percentage changes improved steadily from more than minus 6 percent in Mar to May to minus 4.5 percent in Jun. The FHFA house price index increased 0.9 percent in Sep and fell 2.1 percent in the 12 months ending in Sep.

Table 51, US, FHFA House Price Index Purchases Only SA. Month and NSA 12 Months ∆%

2011	Month ∆% SA	12 Month ∆% NSA
Sep	0.9	-2.1
Aug	-0.2	-4.2
Jul	0.1	-4.0
Jun	0.6	-4.5
May	0.3	-6.1
Apr	0.3	-6.2
Mar	-0.4	-6.1
Feb	-1.6	-5.6
Jan	-1.1	-4.8
Dec 2010		-3.8
Dec 2009		-1.8
Dec 2008		-9.4
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.9
Dec 2004		10.1
Dec 2003		7.9
Dec 2002		7.8
Dec 2001		6.8
Dec 2000		7.1

Source: http://www.fhfa.gov/Default.aspx?Page=87

The monthly archive of the NSA (not seasonally-adjusted) house price index of FHFA is used to construct Table 52. The fastest period of price appreciation was from Dec 2000 to Dec 2005 at the extremely high average yearly compound rate of 8.5 percent. Stimulus of housing had already begun in the second half of the 1990s with cumulative appreciation of 27.9 percent and average yearly rate of 5.1 percent. Between 2000 and 2011, the FHFA index increased 29.6 percent at the average yearly rate of 2.4 percent. Appreciation of house prices since 1991, when the FHFA index begins, to 2011, accumulated 84.1 percent for yearly average rate of 3.1 percent.

Table 52, US, FHFA House Price Index NSA ∆% and Average Yearly Growth Rate

	∆%	Yearly Average Growth Rate
Dec 1991 to Dec 2000	42.4	4.0
Dec 1991-Dec 1995	11.3	2.7
Dec 1995-Dec 2000	27.9	5.1
Dec 2000 to Dec 2005	50.3	8.5
Dec 2000 to Dec 2006	54.0	7.5
Sep 2000 to     Sep 2011	29.6	2.4
Sep 1991 to      Sep 2011	84.1	3.1

Source: http://www.fhfa.gov/Default.aspx?Page=87

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

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

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

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

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

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

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

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

W = Y/r (1)

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

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

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

VIB Japan. The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Japan Manufacturing PMI^TM registered 49.1 in Nov from 50.6 in Oct for the sharpest acceleration of decline of output since Apr after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Alex Hamilton, economist at Markit and author of the report, finds that weakening demand originated in the appreciated yen together with declining new orders from emerging Asia especially China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Sep ∆% -0.7 12 months ∆% 1.7 Blog 11/13/11
Consumer Price Index	Oct SA ∆% 0.1 Oct 12 months NSA ∆% -0.2 Blog 11/27/11
Real GDP Growth	IIIQ2011 ∆%: 1.5 on IIQ2011;  ∆% from quarter a year earlier: 0.0 % Blog 11/20/11
Employment Report	Oct Unemployed 2.88 million Change in unemployed since last year: minus 460 thousand Unemployment rate: 4.5% Blog 12/02/11
All Industry Index	Sep month SA ∆% -0.9 12 months NSA ∆% -0.8 Blog 11/27/11
Industrial Production	Oct SA month ∆%: 2.4 12 months NSA ∆% 0.4 Blog 12/02/11
Machine Orders	Total Sep ∆% -3.7 Private ∆%: 11.6 Aug ∆% Excluding Volatile Orders -8.2 Blog 11/13/2011
Tertiary Index	Sep month SA ∆% -0.7 Sep 12 months NSA ∆% -0.4 Blog 11/13/2011
Wholesale and Retail Sales	Oct 12 months: Total ∆%: 0.9 Wholesale ∆%: 0.5 Retail ∆%: 1.9 Blog 12/02/11
Family Income and Expenditure Survey	Oct 12 months ∆% total nominal consumption minus 0.6, real minus 0.4 Blog 12/02/11
Trade Balance	Exports Oct 12 months ∆%: -3.7 Imports Sep 12 months ∆% 17.9 Blog 11/27/11

Links to blog comments in Table JPY:

11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

The employment report for Japan in Oct is in Table 53. The rate of unemployment fell from 4.6 percent in Jul to 4.1 percent in Sep but increased to 4.5 percent in Oct. The number unemployed has declined by 460 thousand, or 13.8 percent, relative to a year earlier.

Table 53, Japan, Employment Report Oct 2011

Unemployed	2.88 million
Change since last year	-460 thousand; ∆% –13.8
Unemployment rate	4.5% SA -0.1 from 4.6% in Jun; 0.4 from earlier year; NSA 4.4%, –0.6% from earlier year
Population ≥ 15 years	110.4 million
Change since last year	–140,000 from earlier year ∆% –0.1
Labor Force	65.5 million
Change since last year	-690,000 ∆% –1.0
Employed	62.6 million
Change since last year	-220,000 ∆% –0.3
Labor force participation rate	59.4%
Change since last year	-0.5
Employment rate	56.7%
Change since last year	-0.2

Source: 

Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/roudou/154.htm

Chart 46 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2011. The sharp decline in Sep is the best reading in 2011 but the rate increased in Oct.

Chart 46, Japan, Unemployment Rate 2008-2011

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/roudou/154.htm

Japan’s industrial production rose 2.4 percent in Oct relative to Sep and 0.4 percent relative to a year earlier, as shown in Table 54. The decline of 4.0 percent in Sep was revised to 3.3 percent and in 12 months also from 4.0 percent to 3.3 percent. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep. Industrial production was higher in 12 months for the first month in Aug by 0.4 percent and again in Oct by 0.4 percent.

Table 54, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Oct 2011	2.4	0.4
Sep	-3.3	-3.3
Aug	0.6	0.4
Jul	0.4	-3.0
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2010		16.7
2009		-21.3
2008		-3.2

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a1010j.pdf

Japan is experiencing weak internal demand as in most advanced economies. Table 55 provides Japan’s retail and wholesale sales. Retail sales rose 1.9 percent in Oct after falling 1.1 percent in the 12 months ending in Sep and 2.6 percent in the 12 months ending in Aug. Retail sales have not recovered yet from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Wholesale sales had been driving total sales but grew only 0.5 percent in Oct such that total sales rose only 0.9 percent.

Table 55, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Oct 2011	0.9	0.5	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

Source: http://www.meti.go.jp/english/statistics/tyo/syoudou/index.html

The survey of household income and consumption of Japan in Table 56 is showing noticeable improvement in Sep relative to earlier months, which can be appreciated in the chart in the link in parentheses (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption fell 0.4 percent in real terms in Oct and 0.6 percent in nominal terms, which is significant improvement with decline of 1.9 percent in both real and nominal terms in Sep and fall of 3.9 percent in nominal terms and 4.1 percent in real terms in Aug. Some segments of consumption are increasing such as housing, furniture and household utensils in real terms, clothing and footwear, medical care and transport. Household income, disposable income and consumption expenditures all fell in nominal and real terms in Oct 2011 relative to a year earlier.

Table 56, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Oct 2011	Nominal	Real
Households of Two or More Persons
Total Consumption	-0.6	-0.4
Excluding Housing, Vehicles & Remittance		-1.7
Food	-0.6	-0.4
Housing	37.0	37.1
Fuel, Light & Water Charges	-1.8	-5.8
Furniture & Household Utensils	-3.6	2.3
Clothing & Footwear	2.6	2.3
Medical Care	6.2	7.5
Transport and Communications	1.7	0.3
Education	-7.4	-7.6
Culture & Recreation	-10.5	-7.5
Other Consumption Expenditures	-6.1	-5.9*
Workers’ Households
Income	-3.0	-2.8
Disposable Income	-4.0	-3.8
Consumption Expenditures	-2.0	-1.8

*Real: nominal deflated by CPI excluding imputed rent

Source: http://www.stat.go.jp/english/data/kakei/156.htm

VIC China. The HSBC China Manufacturing PMI^™ compiled by Markit fell from 51.0 in Oct to 47.7 in Nov, which is the lowest in 32 months, indicating sharp deterioration of manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8859). The good news in the index is the decline in average input costs for the first time in 16 months. The decline in new business was the prime reason for falling output but export business continued to increase. Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC finds that the combination of weakening production and subdued inflation can lead to easing policies that may still ensure growth of 8 percent for China in 2012. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

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

Links to blog comments in Table CNY: 11/27/11

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

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

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

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

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

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

VID Euro Area. The Markit Eurozone Manufacturing PMI^® that is highly associated with euro zone manufacturing fell from 47.1 in Oct to 46.4 in Nov, which is the lowest reading in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). Chris Williamson, Chief Economist at Markit, finds that production and new orders declined at the fastest rates since the first half of 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). All individual indexes of countries in the report fell for the first time since the middle of 2009.

Table EUR provides the regional country data table for the euro zone. The Nov index is consistent with a rate of contraction of manufacturing output at 2 percent in the final quarter of 2011. The debt crisis has introduced significant uncertainty in regional business. Table EUR provides the regional country data table for the euro zone.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 11/11/11
Unemployment	Oct 2011: 10.3% unemployment rate Oct 2011: 16.294 million unemployed Blog 12/02/11
HICP	Sep month ∆%: 0.8 12 months Sep ∆%: 3.0 Blog 10/16/11
Producer Prices	Euro Zone industrial producer prices Oct ∆%: 0.1 Oct 12 months ∆%: 5.5 Blog 12/02/11
Industrial Production	Sep month ∆%: -2.0 Sep 12 months ∆%: 2.2 Blog 11/11/11
Industrial New Orders	Sep month ∆%: minus 6.4 Sep 12 months ∆%: 1.6 Blog 12/02/11
Construction Output	Jul month ∆%: 1.4 Jul 12 months ∆%: 1.2 Blog 09/25/11
Retail Sales	Sep month ∆%: minus 0.7 Sep 12 months ∆%: minus 1.5 Blog 11/13/11
Confidence and Economic Sentiment Indicator	Sentiment 93.7 Nov 2011 down from 107 in Dec 2010 Confidence minus 20.4 Oct 2011 down from minus 11 in Dec 2010 Blog 12/02/11
Trade	Jan-Sep 2011/2010 Exports ∆%: 14.4 Imports ∆%: 14.9 Blog 11/11/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 12/02/11 9/04/11

Links to blog comments in Table EUR: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

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

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

There is significant volatility in industrial new orders and the euro zone is not an exception. Table 57 shows percentage changes of euro zone industrial new orders. Both monthly changes and 12 months changes are highly volatile. Industrial new orders fell 6.4 percent in Sep 2011 and were higher by 1.6 percent than in Sep 2010. Monthly changes were negative in Jul, Jun and Apr. The 12 months rates of change have declined from 21.2 percent in Feb to 1.6 percent in Sep. The data consist of values such that moderation of producer prices may influence rates of change

Table 57, Euro Zone, Industrial New Orders ∆%

	Month	12 Months
Sep 2011	-6.4	1.6
Aug	1.4	5.9
Jul	-1.9	8.8
Jun	-0.7	10.7
May	3.3	13.2
Apr	-0.3	11.1
Mar	0.5	14.5
Feb	1.5	21.0
Jan	1.9	21.2
Dec 2010	1.1	18.3

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-23112011-AP/EN/4-23112011-AP-EN.PDF

Table 58 provides the monthly rates of change of new orders by components. There is high volatility even when excluding heavy transport and equipment, falling 4.3 percent in Sep after growing 0.3 percent in Aug and 1.3 percent in Jul but falling 2.6 percent in Jun. Orders for capital goods have been somewhat stronger and nondurable goods more moderate. The month of Jun was particularly weak with all segments showing declines with the exception of capital goods.

Table 58, Euro Zone, Industrial New Orders Month ∆%

2011	Sep	Aug	Jul	Jun	May	Apr
Total	-6.4	1.4	-1.9	-0.7	3.3	-0.3
Interm.	-3.2	0.8	1.6	-4.1	2.2	-2.4
Capital Goods	-6.8	2.7	-8.2	5.9	3.2	1.4
Durable	-0.6	-1.0	3.2	-4.1	0.7	1.3
Non- durable	-2.0	0.9	0.3	-3.4	5.1	0.1
Total Ex Heavy T&E	-4.3	0.3	1.3	-2.6	2.7	-1.0

Note: Interm: Intermediate; T&E: Transport & Equipment

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-23112011-AP/EN/4-23112011-AP-EN.PDF

Eurostat reported an increase of the rate of unemployment in the euro area to 10.3 percent in Oct as shown in Table 59. The number of unemployed was 16.294 million in Oct, which is higher by 367,000 than in Oct 2010 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-30112011-BP/EN/3-30112011-BP-EN.PDF).

Table 59, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions

	Unemployment Rate %	Number Unemployed Millions
Oct 2011	10.3	16.294
Sep	10.2	16.198
Aug	10.1	15.739
Jul	10.1	15.777
Jun	10.0	15.696
May	10.0	15.672
Apr	9.9	15.608
Mar	10.0	15.653
Feb	10.0	15.665
Jan	10.0	15.704
Sep 2010	10.1	15.869

Source:  http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-30112011-BP/EN/3-30112011-BP-EN.PDF

Chart 47 provides Eurosat estimates of unemployment rates in the European Union. There is significant diversity in the rates of unemployment in members of the euro zone and the European Union.

Chart 47, Unemployment Rates, 2011 Green, 2010 Blue

Note: Green 2011, Blue 2010, X no data

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/tgm/graph.do;jsessionid=9ea7d07d30e58e3644b7841043e3896eccb54f3582ed.e34OaN8PchaTby0Lc3aNchuMbhmOe0?tab=graph&plugin=1&language=en&pcode=teilm020&toolbox=type

Table 60 provides the euro area harmonized index of consumer prices, rate of unemployment and GDP growth from 1999 to 2011. The gains in reducing the rate of unemployment to 7.6 percent by 2007 were eroded by the global recession with increase of the rate of unemployment to more than 10.0 percent. GDP growth is stalling at the margin with significant differences in the economies of member countries.

Table 60, Euro Area, HICP, Rate of Unemployment and GDP

	Harmonized Index of Consumer Prices ∆%	Rate of Unemployment %	GDP ∆%
2011	3.0	10.2	1.6*
2010	1.6	10.1	1.8
2009	0.3	9.6	-4.1
2008	3.3	7.6	0.4
2007	2.1	7.6	2.8
2006	2.2	8.5	3.1
2005	2.2	9.2	1.7
2004	2.2	9.0	2.2
2003	2.1	8.9	0.8
2002	2.3	8.5	0.9
2001	2.4	8.1	1.9
2000	2.2	8.5
1999	1.2	9.4

*EUROSTAT Forecast; HICP flash for Oct 2011

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31102011-AP/EN/2-31102011-AP-EN.PDF

The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table 61 with the index falling from 108.0 in Feb to 93.7 in Nov.

Table 61, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Historical Average	100.0	-6.5	11.4	-12.5	-8.9	-18.4
Nov 2011	93.7	-7.3	-1.7	-20.4	-11.0	-24.8
Oct	94.8	-6.5	0.1	-19.9	-9.7	-25.1
Sep	95.0	-5.9	0.0	-19.1	-9.8	-26.6
Aug	98.4	-2.7	3.7	-16.5	-8.7	-23.4
Jul	103.0	0.9	7.9	-11.2	-3.6	-24.3
Jun	105.4	3.5	10.1	-9.7	-2.6	-23.5
May	105.5	3.8	9.3	-9.9	-2.4	-24.7
Apr	106.1	5.6	10.3	-11.6	-1.8	-24.3
Mar	107.3	6.6	10.8	-10.6	-1.4	-25.4
Feb	108.0	6.7	11.2	-10.0	-0.2	-24.2
Jan	106.8	6.2	9.9	-11.2	-0.6	-26.0
Dec 2010	107.0	5.3	9.8	-11.0	4.3	-26.7

ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction

Source: European Commission Services 

http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm

VIE Germany. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®) fell from 49.1 in Oct to 47.9 in Nov for the seventh consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). The index registered the fastest deterioration of overall manufacturing since Jul 2009. While the declines in output and new orders were the fastest since Jun 2009, the rates of decline are much more benign than those experienced during the global recession of 2008 and 2009. Tim Moore, Senior Economist at Markit and author of the report, finds resilience in output of consumer goods that compensated for declines in manufacturing export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5 Blog 11/27/11
Consumer Price Index	Oct month SA ∆%: 0.0 Aug 12 months ∆%: 2.5 Blog 12/02/11
Producer Price Index	Oct month ∆%: 0.0 12 months NSA ∆%: 5.5 Blog 10/23/11
Industrial Production	Sep month SA ∆%: minus 2.7 12 months NSA: 6.5 Blog 11/13/11
Machine Orders	Sep month ∆%: -4.3 Sep 12 months ∆%: 2.4 Blog 11/04/11
Retail Sales	Oct Month ∆% 0.7 12 Months ∆% -0.4 Blog 12/02/11
Employment Report	Employment Accounts: Oct Employed 12 months NSA ∆%: 2.9 Labor Force Survey: Aug Unemployment Rate: 5.2% Blog 12/02/11
Trade Balance	Exports Sep 12 month NSA ∆%: 10.5 Imports Sep 12 months NSA ∆%: 11.6 Exports Sep month SA ∆%: 0.9 percent; Imports Sep month SA minus 0.8Blog 11/13/11

Links to blog comments in Table DE: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

Data from the labor force survey of Germany are in Table 62. The number unemployed fell 1.4 percent from 2.22 million in Sep 2011 to 2.19 million in Oct 2011, which is lower by 20.7 percent than 2.76 million unemployed in Oct 2010. The rate of unemployment fell from 5.9 percent in Aug 2011 to 5.2 percent in Sep, which is significantly lower than 6.6 percent in Sep 2010. The employment rate rose from 61.8 percent of the population in Sep 2010 to 64 percent in Sep 2011. Seasonally adjusted, the rate of unemployment fell from 5.9 percent in Aug 2011 to 5.8 percent in Sep 2011, much lower than 6.8 percent a year earlier in Sep 2010.

Table 62, Germany, Unemployment Labor Force Survey

	Oct 2011	Sep 2011	Oct 2010
NSA
Number Unemployed Millions	2.19 ∆% Sep 2011: –1.4 ∆% Oct 2010: –20.7	2.22	2.76
% Rate Unemployed	5.2	5.2	6.6
Persons in Employment	40.15 ∆% Sep 2011: –0.3 ∆% Oct 2010: 2.9	40.28	39.02
Employment Rate	63.8 ∆% Sep 2011 –0.3 ∆ Oct 2010 3.2	64.0	61.8
SA
Number Unemployed Millions	2.33 ∆% Sep 2011: –2.5 ∆% Oct 2010: –17.1	2.39	2.81
% Rate Unemployed	5.5	5.7	6.8
Persons in Employment	39.89 ∆% Sep 2011: 0.3 ∆% Oct 2010: 2.9	39.78	38.77

NSA: not seasonally adjusted; SA: seasonally adjusted

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/11/PE11__440__132,templateId=renderPrint.psml

The unemployment rate in Germany as percent of the labor force in Table 63 fell to 6.4 percent in Nov 2011. The rate is much lower than 11.1 percent in 2005 and 9.6 percent in 2006.

Table 63, Germany, Unemployment Rate in Percent of Labor Force

	Percent of Labor Force
Nov 2011	6.4
Oct	6.5
Sep	6.6
Aug	7.0
Jul	7.0
Jun	6.9
May	7.0
Apr	7.3
Mar	7.6
Feb	7.9
Jan	7.9
Dec 2010	7.1
Dec 2009	7.8
Dec 2008	7.4
Dec 2007	8.1
Dec 2006	9.6
Dec 2005	11.1

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/LabourMarket/Content75/arb210a,templateId=renderPrint.psml

Chart 48 shows the long-term decline of the rate of unemployment in Germany from more than 12 percent in early 2005 to 6.4 percent in Nov 2011.

Chart 48, Germany, Unemployment Rate, Original Value, Percent

Source: Statistisches Bundesamt Deutschland

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

Retail sales in Germany adjusted for inflation are provided in Table 64. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales increased 0.7 percent in Oct, decreasing 0.4 percent in 12 months.

Table 64, Retail Sales in Germany Adjusted for Inflation

	12 Months ∆% NSA	Month ∆% SA and Calendar Adjusted
Oct 2011	-0.4	0.7
Sep	0.6	0.3
Aug	3.3	-0.7
Jul	-2.0	0.3
Jun	-2.4	2.1
May	4.7	-1.2
Apr	5.0	0.4
Mar	-2.7	-1.2
Feb	2.4	-0.1
Jan	2.9	0.9
Dec 2010	0.5	0.5
Dec 2009	-2.2
Dec 2008	3.3
Dec 2007	-6.2
Dec 2006	1.3

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/RetailTrade/Content100/kums331x12,templateId=renderPrint.psml

Chart 49 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at constant prices from 2007 to 2011. There appear to be fluctuations without trend.

Chart 49, Germany, Turnover in Retail Trade at Constant Prices 2005=100

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/RetailTrade/Content100/kums331graf0.psml

Chart 50 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at corrent prices from 2007 to 2011. There are also sharp fluctuations but without trend.

Chart 50, Germany, Turnover in Retail Sales at Current Prices, Original Values, 2005=100

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

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

VIF France. The Markit France Manufacturing Purchasing Managers Index^® (PMI^®) fell to 47.3 in Nov from 48.5 in Oct, which is the lowest reading since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). The index has been in the contraction zone below 50 during four consecutive months. New orders fell at the sharpest rate since Apr 2009 and have fallen during five consecutive months. Jack Kennedy, Senior Economist at Markit, and author of the France Manufacturing PMI^® find increasing weakness in domestic and export demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). Table FR provides France’s country data table.

Table FR, France, Economic Indicators

CPI	Oct month ∆% 0.3 12 months ∆%: 2.4 11/13/11
PPI	Oct month ∆%: 0.5 Oct 12 months ∆%: 5.8 Blog 12/02/11
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.4 IIIQ2011/IIIQ2010 ∆%: 1.6 Blog 11/20/11
Industrial Production	Sep/Aug SA ∆%: Industrial Production minus 1.7; Manufacturing minus 1.6 Sep 12 months NSA ∆%: Industrial Production 3.4; Manufacturing 4.2 Blog 11/13/11
Industrial New Orders	Mfg Sep/Aug ∆% -3.1 YOY ∆% 7.9 Blog 11/20/11
Consumer Spending	Oct Manufactured Goods ∆%: 0.3 Oct 12 Months Manufactured Goods ∆%: minus 0.2 Blog 12/02/11
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/02/11
Trade Balance	Sep Exports ∆%: month minus 5.9, 12 months 7.5 Sep Imports ∆%: month minus 0.6, 12 months 10.3 Blog 11/13/11
Confidence Indicators	Historical averages 100 Oct: France 93 Mfg Business Climate 95 Retail Trade 93 Services 92 Building 99 Household 79 Blog 11/27/11

Links to blog comments in Table FR: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

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

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

The number of unemployed in France rose from 2.077 million in IV2007, for a rate of unemployment of 7.5 percent, to 2.631 million in IIIQ2011, for a rate of unemployment of 9.3 percent, as shown in Table 65. At the same time, the rate of employment fell from 64.4 percent in IV2007 to 63.8 percent in IIIQ2011. 

Table 65, France Unemployed and Unemployment Rate, Millions and %

	Unemployed Millions	Unemployed Percent	Employment Rate
IIIQ2011	2.631	9.3	63.8
IIQ2011	2.594	9.1	63.9
IQ2011	2.611	9.2	63.8
IVQ2010	2.619	9.2	63.8
IIIQ2010	2.658	9.4	63.9
IIQ2010	2.651	9.4	63.9
IQ2010	2.682	9.5	63.9
IVQ2009	2.692	9.5	63.7
IIIQ2009	2.603	9.2	63.9
IIQ2009	2.607	9.2	64.2
IQ2009	2.425	8.6	64.4
IVQ2008	2.168	7.7	64.8
IIIQ2008	2.073	7.4	64.8
IIQ2008	2.032	7.3	64.8
IQ2008	1.994	7.2	64.9
IV2007	2.077	7.5	64.6
IIIQ2007	2.227	8.0	64.4
IIQ2007	2.258	8.1	64.1
IQ2007	2.341	8.5	63.9
IVQ2006	2.307	8.4	63.9
IVQ2005	2.477	9.0	63.5
IVQ2004	2.419	8.9	63.7
IVQ2003	2.382	8.7	63.8
IVQ2002	2.148	8.0
IVQ2001	2.022	7.6
IVQ2000	2.133	8.1
IVQ1999	2.479	9.5
IVQ1995	2.583	10.1
IVQ1990	1,975	7.9
IVQ1985	2.263	9.2
IVQ1980	1.198	5.0
IVQ1975	0.841	3.7

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=14&date=20111201

Chart 51 of the Institut National de la Statistique et des Études Économiques provides an excellent view of the unemployment rate in France. The rate of unemployment rose from 2003 to 2006 and then fell sharply in 2007. The global recession caused sharp increase in the French rate of unemployment that has declined from the peak and stabilized at a high level.

Chart 51, France, Unemployment Rate International Labor Organization Criterion, Seasonally Adjusted Average over Quarter, Percent

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=14&date=20111201

The Oct monthly report of household expenditures in consumption goods for France is in Table 66. Total consumption was flat in Oct and consumption of manufactured products increased 0.3 percent. Total consumption fell 0.9 percent in Oct 2011 relative to Oct 2010 and consumption of manufactured goods fell 0.2 percent in Oct 2011 relative to Oct 2010. Internal demand is weak throughout most advanced economies.

Table 66, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading Days SA

	Total	Food	Eng. Goods	Energy	Mfg Goods
Oct 2011	0.0	-0.3	0.9	-2.0	0.3
Oct 2011/ Oct 2010	-0.9	-0.3	0.5	-5.9	-0.2
Sep	-0.2	0.6	0.4	-3.1	0.1
Aug	0.4	0.2	-0.3	2.6	0.0
Jul	-0.6	-0.5	-1.0	0.4	0.3
Jun	0.8	-0.4	1.6	1.2	0.9
May	-0.1	-1.4	-1.0	5.4	-0.8
Apr	-1.8	1.5	-2.8	-5.9	-1.2
Mar	-0.9	-0.8	-1.0	-0.6	-0.9
Feb	0.4	0.5	0.6	-0.3	0.6
Jan	-0.5	0.1	-0.2	-2.1	-0.1
Dec 2010	0.3	0.3	0.4	-0.3	0.1

Eng. Goods: Engineered Goods

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20111130

Chart 53 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth.

Chart 53, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20111130

VIG Italy. The Markit/ADACI Italy Purchasing Managers’ Index^® (PMI^®) rose slightly from the 28-month low of 43.3 in Oct to 44.0 in Nov in the fourth month of deterioration of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8842). The pace of decline of new business for Italy’s manufacturing continued at the two-and-a half year low registered in Oct and export business declined at the fastest rhythm since Aug 2009. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Nov month ∆%: -0.1 Nov 12 months ∆%: 3.3 Blog 12/02/11
Producer Price Index	Oct month ∆%: -0.2 Oct 12 months ∆%: 4.7 Blog 12/02/11
GDP Growth	IIQ2011/IIQ2010 SA ∆%: 0.8 IIQ2011/IQ2011 NSA ∆%: 0.3 Blog 09/11/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Sep month ∆%: minus 4.8 12 months ∆%: minus 2,7 Blog 11/13/11
Retail Sales	Sep month ∆%: -0.4 Sep 12 months ∆%: minus 1.6 Blog 11/27/11
Business Confidence	Mfg Nov 94.4, Jun 100.2 Construction Oct 80.1, Jun 74.5 Blog 12/02/11
Consumer Confidence	Consumer Confidence Nov 96.5, Oct 93.3 Economy Nov 83.4, Oct 76.0 Blog 11/27/11
Trade Balance	Balance Sep SA -€ 1350 million versus Aug -€ 2405 Exports Sep month SA ∆%: 0.2; Imports Sep month SA ∆%: -1.3 Exports 12 months NSA ∆%: 10.3 Imports 12 months NSA ∆%: 3.6 Blog 11/20/11

Links to blog comments in Table IT: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/21/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

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

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

Italy’s index of business confidence in manufacturing and construction is provided in Table 67. There has been deterioration below the historical average of 100 since Jun with reading of 94.4 in Nov. Order books have fallen from minus 21 in Jun to minus 31 in Nov. There is mild improvement in construction with an increase of the index from 74.5 in Jun to 80.1 in Oct.

Table 67, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Nov	Oct	Sep	Aug	Jul	Jun
Mfg Confidence	94.4	94.2	94.6	98.7	98.0	100.2
Order Books	-31	-29	-28	-22	-25	-21
Stocks Finished Products	1	1	1	1	1	1
Production Expectation	2	0	0	6	7	-1
Construction Confidence		80.1	78.6	77.0	75.9	74.5
Order Books		-46	-50	-54	-54	-54
Employment		-20	-18	-17	-19	-22

Mfg: manufacturing

Source: http://www.istat.it/it/archivio/46644

VIH United Kingdom. The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) declined to 47.6 in Nov from the upwardly revised 47.8 in Oct for the lowest level since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8853). There have been three consecutive monthly declines of manufacturing output in the UK and the rate of decline in Nov was the fastest in more than two-and-a-half year. Declining new orders determined the decline in output as a result of weak domestic and international markets. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators

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

Links to blog comments in Table UK: 11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

11/20/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

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

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

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

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

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

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

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

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

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

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

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

Table 68 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy encouraging carry trade from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table 68 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 13.4 percent by Fri Nov 18, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table 68 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table 68, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	12/02  /2011
Rate	1.1423	1.5914	1.192	1.339
CNY/USD	01/03 2000	07/21 2005	7/15 2008	12/02 2011
Rate	8.2798	8.2765	6.8211	6.3603
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

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

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

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

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

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

Table 68 extracts four rows of Table 68 with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 71 below, the dollar has devalued again to USD 1.339/EUR or by 12.3 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3603/USD on Fri Dec 2, 2011, or by an additional 6.8 percent, for cumulative revaluation of 23.2 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table 69 now includes three last rows with the CNY/USD weekly rate. The final row of Table 69 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with 0.3 percent. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table 69, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	6/26/03	7/14/08	6/07/10	12/02 /2011
Rate	1.1423	1.5914	1.192	1.339
CNY/USD	01/03 2000	07/21 2005	7/15 2008	12/02 2011
Rate	8.2798	8.2765	6.8211	6.3603
Weekly Rates	11/11/ 2011	11/18/ 2011	11/25/ 2011	12/02/ 2011
CNY/USD	6.342	6.3568	6.3816	6.3603
∆% from Earlier Week*	0.0	-0.2	-0.4	0.3

*Negative sign is depreciation, positive sign is appreciation

Source: Table 68 and same table in earlier blog posts.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table 70. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table 70, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

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

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

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

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

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 68 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill recession. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table 71, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 12/02/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. After the surge of markets in the week of Dec 2 there are now only three assets with negative change in valuation in column “∆% Trough to 12/02/11:” NYSE Financial minus 4.7 percent, Japan’s Nikkei Average minus 2.0 percent and Shanghai Composite minus 0.9 percent. The highest valuations are by US equities indexes: DJIA 24.1 percent and S&P 500 21.7 percent. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 24.1 percent from the trough and of the S&P 500 by 21.7 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 12/02/11” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations show increases of less than 10 percent: European stocks index STOXX 50 is now 0.6 percent above the trough on Jul 2, 2010; Dow Global is 7.9 percent above the trough; Dow Asia Pacific is now higher by 4.9 percent; and Dax is 7.2 percent above the trough on May 25, 2010. Japan’s Nikkei Average is 2.0 percent below the trough on Aug 31, 2010 and 24.1 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8643.75 on Fri Dec 2, which is 15.7 percent below 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 12.3 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 12/02/2011” in Table 71 shows sharp losses for all risk financial assets in the week of Dec 2. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table 71 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 12/02/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Dec 2, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 12/02/11” but also relative to the peak in column “∆% Peak to 12/02/11.” There are now only three indexes above the peak: DJIA 7.3 percent, S&P 500 2.2 percent and DJ UBS Commodities 0.9 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 24.1 percent, Nikkei Average by 24.1 percent, Shanghai Composite by 25.4 percent, STOXX 50 by 14.8 percent, Dow Global by 11.9 percent and Dow Asia Pacific by 8.2 percent. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. The situation of risk financial assets has worsened.

Table 71, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 12/02 /11	∆% Week 12/02/ 11	∆% Trough to 12/02 11
DJIA	4/26/ 10	7/2/10	-13.6	7.3	7.0	24.1
S&P 500	4/23/ 10	7/20/ 10	-16.0	2.2	7.4	21.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	-24.1	9.9	-4.7
Dow Global	4/15/ 10	7/2/10	-18.4	-11.9	8.8	7.9
Asia Pacific	4/15/ 10	7/2/10	-12.5	-8.2	7.4	4.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-24.1	5.9	-2.0
China Shang.	4/15/ 10	7/02 /10	-24.7	-25.4	-0.8	-0.9
STOXX 50	4/15/10	7/2/10	-15.3	-14.8	8.3	0.6
DAX	4/26/ 10	5/25/ 10	-10.5	-3.9	10.7	7.2
Dollar Euro	11/25 2009	6/7 2010	21.2	11.5	-1.1	-12.3
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	0.9	3.2	17.9
10-Year T Note	4/5/ 10	4/6/10	3.986	2.042

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

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

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 72 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table 72 for Dec 2 shows that the S&P 500 is now 2.7 percent above the Apr 26, 2010 level and the DJIA is 7.3 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 72, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from  prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7

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

Table 73, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table 73 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 11.2 percent to ZAR 8.046/USD on Dec 2, which is still 30.5 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 4.7 percent stronger at SGD 1.285/USD on Dec 2 relative to the trough of depreciation but still stronger by 17.3 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 3.1 percent relative to the trough to BRL 1.791/USD on Dec 2 but still stronger by 26.3 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Copom reduces the Selic rate to 11.00 percent

30/11/2011 7:47:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.

The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table 73 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table 73, Exchange Rates

	Peak	Trough	∆% P/T	Dec 2, 2011	∆T Dec 02  2011	∆P Dec 02 2011
EUR USD	7/15 2008	6/7 2010		12/2 2011
Rate	1.59	1.192		1.339
∆%			-33.4		10.9	-18.7
JPY USD	8/18 2008	9/15 2010		12/02 2011
Rate	110.19	83.07		77.96
∆%			24.6		6.2	29.2
CHF USD	11/21 2008	12/8 2009		12/02 2011
Rate	1.225	1.025		0.919
∆%			16.3		10.3	24.9
USD GBP	7/15 2008	1/2/ 2009		12/02 2011
Rate	2.006	1.388		1.559
∆%			-44.5		10.9	-28.7
USD AUD	7/15 2008	10/27 2008		12/02 2011
Rate	1.0215	1.6639		1.021
∆%			-62.9		41.1	4.1
ZAR USD	10/22 2008	8/15 2010		12/02 2011
Rate	11.578	7.238		8.046
∆%			37.5		-11.2	30.5
SGD USD	3/3 2009	8/9 2010		12/02 2011
Rate	1.553	1.348		1.285
∆%			13.2		4.7	17.3
HKD USD	8/15 2008	12/14 2009		12/02 2011
Rate	7.813	7.752		7.767
∆%			0.8		-0.2	0.6
BRL USD	12/5 2008	4/30 2010		12/02 2011
Rate	2.43	1.737		1.791
∆%			28.5		-3.1	26.3
CZK USD	2/13 2009	8/6 2010		12/02 2011
Rate	22.19	18.693		18.781
∆%			15.7		-0.5	15.4
SEK USD	3/4 2009	8/9 2010		12/02 2011
Rate	9.313	7.108		6.752
∆%			23.7		5.0	27.5
CNY USD	7/20 2005	7/15 2008		12/02 2011
Rate	8.2765	6.8211		6.3603
∆%			17.6		6.8	23.2

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

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

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

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

Table 74, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table 74. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.042 percent at the close of market on Fri Dec 2 would be equivalent to price of 105.2492 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 3.9 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table 74. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table 74 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Nov 30, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2797 billion, or $2.8 trillion, with portfolio of long-term securities of $2576 billion, or $2.6 trillion, consisting of $1575 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $106 billion Federal agency debt securities and $827 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1485 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table 74, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9

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

Source:

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

VIII Economic Indicators. Crude oil input in refineries fell 0.2 percent to 14,594 thousand barrels per day on average in the four weeks ending on Nov 25 from 14,626 thousand barrels per day in the four weeks ending on Nov 11, as shown in Table 75. The rate of capacity utilization in refineries continues at a relatively high level of 84.4 percent on Nov 25, 2011, which is slightly higher than on Nov 26, 2010 at 83.6 percent and about the same as 84.5 on Nov 18, 2011. Imports of crude oil increased 0.3 percent from 8,578 thousand barrels per day on average in the week of Nov 18 to 8,605 thousand barrels per day in the week of Nov 25. Decreasing utilization in refineries with increasing imports resulted in increase of commercial crude oil stocks by 3.9 million barrels from 330.8 million barrels on Nov 18 to 334.7 million barrels on Nov 25. Motor gasoline production increased 0.3 percent from 9,125 thousand barrels per day in the week of Nov 18 to 9,152 thousand barrels per day on average in the week of Nov 25. Gasoline stocks increased 0.2 million barrels and stocks of fuel oil increased 5.5 million barrels. Supply of gasoline fell from 8,926 thousand barrels per day on Nov 26, 2010, to 8,664 thousand barrels per day on Nov 25, 2011, or by 2.9 percent, while fuel oil supply rose 1.3 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 75 also shows increase in the WTI price of crude oil by 14.7 percent from Nov 26, 2010 to Nov 25, 2011. Gasoline prices rose 15.8 percent from Nov 29, 2010 to Nov 28, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

Table 75, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	11/25/11	11/18/11	11/26/10
Crude Oil Refineries Input	14,594 Week ∆%: -0.2	14,626	14,183
Refinery Capacity Utilization %	84.4	84.5	83.6
Motor Gasoline Production	9,152 Week ∆%: 0.3	9,125	8,920
Distillate Fuel Oil Production	4,665 Week ∆%: 0.9	4,622	4,308
Crude Oil Imports	8,605 Week ∆%: 0.3	8,578	8,322
Motor Gasoline Supplied	8,664 ∆% 2011/2010= -2.9%	8,602	8,926
Distillate Fuel Oil Supplied	3,965 ∆% 2011/2010 = 1.3%	4,249	3,912
	11/25/11	11/18/11	11/26/10
Crude Oil Stocks Million B	334.7 ∆= 3.9 MB	330.8	359.7
Motor Gasoline Million B	209.8     ∆= 0.2 MB	209.6	210.2
Distillate Fuel Oil Million B	138.5 ∆= 5.5 MB	133.0	158.1
WTI Crude Oil Price $/B	96.16 ∆% 2011/2010 14.7	97.67	83.87
	11/28/11	11/21/11	11/29/10
Regular Motor Gasoline $/G	3.307 ∆% 2011/2010 15.8	3.368	2.856

B: barrels; G: gallon

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

Chart 54 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks.

Chart 54, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

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

Chart 55 of the US Energy Information Administration provides closer view of US crude oil stocks since Dec 2009. Crude oil stocks rose in a clear trend throughout 2010 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower. The final part of the chart shows the increase in oil stocks in the week of Nov 25.

Chart 55, US, Crude Oil Stocks

Source: US Energy Information Administration

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

Chart 56 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 56 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart 56, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table 76. Seasonally adjusted claims increased 6,000 from 396,000 on Nov 19 to 402,000 on Nov 26. Claims not adjusted for seasonality decreased 69,665, from 440,281 on Nov 19 to 370,616 on Nov 26.

Table 76, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Nov 26	402,000	370,616	395,750
Nov 19	396,000	440,281	395,250
Change	+6,000	-69,665	+500
Nov 12	392,000	363,016	397,750
Prior Year	439,000	412,922	433,000

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

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

Table 77 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 573,230 on Nov 29, 2008 to 370,616 on Nov 26, 2011 and are lower than 412,922 on Nov 27, 2010, but are much higher than 324,047 on Nov 24, 2007.

Table 77, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Nov 25, 2000	321,859	356,000
Nov 24, 2001	438,893	491,000
Nov 23, 2002	436,549	390,000
Nov 22, 2003	357,811	357,000
Nov 27, 2004	320,690	335,000
Nov 26, 2005	290,730	311,000
Nov 25, 2006	323,509	349,000
Nov 24, 2007	324,047	353,000
Nov 29, 2008	573,230	532,000
Nov 28, 2009	462,090	477,000
Nov 27, 2010	412,922	439,000
Nov 26, 2011	370,616	402,000

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

IX Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 78 provides inflation of the CPI. In Jul-Oct 2011, CPI inflation for all items seasonally adjusted was 3.3 percent in annual equivalent, that is, compounding inflation in Jul-Oct and assuming it would be repeated for a full year. In the 12 months ending in Oct, CPI inflation of all items not seasonally adjusted was 3.5 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.1 percent in 12 months and 1.8 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is minus 0.01 percent for three months, 0.04 percent for six months, 0.10 percent for 12 months, 0.25 percent for two years, 0.38 percent for three years, 0.91 percent for five years, 1.48 percent for seven years, 2.03 percent for ten years and 3.02 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table 78. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

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

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

Table 78, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

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

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

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

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

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

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

Cole, Harold L. and Lee E. Ohanian. 1999. The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review 23 (1, Winter): 2-24.

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

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

Darby, Michael R. Darby. 1974. The permanent income theory of consumption—a restatement. Quarterly Journal of Economics (88, 2): 228-50.

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

Draghi, Mario. 2011Dec1. Introductory statement by Mario Draghi, President of the ECB. Brussels, Hearing before the Plenary of the European Parliament, Dec 1 http://www.ecb.int/press/key/date/2011/html/sp111201.en.html

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Gorton, Gary. 2009EFM. The subprime panic. European Financial Management 15 (1): 10-46.

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

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

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© Carlos M. Pelaez, 2010, 2011

Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Carlos M. Pelaez, 2010, 2011