Mediocre Economic Growth, Financial Repression, IMF Forecast, World Financial Turbulence and World Economic Slowdown: Part II

 

Mediocre Economic Growth, Financial Repression, IMF Forecast, World Financial Turbulence and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Mediocre Economic Growth

II Financial Repression

IIA Views of the Economy and Interest Rates

IIB Financial Repression

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV IMF Forecast

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

VI World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI^™, produced by JP Morgan and Markit in association with ISM and IPFSM, rose to 53.0 in Dec from 52.0 in Nov, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9032). This index is highly correlated with global GDP, indicating continued growth of the global economy for nearly two years and a half. The US economy drove growth in the global economy in Dec. The HSBC Brazil Services Business Activity Index of the HSBC Brazil Services PMI^™, compiled by Markit, rose from 52.6 in Nov to 54.8 in Dec while the HSBC Brazil Composite Output Index rose to 53.2 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8999

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9007). The table “World-Wide Factory Activity, by Country,” of Real Time Economics produced by WSJ Research and published in the Wall Street Journal on Jan 3 (http://blogs.wsj.com/economics/2012/01/03/world-wide-factory-activity-by-country-21/tab/interactive/) shows only nine countries with manufacturing indexes above 50 in Dec: Australia (50.2), Canada (54.0), India (54.2), Japan (50.2), Russia (51.6), Saudi Arabia (57.7), Switzerland (50.7), Turkey (52.9) and the US (53.9). Andre Loes, Chief Economist, Brazil, at HSBC, finds strength in private-sector services at 53.7 in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8999

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9007). The HSBC Brazil Manufacturing PMI^™, compiled by Markit, improved slightly from 48.7 in Nov to 49.1 in Dec, indicating the weakest deterioration in seven months of decline of manufacturing business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8982

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8979). The rate of declining of new manufacturing orders was the weakest in seven months. Both internal demand and foreign orders fell in Dec. Andre Loes, Chief Economist, Brazil at HSBC, finds improvement at the margin because of three consecutive months of increases in the PMI, suggesting that the worst conditions have already occurred (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8982

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8979).

VIA United States. The Manufacturing ISM Report on Business^® purchasing managers’ index jumped 1.2 percentage points from 53.9 in Nov to 52.7 in Dec, indicating continuing growth for 29 consecutive months at a faster rate of change (http://www.ism.ws/ISMReport/MfgROB.cfm). New orders, which are an indicator of future business, rose 0.9 percentage points, from 56.7 in Nov to 57.6 in Dec, indicating growth at a faster rate. The employment index gained 3.3 percentage points from 51.8 in Nov to 55.1 in Dec, indicating growth at a faster rate of change. Prices paid or costs of inputs rose 2.5 percentage points from 45.0 in Nov to 47.5 in Dec, which is the third reading below 50 since May, indicating decline at a slower rate. The Nonmanufacturing Purchasing Managers’ Index of the Institute for Supply Management increased 0.6 percentage points from 52.0 in Nov to 52.6 in Dec, indicating growth at a faster rate (http://www.ism.ws/ISMReport/NonMfgROB.cfm). The Business Activity/Production Index/ was 56.2 in Dec, unchanged from 56.2 in Nov, indicating growth at the same rate. Nonmanufacturing activity has been growing in the US during 29 consecutive months. The index of new orders increased 0.2 percentage points from 53.0 in Nov to 53.2 in Dec, signaling growth at a faster rate. The employment index rose 0.5 percentage points from 48.9 in Nov to 49.4 in Dec, indicating contraction at a slower rate. The prices paid index fell 1.3 percentage points from 62.5 in Nov to 61.2 in Dec, indicating growth at a slower rate. New export orders fell 4.5 percentage points from 55.5 in Nov to 51.0 in Dec while imports increased 5.5 percentage points from 48.5 in Nov to 54.0 in Dec.

Table USA, US Economic Indicators

Consumer Price Index	Dec 12 months NSA ∆%: 3.0; ex food and energy ∆%: 2.2 Nov month ∆%: 0.0; ex food and energy ∆%: 0.1 Blog 01/22/12
Producer Price Index	Dec 12 months NSA ∆%: 4.8; ex food and energy ∆% 3.0 Dec month SA ∆% = -0.1; ex food and energy ∆%: 0.3 Blog 01/22/12
PCE Inflation	Nov 12 months NSA ∆%: headline 2.5; ex food and energy ∆% 1.7 Blog 12/27/11
Employment Situation	Household Survey: Nov Unemployment Rate SA 8.6% Blog calculation People in Job Stress Nov: 28.9 million NSA Establishment Survey: Nov Nonfarm Jobs 100,000; Private +120,000 jobs created  Oct 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.6% Blog 12/04/11
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 Nov 2011 3.500 million lower by 1.145 million than 4.645 million in Nov 2006 Blog 01/15/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 2.8 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 01/29/12
Personal Income and Consumption	Nov month ∆% SA Real Disposable Personal Income (RDPI) 0.0 Nov month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.2 12 months NSA ∆%: RDPI: -0.1; RPCE ∆%: 1.3 Blog 12/27/11
Quarterly Services Report	IIIQ11/IIQII SA ∆%: Information 0.6 Professional 0.8 Administrative 1.7 Hospitals -0.9 Blog 12/11/11
Employment Cost Index	IIIQ2011 SA ∆%: 0.3 Sep 12 months ∆%: 2.0 Blog 10/30/11
Industrial Production	Dec month SA ∆%: 0.4 Dec 12 months SA ∆%: 3.7 Capacity Utilization: 78.1 Blog 01/22/12
Productivity and Costs	Nonfarm Business Productivity IIIQ2011∆% SAAE 2.1; IIIQ2011/IIIQ2010 ∆% 0.9; Unit Labor Costs IIIQ2011 ∆% -2.5; IIIQ2011/IIIQ2010 ∆%: 0.4 Blog 12/04/11
New York Fed Manufacturing Index	General Business Conditions From 8.19 Dec to Jan 13.48 New Orders: From 5.99 Dec to 13.70 Jan Blog 01/22/12
Philadelphia Fed Business Outlook Index	General Index from 6.8 Dec to 8.2 Jan New Orders from 10.7 Dec to 6.5 Jan Blog 1/22/12
Manufacturing Shipments and Orders	Nov New Orders SA ∆%: minus 1.8; ex transport ∆%: 0.3 12 months Jan-Nov NSA ∆%: 12.3; ex transport ∆% 12.5 Blog 01/08/12
Durable Goods	Dec New Orders SA ∆%: 3.0; ex transport ∆%: 2.1 Jan-Dec months NSA New Orders ∆%: 10.0; ex transport ∆% : 8.7 Blog 01/29/12
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 12/04/11
Sales of Merchant Wholesalers	Jan-Nov 2011/2010 ∆%: Total 14.4; Durable Goods: 12.3; Nondurable Goods 16.2 Blog 01/15/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Oct 11/Oct 10 NSA ∆%: Sales Total Business 9.3; Manufacturers 9.7 Retailers 7.0; Merchant Wholesalers 11.0 Blog 01/15/12
Sales for Retail and Food Services	Jan-Dec 2011/Jan-Dec 2010 ∆%: Retail and Food Services: 7.7; Retail ∆% 7.9 Blog 01/15/12
Value of Construction Put in Place	Nov SAAR month SA ∆%: 1.2 Oct 12 months NSA: 0.5 Blog 01/08/12
Case-Shiller Home Prices	Oct 2011/Oct 2010 ∆% NSA: 10 Cities minus 3.0; 20 Cities: minus 3.4 ∆% Oct SA: 10 Cities minus 0.5 ; 20 Cities: minus 0.6 Blog 01/01/12
FHFA House Price Index Purchases Only	Nov SA ∆% 1.0; 12 month ∆%: minus 1.8 Blog 01/29/12
New House Sales	Dec month SAAR ∆%: minus 2.2 Jan-Dec 2011/Jan-Dec 2010 NSA ∆%: minus 6.2 Blog 01/29/12
Housing Starts and Permits	Dec Starts month SA ∆%: -4.1; Permits ∆%: -0.1 Jan-Dec 2011/2010 NSA ∆% Starts 3.4; Permits  ∆% 1.2 Blog 1/22/12
Trade Balance	Balance Nov SA -$47,752 million versus Oct -$43,271 million Exports Nov SA ∆%: -0.9 Imports Nov SA ∆%: 1.3 Goods Exports Jan-Nov 2011/2010 NSA ∆%: 17.0 Good Imports Jan-Nov 2011/2010 NSA ∆%: 16.1 Blog 01/15/12
Export and Import Prices	Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6 Blog 01/15/12
Consumer Credit	Nov ∆% annual rate: 9.9 Blog 01/15/12
Net Foreign Purchases of Long-term Treasury Securities	Nov Net Foreign Purchases of Long-term Treasury Securities: $59.8 billion Nov versus Oct -$41.0 billion Major Holders of Treasury Securities: China $1133 billion; Japan $1039 billion  Blog 01/22/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 4.4; Outlays -2.6; Individual Income Taxes 5.6 Deficit Fiscal Year 2011 $1,296,80 million Deficit Fiscal Year 2012 Oct-Dec $321,735 million Blog 01/15/12
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	IIIQ2011 -131B %GDP 2.9 Blog 12/18/11

Links to blog comments in Table USA:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

1/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or_08.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/2011 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/2011 II http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/4/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

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

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

New Orders of durable goods have been quite strong in the quarter Oct-Dec. New orders of durable goods seasonally-adjusted increased 3.0 percent in Dec relative to Nov and shipments increased 2.1 percent, as shown in Table VIA-1. The data are not adjusted for price changes and include large-value items that cause fluctuations in monthly data. New orders excluding transportation increased 2.1 percent in Dec while shipments increased 2.4 percent. Excluding defense orders increased 3.5 percent in Dec and shipments increased 1.9 percent. New orders of computers and related products fell 2.6 percent in Dec after falling 7.4 percent in Nov but after increasing 4.1 percent in Oct and increasing 6.4 percent in Sep. New orders of motor vehicles increased 0.6 percent in Dec and were flat in Nov after increasing 5.9 percent in Oct. Financial markets focus on capital goods on the argument that it would suggest investment. New orders of capital goods rose 4.5 percent in Dec after increasing 8.3 percent in Nov, following a drop of 5.4 percent in Oct. Nondefense new orders of capital goods increased 5.8 percent in Dec after increasing 9.6 percent in Nov but dropping 3.5 percent in Oct. Nondefense capital goods orders excluding aircraft increased 2.9 percent in Dec after dropping 1.2 percent in Nov and 0.9 percent in Oct. The volatility of durable goods data is found in nondefense aircraft new orders increasing 18.9 percent in Dec and upwardly revised 88.1 percent in Nov but after falling 13.9 percent in Oct and creasing 26.7 percent in Sep but after increasing 26.2 percent in Aug.

Table VIA-1, Durable Goods Manufacturers’ Shipments and New Orders, SA, ∆%

2011	Dec ∆%	Nov ∆%	Oct ∆%
Total
S	2.1	-0.3	1.5
NO	3.0	4.3	0.1
Excluding Transport
S	2.4	0.4	0.3
NO	2.1	0.5	1.6
Excluding Defense
S	1.9	-0.5	1.9
NO	3.5	4.6	1.1
Computers & Electronic Products
S	-1.0	-3.1	1.1
NO	1.2	5.6	1.3
Computers & Related Products
S	1.9	-9.8	6.8
NO	-2.6	-7.4	4.3
Transport Equipment
S	1.0	-2.5	5.2
NO	5.5	16.6	-4.5
Motor Vehicles & Parts
S	0.9	-1.0	6.6
NO	0.6	0.0	5.9
Nondefense Aircraft
S	1.2	-11.6	8.3
NO	18.9	88.1	-13.9
Capital Goods
S	3.2	-2.1	-0.5
NO	4.5	8.3	-5.4
Nondefense Capital Goods
S	2.6	-2.3	0.3
NO	5.8	9.6	-3.5
Nondefense Capital Goods Excluding Aircraft
S	2.9	-1.0	-0.9
NO	2.9	-1.2	-0.9

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

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

Chart VIA-1 of the US Bureau of the Census shows new orders for durable goods from Dec 2010 to Nov 2011. There is significant volatility in these data that clouds analysis of the trend of growth of output. There are six relatively larger increases in durable goods new orders in Chart VIA-1 but less sharp drops in four months and flat performance in two months.

Chart VIA-1, US, Durable Goods New Orders 2010-2010, SA, Monthly Percentage Changes

Source: US Census Bureau

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

Table VIA-2 shows growth of new orders and shipments of durable goods in Jan-Dec 2011 relative to the same period in 2010. Data are not adjusted for seasonality or price changes. The cumulative values for Jan-Dec 2011 in billions of dollars and percent of total are also included to provide relative value contribution. There are many general categories other than those in Table VIA-2 and some sub-segments are part of general categories such that percentages do not add. Total new orders rose 10.0 percent in Jan-Dec 2011 relative to the same period a year earlier, 8.7 percent excluding transportation equipment and 11.6 percent excluding defense. The value of shipments and new orders of durable goods is about $2.4 trillion. The monthly and 12 months rate of growth are consistent with continuing expansion of manufacturing and the US economy. While new orders of the more aggregate component of computers and electronic products fell 1.8 percent relative to a year earlier, the sub-segment of new orders of computers and related products grew 9.1 percent. Transportation equipment new orders, accounting for 25.5 percent of the total, rose 13.7 percent and motor vehicles, accounting for 14.8 percent of total orders, rose 9.8 percent. Nondefense aircraft new orders rose 53.4 percent but account for only 5.6 percent of the total. New orders of total capital goods, accounting for 41.2 percent of the total, rose 10.9 percent and nondefense capital goods excluding aircraft rose 10.0 percent.

Table VIA-2, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %

	Billions of Dollars         Dec 2011	% Total	Jan-Dec 2011/Jan-Dec 2010  ∆%
Total
S	2,379.1	100.0	7.8
NO	2,381.4	100.0	10.0
Excluding Transport
S	1,817.1	76.4	8.9
NO	1,774.6	74.5	8.7
Excluding Defense
S	2,260.1	95.0	9.5
NO	2,258.7	94.8	11.6
Computers & Electronic Products
S	368.3	15.5	1.1
NO	290.4	12.2	-1.8
Computers & Related Products
S	69.8	2.9	9.8
NO	69.6	2.9	9.1
Transport Equipment
S	562.0	23.6	4.4
NO	606.8	25.5	13.7
Motor Vehicles
S	352.1	14.8	9.6
NO	352.6	14.8	9.8
Nondefense Aircraft
S	88.9	3.7	11.0
NO	132.9	5.6	53.4
Capital Goods
S	914.2	38.4	5.4
NO	982.1	41.2	10.9
Nondefense Capital Goods
S	822.0	34.6	9.1
NO	888.7	37.3	14.5
Nondefense Capital Goods Excluding Aircraft
S	769.8	32.4	9.1
NO	794.5	33.4	10.0

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

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

New orders and shipments of durable goods are highly cyclical, as shown in Table VIA-3. New orders and shipments fell sharply during the contraction in 2008 and 2009 and were weak in 2003 in the tail of the contraction of 2001.

Table VIA-3, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders

Jan/Dec Relative to Earlier Year	Shipments ∆%	New Orders ∆%
2011	7.8	10.0
2010	7.3	13.6
2009	-15.9	-20.2
2008	-2.7	-5.7
2007	0.4	1.0
2006	5.6	7.0
2005	6.2	8.2
2004	10.3	10.9
2003	0.8	2.8

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

Data and other information continue to provide depressed conditions in the US housing market. Table VIA-4 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). House prices fell in seven of twelve months in 2011. The quarter Sep-Nov was quite strong with three consecutive increases in sales accumulating to 8.3 percent, which is equivalent to 37.6 percent in a year. Prices then fell 2.2 percent in Dec.

Table VIA-4, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Dec	307	-2.2
Nov	314	2.3
Oct	307	1.7
Sep	302	4.1
Aug	290	-1.7
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
Dec 2010	331	15.3

Source: http://www.census.gov/construction/nrs/pdf/newressales.pdf

There is additional information of the report of new house sales in Table VIA-5. 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, 6.3 in Oct, 6.0 in Nov and 6.1 in Dec. Median and average house prices oscillate. In Dec, median prices of new houses sold without seasonal adjustment fell 2.5 percent but average prices rose 6.3 percent. 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 VIA-5, 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 ∆%
Dec 2011	6.1	210,300	-2.5	266,000	6.3
Nov	6.0	215,700	-2.4	250,300	-1.3
Oct	6.3	221,100	1.9	253,700	-0.7
Sep	6.4	217,000	-1.2	255,400	-1.5
Aug	6.7	219,600	-4.5	259,300	-4.1
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/construction/nrs/pdf/newressales.pdf

The depressed level of residential construction and new house sales in the US is evident in Table VIA-6 providing new house sales in Jan-Dec of various years. Sales of new houses in the 2011 are substantially lower than in any year between 1995 and 2011. Sales of new houses in 2011 are lower by 6.2 percent in relation to 2010 and 19.6 percent below the level 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 Jan-Dec 2011 relative to the same period in 2005 fell 76.5 percent and 71.3 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 Jan-Dec 2011 fell 54.7 per cent relative to the same period in 1995.

Table VIA-6, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Dec 2011	302
Jan-Dec 2010	323
∆%	-6.2*
Jan-Dec 2009	375
∆% Jan-Dec 2011/ Jan-Dec 2009	-19.5
Jan-Dec 2008	485
∆% Jan-Dec 2011/ Jan-Dec 2008	-37.7
Jan-Dec 2007	776
∆% Jan-Dec 2011/ Jan-Dec 2007	-61.1
Jan-Dec 2006	1,051
∆% Jan-Dec 2011/Jan-Dec 2006	-71.3
Jan-Dec 2005	1,283
∆% Jan-Dec 2011/Jan-Dec 2005	-76.5
Jan-Dec 2004	1,203
∆% Jan-Dec 2011/Jan-Dec 2004	-74.9
Jan-Dec 2003	1,086
∆% Jan-Dec 2011/ Jan-Dec  2003	-72.2
Jan-Dec 2002	973
∆% Jan-Dec 2011/ Jan-Dec 2001	-68.9
Jan-Dec 2001	908
∆% Jan-Dec 2011/ Jan-Dec 2001	-66.7
Jan-Dec 2000	877
∆% Jan-Nov 2011/ Jan-Nov 2000	-65.6
Jan-Nov 1995	667
∆% Jan-Dec 2011/ Jan-Dec 1995	-54.7

*Computed using unrounded data

Source: http://www.census.gov/construction/nrs/historical_data/historic_releases.html

Table VIA-7 provides the entire available series of new house sales from 1963 to 2011. The level of 302 thousand new houses sold in 2011 is the lowest since 1963 in the 48 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 VA-7 with sales of new houses below 400 thousand.

Table VIA-7, 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
2011	302

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

Chart VIA-2 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 VIA-2, 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 VIA-8. The percentage change of new house sales from 1963 to 2011 is minus 46.1 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). Sales of new houses sold in 2011 fell 54.7 percent relative to the same period in 1995.

Table VIA-8, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2011	-46.1	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2011	-54.7	NA
2000-2011	-65.6	NA
2005-2011	-76.5	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 VIA-9. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially.

Table VIA-9, 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
2011	$225,800	$266,600

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 VIA-10. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between 2006 and 2011, median prices of new houses sold fell 8.4 percent and average prices fell 12.8 percent. Between 2010 and 2011, median prices increased 1.8 percent and average prices fell 2.3 percent.

Table VIA-10, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New  Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% 2000 to 2003	15.4	18.9
∆% 2000 to 2005	42.5	43.5
∆% 2000 to 2011	33.6	28.8
∆% 2005 to 2011	-6.3	-10.2
∆% 2000 to 2006	45.9	47.8
∆% 2006 to 2011	-8.4	-12.8
∆% 2009 to 2011	4.2	-1.6
∆% 2010 to 2011	1.8	-2.3

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

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 VIA-11 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 VIA-11.

Table VIA-11, 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 VIA-12. Behavior is not very different than in Table VIA-12 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 VIA-12, 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 VIA-3 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 VIA-3, 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 VIA-13. 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 4.4 percent in Jun. The FHFA house price index fell 0.7 percent in Oct and fell 3.3 percent in the 12 months ending in Oct. There was significant recovery in Nov with increase in the house price index of 1.0 percent and reduction of the 12-month rate of decline to 1.8 percent.

Table VIA-13, US, FHFA House Price Index Purchases Only SA. Month and NSA 12 Months ∆%

2011	Month ∆% SA	12 Month ∆% NSA
Nov	1.0	-1.8
Oct	-0.7	-3.3
Sep	0.4	-2.7
Aug	-0.2	-4.1
Jul	0.0	-4.0
Jun	0.6	-4.4
May	0.2	-6.0
Apr	0.4	-6.1
Mar	-0.4	-6.0
Feb	-1.5	-5.4
Jan	-0.9	-4.6
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

VIB Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) increased from 49.1 in Nov to 50.2 in Dec, which is above the contraction zone of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8968). The index suggests only marginal growth. New export business fell in Dec with the contraction extending over ten months. There was marginal improvement in employment. Alex Hamilton, economist at Markit and author of the report finds better operating conditions in Japan’s manufacturing in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8968). The Markit Japan Services PMI^™ Composite Output Index increased from 48.9 in Nov to expansion territory at 50.1 in Dec, suggesting marginal growth of the private sector in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8970). Alex Hamilton, economist at Markit and author of the report, finds that services companies are becoming more guardedly optimistic about future activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8970). The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. There appear to be already some effects on exporting economies in Asia. The HSBC South Korea Manufacturing PMI^®, compiled by Markit, fell from 47.1 in Nov to 46.4 in Dec, with the deterioration being the worst since Feb 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8996). Output and new orders fell at higher rates. Ronald Man, economist at HSBC in Asia, finds that employment contracted for the first time in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8996). The HSBC Taiwan PMI^™ rose from 43.9 in Nov to 47.1 in Dec, indicating continuing deterioration of manufacturing business in Taiwan but at a slower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8995). Donna Kwok, Economist at HSBC in Asia, finds declining production and new business but slowing deterioration in the second consecutive month. Table JPY provides the country data 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	Dec ∆% 0.1 12 months ∆% 1.3 Blog 01/22/12
Consumer Price Index	Dec NSA ∆% minus 0.0 Dec 12 months NSA ∆% -0.2 Blog 01/29/12
Real GDP Growth	IIIQ2011 ∆%: 1.4 on IIQ2011;  IIIQ2011 SAAR 5.6% ∆% from quarter a year earlier: -0.7 % Blog 12/11/11
Employment Report	Nov Unemployed 2.80 million Change in unemployed since last year: minus 380 thousand Unemployment rate: 4.5% Blog 01/01/12
All Industry Indices	Nov month SA ∆% -1.1 12 months NSA ∆% -1.3 Blog 01/22/12
Industrial Production	Nov SA month ∆%: minus 2.6 12 months NSA ∆% minus 0.4 Blog 01/01/12
Machine Orders	Total Nov ∆% 14.7 Private ∆%: 21.5 Nov ∆% Excluding Volatile Orders 14.8 Blog 01/22/12
Tertiary Index	Nov month SA ∆% -0.8 Nov 12 months NSA ∆% -0.8 Blog 01/22/12
Wholesale and Retail Sales	Dec 12 months: Total ∆%: minus 0.5 Wholesale ∆%: minus 1.6 Retail ∆%: +2.5 Blog 01/29/12
Family Income and Expenditure Survey	Nov 12 months ∆% total nominal consumption minus 3.8, real minus 3.2 Blog 01/01/12
Trade Balance	Exports Dec 12 months ∆%: minus 8.0 Imports Dec 12 months ∆% +8.1 Blog 1/29/12

Links to blog comments in Table JPY:

1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/11/2011 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial.html

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

Table VIB-1 provides forecasts of majority of policy board members of the Bank of Japan. Fiscal-year 2011 ends in Japan on Mar 31. Financial markets were surprised that the forecast of GDP for fiscal year 2011 is still contraction of 0.3 to 0.4 percent. Recovery begins in fiscal year 2012 with forecast of growth from 1.8 to 2.1 percent. The first quarter of calendar year 2012 from Jan to Mar may still show weakness.

Table VIB-1, Japan, Forecasts of Majority of Policy Board Members of Bank of Japan, ∆% over prior year

	Real GDP	Domestic CGPI	CPI
Median Forecasts
Fiscal Year 2011	-0.4 to –0.3	+1.8 to +1.9	-0.1 to 0.0
Fiscal Year 2012	+1.8 to +2.1	-0.1 to +0.2	0.0 to +0.2
Fiscal Year 2013	+1.4 to +1.7	+0.6 to +1.0	+0.4 to 0.5
Range of Forecasts
Fiscal Year 2011	-0.5 to –0.3	+1.7 to 1.9	-0.1 to 0.0
Fiscal Year 2012	+1.8 to +2.2	-0.2 to +0.2	-0.2 to +0.3
Fiscal Year 2013	+1.4 to +1.8	+0.5 to +1.0	+0.2 to +0.6

Source: Bank of Japan http://www.boj.or.jp/en/announcements/release_2012/k120124a.pdf

Japan is experiencing weak internal demand as in most advanced economies. Table VIB-2 provides Japan’s retail recovered in Dec with growth of 2.5 percent in 12 months while total sales fell 0.5 percent and wholesale sales fell 1.6 percent. Retail sales fell 2.2 percent in Nov after increasing 1.9 percent in the 12 months ending in Oct and falling 1.1 percent in the 12 months ending in Sep. 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 12-month percentage changes began to contract in Nov and Dec.

Table VIB-2, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Dec 2011	-0.5	-1.6	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	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
2011	1.0	1.8	-1.2
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

Japan’s trade balance is in Table VIB-3. Japan experienced another deficit in trade balance in Dec, which is seventh deficit in 2011 and the third consecutive. The first two rows of Table VIB-3 show exports, imports and the trade balance for the entire year in 2011 and 2010. Japan’s exports increased 24.4 percent in 2010 but fell 2.7 percent in 2011 while imports increased 18.0 percent in 2010 and 12.2 percent in 2011. The trade balance of Japan for 2011 is preliminarily estimated at a deficit of JPY 2,492.7 billion while there was a surplus of JPY 6,635 billion in 2010. The adversity caused by the Great East Earthquake/tsunami is manifested in drops of exports in 12 months ending in Mar through Jul with the first 12-month increase of 2.8 percent in Aug and 2.3 percent in Sep but decline by 3.8 percent in Oct and sharper declines of 4.5 percent in Nov and 8.0 percent in Dec. At the same time, imports rose rapidly because of the need to reconstruct the country in recovering internal production. The combination of risk aversion in international finance with unconventional monetary policy of zero interest rates and quantitative easing has caused an adverse appreciation of the Japanese yen relative to the dollar. Yen appreciation undermines the competitiveness of Japanese products in world markets and also the conversion into JPY of foreign profits of Japanese companies (see Pelaez and Pelaez, Government Intervention in Globalization (2008a), 70-4).

Table VIB-3, Japan, Exports, Imports and Trade Balance, NSA JPY Billions and ∆%

	Exports JPY Billions	12 months ∆%	Imports JPY Billions	12 months ∆%	Balance JPY Billions
2011	65,554.8	-2.7	68,047.5	12.2	-2,492.7
2010	67,399	24.4	60,764	18.0	6,635
Dec 2011	5,623.7	-8.0	5,828.8	8.1	-205.1
Nov	5,196.6	-4.5	5,884.2	11.4	-687.6
Oct	5,507.5	-3.8	5,789.3	17.9	-281.8
Sep	5,976.7	2.3	5,682.8	12.2	293.9
Aug	5,356.6	2.8	6,136.1	19.2	-777.5
Jul	5,781.0	-3.4	5,713.2	9.9	67.8
Jun	5,775.6	-1.6	5,708.2	9.8	67.4
May	4,760.0	-10.3	5,617.3	12.4	-857.3
Apr	5,156.6	-12.4	5,624.3	9.0	-467.7
Mar	5,861.2	-2.3	5,674.9	12.0	186.3
Feb	5,589.0	9.0	4,938.7	10.0	650.3
Jan	4,970.3	1.4	5,449.7	12.2	-479.4
Dec 2010	6,112.0	12.9	5,392.4	10.7	32.6
Nov	5,439.8	9.1	5,282.2	14.3	157.6
Oct	5,722.5	7.8	4,909.9	8.9	812.6
Sep	5,839.6	14.3	5,065.3	10.3	774.3
Aug	5,209.8	15.5	5,146.0	18.4	63.8
Jul	5,981.9	23.5	5,197.3	16.1	784.6
Jan-Mar 2011	16,420.5	2.4	16,063.3	11.4	357.3
Apr-Jun 2011	15,692.2	-8.0	16,948.5	10.4	-1,256.3

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/201112ce.xml

The structure of exports and imports of Japan is in Table VIB-4. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 35.8 percent of Japan’s imports and increased 26.8 percent in the 12 months ending in Dec. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 12.8 percent of Japan’s exports with decline of 8.0 percent in the 12 months ending in Dec. Machinery contributes 21.7 percent of Japan’s exports with decline of 6.5 percent in the 12 months ending in Dec. Electrical machinery contributes 17.4 percent of Japan’s exports with decline of 10.1 percent in the 12 months ending in Dec. The best outcome is transport equipment with share of 23.0 percent in total exports but now also declining 4.2 percent in the 12 months ending in Dec. The breakdown of transport equipment in Table VIB-4 shows decline of the major categories of motor vehicles of 4.1 percent: cars decline by 6.9 percent with strong growth in the minor categories of 10.9 percent for buses and trucks but decline of 5.5 percent for parts of motor vehicles, growth of 23.8 percent for motorcycles but decline of 12.6 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

Table VIB-4, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Dec 2011	Value JPY Millions	% of Total	12 Months∆%	Contribution Degree %
Exports	5,623,691	100.0	-8.0	-8.0
Foodstuffs	38,876	0.7	-14.6	-0.1
Raw Materials	85,653	1.5	-5.0	-0.1
Mineral Fuels	73,598	1.3	-30.3	-0.5
Chemicals	546,832	9.7	-13.9	-1.4
Manufactured Goods	718,379	12.8	-8.0	-1.0
Machinery	1,217,907	21.7	-6.5	-1.4
Electrical Machinery	980,801	17.4	-10.1	-1.8
Transport Equipment	1,295,450	23.0	-4.2	-0.9
Motor Vehicles	820,997	14.6	-4.1	-0.6
Cars	686,834	12.2	-6.9	-0.8
Buses & Trucks	121,773	2.2	10.9	0.2
Parts of Motor Vehicles	283,789	5.0	-5.5	-0.3
Motorcycles	27,349	0.5	23.8	0.1
Ships	115,532	2.1	-12.6	-0.3
Other	666,195	11.8	-5.9	-0.7
Imports	5,828,753	100.0	8.1	8.1
Foodstuffs	508,069	8.7	12.2	1.0
Raw Materials	395,805	6.8	-15.6	-1.4
Mineral Fuels	2,086,797	35.8	26.8	8.2
Chemicals	436,719	7.5	-2.0	-0.2
Manufactured Goods	472,207	8.1	3.3	0.3
Machinery	406,932	7.0	-0.0	-0.0
Electrical Machinery	662,114	11.4	-5.6	-0.7
Transport Equipment	154,957	2.7	6.0	0.2
Other	705,154	12.1	5.5	0.7

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/201112ce.xml

Table VIB-5 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2010. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year in the years from 1979 to 2010. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.

Table VIB-5, Japan, Exports and Imports Fiscal Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,555	68,048	-2,493

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

The geographical breakdown of exports by imports with selected regions and countries is provided in Table VIB-6 for Nov 2011. The share of Asia in Japan’s trade is more than one half, 54.6 percent of exports and 44.3 percent of imports. Within Asia, exports to China are 19.2 percent of total exports and imports from China 21.7 percent of total imports. The second largest export market for Japan is the US with share of 17.9 percent of total exports and share of imports from the US of 8.0 percent in total imports.

Table VIB-6, Japan, Value and 12 Months Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Dec 2011	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,623,691	-8.0	5,828,753	8.1
Asia	3,071,386	-11.7	2,584,958	6.7
China	1,076,912	-16.2	1,263,016	5.8
USA	1,008,334	3.9	467,029	-1.2
Canada	74,149	1.5	87,304	-2.5
Brazil	44,225	-2.5	89,724	-0.9
Mexico	66,656	-2.9	24,302	-15.5
Western Europe	640,640	-14.5	547,192	4.2
Germany	152,735	-6.9	154,228	3.4
France	51,163	-15.5	72,083	-7.6
UK	105,411	-13.5	43,997	10.5
Middle East	187,293	-6.0	1,225,215	23.2
Australia	133,489	21.9	385,562	9.8

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/201112ce.xml

The geographical distribution of Japan’s trade balance is provided in Table VIB-7. The trade surpluses with Asia, the US and Western Europe are largely erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East. China also contributes a sizeable trade deficit of Japan.

Table VIB-7, Japan, Trade Balance, Millions of Yen

Dec 2011	Millions of Yen
Total	-205,062
Asia	486,428
China	-186,104
USA	541,305
Canada	-13,155
Brazil	-45,499
Mexico	42,354
Western Europe	93,448
Germany	-1,493
France	-20,920
UK	61,414
Middle East	-1,037,922
Australia	-252,073

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/201112ce.xml

VIC China. The HSBC Flash China Manufacturing PMI^™, compiled by Markit, increased from 48.7 in Dec to 48.8 in Jan, which is the highest level in three months, but the output and new orders indexes fell, indicating weakness in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9054). Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC, finds need for additional policy stimulus to stabilize China’s economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9054). The HSBC Emerging Markets Index, produced in partnership with Markit, improved marginally from 52.0 in IIIQ2011 to 52.2 in IVQ2011 with stronger performance by services relative to manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9052). The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing rose from 47.7 in Nov to 48.7 in Dec, indicating marginally deteriorating business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8969). Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC finds weakness in external demand that is causing slowdown in the economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8969), supporting fiscal and monetary policies that can avoid hard landing. Owen Fletcher, writing on Jan 1, on “Signs of strength in Chinese economy,” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203550304577133822170242612.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that China’s official purchasing managers’ index increased from 49.0 in Nov to expansion territory at 50.3 in Dec (http://professional.wsj.com/article/SB10001424052970203550304577133822170242612.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 52.6 in Oct to 48.9 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8898). The composite index combined activity in manufacturing and services rose from 48.9 in Nov to expansion territory at 50.8 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8971). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy measures are required to steer the economy toward higher growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8971). Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Dec 12 months ∆%: 1.7 Jan-Dec ∆%: 6.0 Dec month ∆%: -0.3 Blog 01/15/12
Consumer Price Index	Dec month ∆%: -0.3 Dec 12 month ∆%: 4.1 Jan-Dec ∆%: 5.4 Blog 01/15/12
Value Added of Industry	Dec 12 month ∆%: 12.8 Jan-Dec 2011/Jan-Dec 2010 ∆%: 13.9 Blog 1/22/12
GDP Growth Rate	Year IVQ2011 ∆%: 8.9 Quarter IIQ2011 ∆%: 2.0 Blog 1/22/12
Investment in Fixed Assets	Total Jan-Nov ∆%: 24.4 Jan-Nov ∆% real estate development: 29.9 Blog 12/18/11
Retail Sales	Dec month ∆%: 1.41 Dec 12 month ∆%: 18.1 Jan-Nov ∆%: 17.1 Blog 1/22/12
Trade Balance	Dec balance $16.52 billion Exports ∆% 13.4 Imports ∆% 11.8 Cumulative Dec: $155.14 billion Blog 01/15/12

Links to blog comments in Table CNY:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

VID Euro Area. The Markit Flash Eurozone PMI^® Composite Output Index, which has high association with euro area GDP, rose from 48.3 in Dec to 50.4 in Jan, a five-month high and in positive territory indicating marginal expansion in private-sector economic activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9064). Stronger growth in Germany and modest expansion in France drove the improvement but the rest of the euro zone declined at slower pace. Chris Williamson, Chief Economist at Markit, finds stability in the economy of the euro area after contraction of GDP from 0.5 percent to 0.6 percent in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9064). There is risk in continuing decline of inflows of new business.

The Markit Eurozone PMI^® Composite Output Index rose from 47.0 in Nov to 48.3 in Dec, indicating contracting at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). Chris Williamson, Chief Economist at Markit, finds that the improvement in Dec does not eliminate the risk of recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). The index for IVQ2011 is the weakest since the spring of 2009 and continuing decline of orders may adversely affect output and employment in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8975). The Markit Eurozone Services Business Activity Index of the Markit Eurozone Services PMI^® rose from 47.5 in Nov to 48.8 in Dec, indicating slower rate of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8974). Chris Williamson, Chief Economist at Markit, finds that the index has contracted during four consecutive months with divergence of performance in the form of growth in Germany and France but weaker performance in Spain and Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8974). The Markit Eurozone Manufacturing PMI^® improved slightly to 46.9 in Dec from 46.4 in Nov, which was a low in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8950). Chris Williamson, Chief Economist at Markit, finds that manufacturing output fell at a quarterly rate of 1.5 percent in the fourth quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8950). Lower levels of manufacturing output were experienced in all members of the euro zone for the second consecutive month. 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 12/04/11
Unemployment	Nov 2011: 10.3% unemployment rate Nov 2011: 16.372 million unemployed Blog 01/08/12
HICP	Dec month ∆%: 0.3 12 months Dec ∆%: 2.7 Blog 01/22/12
Producer Prices	Euro Zone industrial producer prices Nov ∆%: 0.2 Nov 12 months ∆%: 5.3 Blog 01/08/12
Industrial Production	Nov month ∆%: -0.1 Nov 12 months ∆%: -0.3 Blog 01/15/12
Industrial New Orders	Oct month ∆%: minus 1.8 Oct 12 months ∆%: 1.6 Blog 01/08/12
Construction Output	Nov month ∆%: 0.8 Nov 12 months ∆%: 0.2 Blog 01/22/12
Retail Sales	Nov month ∆%: minus 0.8 Nov 12 months ∆%: minus 2.5 Blog 01/08/12
Confidence and Economic Sentiment Indicator	Sentiment 93.3 Dec 2011 down from 107 in Dec 2010 Confidence minus 21.1 Nov 2011 down from minus 11 in Dec 2010 Blog 01/08/12
Trade	Jan-Nov 2011/2010 Exports ∆%: 13.1 Imports ∆%: 13.1 Blog 01/15/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 1/22/12

Links to blog comments in Table EUR:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

VIE Germany. The Markit Flash Germany PMI^® Composite Output Index, which has high association with German GDP, rose from 51.3 in Dec to 54.0 in Jan, for a seven-month high, indicating growth of private sector economic activity in two consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9058). Stronger growth in services combined with renewed growth in manufacturing to brighten overall growth of private-sector economic activity in Jan. Tim Moore, Senior Economist at Markit, finds strength in the beginning of 2012 for private sector economic activity in Germany while there are still risks in weak employment and future business inflow (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9058). The Markit Germany Services Business Activity Index of the Markit Germany Services PMI^® rose from 50.3 in Nov to 52.4 in Dec, for a third consecutive month of expansion above 50, such that the Markit Germany Composite Output Index rose from 49.4 in Nov to 51.3 in Dec although manufacturing was weak (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8992). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved slightly from 47.9 in Nov to 48.4 in Dec but falling again below 50 indicates business and output decline at lower rates than in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8991). Tim Moore, Senior Economist at Markit and author of the report, finds that demand weakened in Europe during the summer, spreading subsequently to emerging markets. 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 2011/2010: 3.0% Blog 01/15/12
Consumer Price Index	Dec month SA ∆%: 0.7 Dec 12 months ∆%: 2.1 Blog 01/25/12
Producer Price Index	Dec month ∆%: -0.4 12 months NSA ∆%: 4.0 Blog 01/22/15
Industrial Production	Mfg Nov month SA ∆%: minus 1.0 12 months NSA: 1.4 Blog 12/11/11
Machine Orders	Nov month ∆%: -4.8 Nov 12 months ∆%: -4.4 Blog 01/08/12
Retail Sales	Nov Month ∆% 0.8 12 Months ∆% -0.9 Blog 01/08/12
Employment Report	Employment Accounts: Nov Employed 12 months NSA ∆%: 3.1 Labor Force Survey: Aug Unemployment Rate: 5.5% Blog 01/08/12
Trade Balance	Exports Nov 12 month NSA ∆%: 8.3 Imports Nov 12 months NSA ∆%: 6.7 Exports Nov month SA ∆%: 2.5; Imports Nov month SA minus 0.4 Blog 01/15/12

Links to blog comments in Table DE: 01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

VIF France. The Markit Flash France PMI^® Composite Output Index, which has high association with French GDP, increased from 50.0 in Dec to 50.9 in Jan, which is the highest level in five months, indicating marginal growth of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9057). Growth in Jan is a combination of growth in services at the fastest rate since Aug while manufacturing declined again for the sixth consecutive month. Jack Kennedy, Senior Economist at Markit and author of the report, finds a combination of improvement in private-sector activity with underlying risks in the form of sharper decline in incoming new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9057). The Markit France Services Activity Index of the Markit France Services PMI^® rose from 49.6 in Nov to 50.3 in Dec such that the Markit France Composite Output Index stabilized at 50 in Dec above 48.8 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9012). The pace of deterioration of manufacturing business slowed with the Markit Purchasing Managers’ Index^® (PMI^®)) improving slightly from 47.3 in Nov to 48.9 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8981). The improvement reflected less sharp reduction in new orders in part because of slower decline of new export orders. The index has been below 50 since Aug. Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds fragility in French manufacturing with uncertainty in consumers and business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8981). Table FR provides France’s country data table.

Table FR, France, Economic Indicators

CPI	Dec month ∆% 0.4 12 months ∆%: 2.5 01/15/12
PPI	Oct month ∆%: 0.4 Oct 12 months ∆%: 5.6 Blog 12/27/11
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.3 IIIQ2011/IIIQ2010 ∆%: 1.5 Blog 12/27/11
Industrial Production	Nov/Oct SA ∆%: Industrial Production 1.1; Manufacturing minus 1.3 Nov YOY NSA ∆%: Industrial Production 1.1; Manufacturing 2.2 Blog 01/15/12
Industrial New Orders	Mfg Nov ∆% 1.0 YOY ∆% 2.8 Blog 01/22/12
Consumer Spending	Nov Manufactured Goods ∆%: 0.0 Nov 12 Months Manufactured Goods ∆%: minus 1.9 Blog 01/08/12
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/04/11
Trade Balance	Oct Exports ∆%: month 0.5, 12 months 6.3 Oct Imports ∆%: month minus 0.3, 12 months 7.4 Blog 12/11/11
Confidence Indicators	Historical averages 100 Dec: France 91 Mfg Business Climate 91 Retail Trade 89 Services 92 Building 100 Household 81 Blog 1/29/12

Links to blog comments in Table FR:

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/0812 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds deteriorating conditions in Jan. Table VIF-1 shows the INSEE business climate indicator. The headline synthetic index has fallen to 91 in Dec, which is below the average of 100 since 1976. The final row shows the general production expectations falling to -37 in Jan, well below the average of -8 since 1976. The indicator of demand and export order levels has fallen to -26, well below the average of -12 since 1976. All individual categories deteriorated in Jan.

Table VIF-1, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011-2012	Average since 1976	Sep	Oct	Nov	Dec	Jan
Synthetic Index	100	99	97	96	94	91
Recent Changes in Output	5	4	-0	4	-5	-7
Finished- Goods Inventory Level	13	12	14	18	15	16
Demand and Total Order Levels	-17	-18	-19	-17	-26	-32
Demand and Export Order Levels	-12	-15	-19	-25	-20	-26
Personal Production Expectations	5	6	3	-5	-1	-6
General Production Expectations	-8	-30	-30	-35	-36	-37

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120123

Chart VIF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011.

Chart VIF-1, France, INSEE Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120123

Chart VIF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan.

Chart VIF-2, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120123

Chart VIF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan.

Chart VIF-3, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120123

The Business Climate Indicator for France of the business tendency surveys of Institut National de la Statistique et des Études Économiques (INSEE) in Table VIF-2 deteriorates slightly in Dec to 92 and to 91 in Jan but is more than 10 points below its level of 105 in Jul. Retail trade has fallen from 102 in Jul to 89 in Jan. Services has fallen from 102 in Jul to 91 in Dec and 92 in Jan.

Table VIF-2, France, Confidence Indicators

2011-2012	Average	Sep	Oct	Nov	Dec	Jan
France	100	96	95	93	92	91
Business Climate Mfg	100 since 1976	99	97	95	94	91
Household Confidence	100 between Jan 1987 and Dec 2010	80	84	81	80	81
Wholesale trade Business Climate	100 since 1979	99	NA	96	NA	94
Retail Trade	100	93	95	93	93	89
Services	100	95	94	92	91	92
Building	100	101	100	99	99	100

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20120123

VIG Italy. The Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® fell from 45.8 in Nov from 44.5 in Dec, indicating sharp contraction in services output in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8967). Italy’s Markit/ADACI Purchasing Managers’ Index^® (PMI^®)) improved slightly from 44.0 in Nov to 44.3 in Dec but still showing deterioration for Italian manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8962). Deterioration of manufacturing business originates in decline of new orders with weakening internal and foreign demand. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds that declining orders may challenge future output and employment. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Dec month ∆%: 0.4 Dec 12 months ∆%: 3.3 Blog 01/22/12
Producer Price Index	Nov month ∆%: 0.2 Nov 12 months ∆%: 4.5 Blog 01/01/12
GDP Growth	IIIQ2011/IIIQ2010 SA ∆%: 0.2 IIIQ2011/IIQ2011 NSA ∆%: -0.2 Blog 12/27/11
Labor Report	Nov 2011 Participation rate 62.2% Employment ratio 56.9% Unemployment rate 8.6% Blog 01/08/12
Industrial Production	Nov month ∆%: 0.3 12 months ∆%: minus 4.1 Blog 01/15/12
Retail Sales	Nov month ∆%: minus 1.8 Nov 12 months ∆%: minus 0.3 Blog 01/29/12
Business Confidence	Mfg Dec 92.5, Aug 98.5 Construction Dec 80.1, Aug 77.3 Blog 01/01/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
Trade Balance	Balance Nov SA -€1417 million versus Oct -€1946 Exports Nov month SA ∆%: +3.2; Imports Nov month SA ∆%: +0.5 Exports 12 months NSA ∆%: +6.5 Imports 12 months NSA ∆%: +0.5 Blog 01/22/12

Links to blog comments in Table IT: 1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

An important part of the analysis of Blanchard (2011WEOSep) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VIG-1 provides retail sales growth for Italy. Retail sales fell 0.3 percent in Nov relative to Oct and declined 1.0 percent in Jan-Nov 2011 relative to Jan-Nov 2010. The only strength is in retail sales of food with decline of 0.8 percent in Nov but increase of 0.1 percent in the quarter of Sep-Nov 2011 relative to Jun-Aug 2011 and 0.2 percent in the first ten months relative to a year earlier.

Table VIG-1, Italy, Retail Sales ∆%

	Nov 2011/  Oct 2011 SA	Sep-Nov 11/   Jun-Aug 11 SA	Nov 2011/ Nov 2010 NSA	Jan-Nov 2011/ Jan-Nov 2010
Total	-0.3	-0.5	-1.8	-1.0
Food	-0.8	0.1	-0.1	0.2
Non-food	-0.1	-0.7	-2.6	-1.5

Source: http://www.istat.it/it/archivio/51463

Chart VG-2, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

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

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage in 2011 and yearly rates from 2008 to 2010 in Table VIG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010. There is an evident declining trend in 2011 but only two monthly increases of 0.2 percent in Oct and 0.3 percent in Apr and negative 12-month percentage changes in every month of 2011.

Table VIG-2, Italy, Retail Sales 12 Months ∆%

	12 Months ∆% NSA	Month ∆% SA
Nov 2011	-1.8	-0.3
Oct	-1.4	0.2
Sep	-1.6	-0.4
Aug	-0.3	-0.1
July	-2.3	-0.1
Jun	-1.1	-0.3
May	-0.4	-0.2
Apr	2.2	0.3
Mar	-2.1	-0.2
Feb	0.0	-0.1
Jan	-1.1	-0.3
Dec 2010	0.6	0.1
2010	0.2
2009	-1.7
2008	-0.3

Source: http://www.istat.it/it/archivio/51463

Italy’s index of consumer confidence is in Table VIG-3. Overall confidence has fallen from 96.5 in Aug to 91.6 in both Dec and Jan after sharp contraction from 96.1 in Nov. There is significant deterioration in all categories from Nov to Dec and Jan with exception of current confidence. Confidence on the economy fell from 82.9 in Nov to 75.3 in Jan and confidence on the future fell from 88.3 in Nov to 78.4 in Jan. The debt crisis is having adverse impacts on confidence.

Table VIG-3, Italy, Index of Consumer Confidence SA 2005=100

2011	Jan 12	Dec 11	Nov	Oct	Sep
Confidence	91.6	91.6	96.1	93.0	94.2
Economy	75.3	77.1	82.9	75.7	78.4
Personal	97.9	97.3	101.6	98.6	100.6
Current	102.3	98.4	102.2	101.0	101.2
Future	78.4	82.5	88.3	81.8	85.2

Source: http://www.istat.it/it/archivio/51604

VIH United Kingdom. The Markit/CIPS UK Services PMI^® finds a recurring pattern of weakness in manufacturing partly compensated by relatively stronger services. The Markit/CIPS Business Activity Index registered 54.0 in Dec, suggesting growth higher than 52.1 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9031). The index has exceeded the no change zone of 50 in all the first ten months of 2011. Chris Williamson, Chief Economist at Markit, finds that the sharp drop of manufacturing combined with improvement in services suggests the UK economy did not fall into recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9031).The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased from 47.7 in Nov to 49.6 in Dec, still in contraction territory (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8994). The average for IVQ2011 is the lowest since IIQ2009. There is stabilization after contraction. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators

CPI	Dec month ∆%: 0.4 Nov 12 months ∆%: 4.2 Blog 01/22/12
Output/Input Prices	Output Prices: Dec 12 months NSA ∆%: 4.8; excluding food, petroleum ∆%: 3.0 Input Prices: Dec 12 months NSA ∆%: 8.7 Excluding ∆%: 6.9 Blog 01/15/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.8 Blog 01/29/12
Industrial Production	Nov 2011/Nov 2010 NSA ∆%: Industrial Production minus 3.1; Manufacturing minus 0.6 Blog 01/15/12
Retail Sales	Dec month SA ∆%: +0.6 Dec 12 months ∆%: +2.6 Blog 01/22/12
Labor Market	Sep/Nov Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.9% Blog 01/22/12
Trade Balance	Balance Nov minus ₤2566 million Exports Nov ∆%: -0.9 Sep/Nov ∆%: 9.0 Imports Nov ∆%: 0.8 Sep/Nov ∆%: 7.5 Blog 01/15/12

Links to blog comments in Table UK:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

Revised annual data in Table VIH-1 show the strong impact of the global recession in the UK with decline of GDP of 4.4 percent in 2009 after dropping 1.1 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. The preliminary estimate is growth of 0.9 percent in 2011.

Table VIH-1, UK, Gross Value Added at Chained Volume Measures Basic Prices, ∆%

	∆% on Prior Year
1998	4.1
1999	3.8
2000	4.6
2001	2.9
2002	2.4
2003	3.6
2004	2.8
2005	2.3
2006	2.5
2007	3.5
2008	-1.1
2009	-4.4
2010	2.1
2011	0.9

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data and additions and revisions are analyzed here. Table VIH-2 provides quarter on quarter chained value measures of GDP since 2000. Growth in IIQ2011 was reduced to 0.0 percent. The third estimate for IIIQ2011 is higher at 0.6 percent. The preliminary estimate for IVQ2011 is minus 0.2 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table VIH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

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

Source:  UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VIH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009 and 5.8 percent in IIQ2008. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 2.9 percent in IIIQ2010 and 1.8 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2011. Growth relative to the same quarter a year earlier fell from 2.5 percent in IVQ2010 to 1.7 percent in IQ2011, 0.6 percent in IIQ2011, 0.5 percent in IIIQ2011 and 0.8 percent in IVQ2011 but contraction of 0.2 percent in IVQ2011 relative to IIIQ2011. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

Table VIH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	1.7	0.6	0.5	0.8
2010	1.2	2.5	2.9	1.8
2009	-6.9	-5.8	-3.7	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/datasets-and-tables/search/index.html?pageSize=50&newquery=GDP&sortBy=pubdate&sortDirection=DESCENDING&content-type=Dataset

Contributions to growth of GDP and components in a quarter from the preceding quarter are provided in Table VIH-4. The first line of the table provides the weights of components. Growth of 0.6 percent in IIIQ2011 originated almost entirely in the contribution by services of 0.7 percentage points with virtually nil contributions by other components. Growth in 2011 has mostly originated in services. The preliminary estimate for IVQ2011 is decline of 0.2 percent. All contributions are negative in IV2011 and the contribution of services is zero.

Table VIH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter 

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	154	102	76	763
IVQ11	-0.2	-1.2	-0.9	-0.5	0.0
IIIQ11	0.6	0.2	0.1	0.3	0.7
IIQ11	0.0	-1.4	0.0	3.1	0.1
IQ11	0.4	-0.3	0.8	-1.6	0.8
IVQ10	-0.5	0.2	0.7	-1.4	-0.3
IIIQ10	0.7	0.2	1.3	3.1	0.6
IIQ10	1.1	1.2	1.6	8.1	0.5
IQ10	0.4	1.3	1.2	0.9	0.0
IV09	0.7	0.3	1.2	0.3	0.8
III09	0.2	-1.3	-0.9	0.6	0.4
II09	-0.2	-0.3	-0.2	-2.5	-0.2
I09	-1.6	-3.9	-4.5	-6.4	-0.8
IV08	-2.3	-4.7	-5.0	-5.1	-1.5
III08	-2.0	-1.4	-1.6	-3.7	-1.6
II08	-1.3	-1.4	-1.9	-2.0	-0.9

Note: CONS: construction; * Weights may not add to total because of rounding

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VIH-5. Total production fell 1.2 percent IVQ2011 with manufacturing declining 0.9 percent. Services were flat in IVQ2011, reducing the support of economic activity in prior quarters.

Table VIH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter

Component	2010 Q4	2011 Q1	2011 Q2	2011Q3	2011Q4
Agriculture	-10.0	12.1	-1.1	0.5	0.1
Total Production	0.2	-0.3	-1.4	0.2	-1.2
Mining & quarrying	-5.0	-4.7	-7.7	-0.2	-1.1
Manufacturing	0.7	0.8	0.0	0.1	-0.9
Utilities	6.0	-5.1	-1.4	2.2	-4.1
Water supply	-0.8	5.0	-2.8	-0.5	0.2
Construction	-1.4	-1.6	3.1	0.3	-0.5
Total Services	-0.3	0.8	0.1	0.7	0.0
Distribution, hotels & restaurants	-1.1	1.0	0.0	0.2	-0.5
Transport, storage & communication	0.7	-0.1	-0.2	0.3	-0.1
Business services & finance	-0.1	0.7	0.2	1.2	0.0
Government & other	-0.5	1.3	0.2	0.6	0.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VIH-6. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government.

TableVIH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %

Component	2010 Q4	2011 Q1	2011 Q2	2011Q3	2011Q4
Agriculture	-0.1	0.1	0.0	0.0	0.0
Total Production	0.0	0.0	-0.2	0.0	-0.2
Mining & quarrying	-0.1	-0.1	-0.2	0.0	0.0
Manufacturing	0.1	0.1	0.0	0.0	-0.1
Utilities	0.1	-0.1	0.0	0.0	-0.1
Water supply	0.0	0.1	0.0	0.0	0.0
Construction	-0.1	-0.1	0.2	0.0	0.0
Total Services	-0.2	0.6	0.1	0.6	0.0
Distribution, hotels & restaurants	-0.2	0.1	0.0	0.0	-0.1
Transport, storage & communication	0.1	0.0	0.0	0.0	0.0
Business services & finance	0.0	0.2	0.0	0.4	0.0
Government & other	-0.1	0.3	0.1	0.1	0.1

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

Table VIH-7 provides UK year-on-year growth of value added by components. There was significant deceleration in growth of total production from 1.9 percent in 2010 to minus 1.0 percent in 2011. Manufacturing growth fell from 3.7 percent in 2010 to 2.2 percent in 2011. Construction growth fell from 8.2 percent in 2010 to 3.1 percent. Growth of total services grew at 3.3 percent in 2006 and 4.4 percent in 2007 to decline 0.5 percent in 2008 and 2.6 percent in 2009. Growth in 2010 and 2011 has been more moderate at 1.4 percent.

Table VIH7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2006	2007	2008	2009	2010	2011
Agriculture	-3.1	-3.7	16.2	-15.2	-1.5	2.3
Total Production	0.0	0.5	-2.8	-9.0	1.9	-1.0
Mining & quarrying	-7.6	-2.5	-6.5	-9.0	-4.9	-14.8
Manufacturing	1.7	0.8	-2.6	-9.6	3.7	2.2
Utilities	-0.3	0.8	0.5	-4.8	3.5	-4.0
Water supply	-2.7	3.0	-1.8	-8.1	-1.6	2.7
Construction	0.7	2.1	-2.8	-13.5	8.2	3.1
Total Services	3.3	4.4	-0.5	-2.6	1.4	1.4
Distribution, hotels & restaurants	3.7	4.8	-2.8	-4.6	1.5	0.6
Transport, storage & communication	2.1	5.7	-0.2	-5.7	3.0	0.7
Business services & finance	5.6	6.2	-0.3	-4.3	1.3	1.9
Government & other	0.7	0.9	0.3	2.3	0.7	1.7

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.html

Total production subtracted 0.1 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VIH-8. Total services added 1.1 percentage points in both 2010 and 2011. The concern is with the decline of GDP at minus 0.2 percent in the final quarter of 2011.

Table VIH-8, UK, Contribution to Growth on Prior Year of Value Added by Components, %

Component	2006	2007	2008	2009	2010	2011
Agriculture	0.0	0.0	0.1	-0.1	0.0	0.0
Total Production	0.0	0.1	-0.4	-1.4	0.3	-0.1
Mining & quarrying	-0.2	-0.1	-0.2	-0.2	-0.1	-0.3
Manufacturing	0.2	0.1	-0.3	-1.0	0.4	0.2
Utilities	0.0	0.0	0.0	-0.1	0.1	-0.1
Water supply	0.0	0.0	0.0	-0.1	0.0	0.0
Construction	0.1	0.2	-0.2	-1.0	0.6	0.2
Total Services	2.5	3.3	-0.4	-2.0	1.1	1.1
Distribution, hotels & restaurants	0.5	0.7	-0.4	-0.6	0.2	0.1
Transport, storage & communication	0.2	0.6	0.0	-0.6	0.3	0.1
Business services & finance	1.6	1.7	-0.1	-1.3	0.4	0.6

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/index.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 VII-1 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 unconventional monetary policy encouraging carry trades 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 VII-1 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 of 10.9 percent by Fri Jan 27, 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 VII-1 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 VII-1, 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	01/27 /2012
Rate	1.1423	1.5914	1.192	1.322
CNY/USD	01/03 2000	07/21 2005	7/15 2008	01/27/ 2012
Rate	8.2798	8.2765	6.8211	6.334
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 VII-2 extracts four rows of Table VII-I 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 VII-4 below, the dollar has devalued again to USD 1.322/EUR or by 10.9 percent {[(1.322/1.192)-1]100}. 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 subsequently revaluing 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 6.334/USD on Fri Jan 20, 2012, or by an additional 7.1 percent, for cumulative revaluation of 23.5 percent. China’s markets were closed during the week of Jan 27. 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 VII-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VII-2 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 appreciation of 0.3 percent. In the week of Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. Financial markets were closed in China during the week of Jan 27. 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 VII-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	12/26/03	7/14/08	6/07/10	01/27 /2012
Rate	1.1423	1.5914	1.192	1.322
CNY/USD	01/03 2000	07/21 2005	7/15 2008	01/20 2012 01/27/12
Rate	8.2798	8.2765	6.8211	6.334
Weekly Rates	12/30/2011	01/06/2011	01/13/2012	01/20/2012 01/27/12
CNY/USD	6.294	6.3094	6.3068	6.334
∆% from Earlier Week*	0.7	-0.2	0.04	-0.4

*Negative sign is depreciation, positive sign is appreciation

Source: Table VI-1 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 VII-3. 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 VII-3, 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 VII-1 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 VII-4, 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 01/27/12,” 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 in the week of Dec 2, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the weeks of Jan 20 and Jan 27, there is now only one financial value with negative change in valuation in column “∆% Trough to 01/27/12:” Shanghai Composite minus 2.7 percent but after a week of holidays without reflecting world markets in the week of Jan 27. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 30.7 percent and S&P 500 28.7 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 30.7 percent from the trough and of the S&P 500 by 28.7 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 01/27/12” had double digit gains relative to the trough around Jul 2, 2010 but now only two valuations show increases of less than 10 percent: Dow Asia Pacific is now higher by 9.7 percent and STOXX 50 Europe is 5.8 percent above the trough. DJ UBS Commodities is 18.3 percent above the trough; Dow Global is 13.2 percent above the trough; and DAX is 14.8 percent above the trough. Japan’s Nikkei Average is 0.2 percent above the trough on Aug 31, 2010 and 22.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8841.22

on Fri Jan 27, 2012, which is 13.8 percent lower than 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 8.5 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 01/27/12” in Table VII-4 shows strong performance of risk financial assets in the week of Jan 27, 2012. 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 VII-4 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 01/27/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jan 6, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 01/27/12” but also relative to the peak in column “∆% Peak to 01/27/12.” There are now only three equity indexes above the peak in Table VII-4: DJIA 13.0 percent, S&P 500 8.1 percent and Dax 2.8 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 16.8 percent, Nikkei Average by 22.4 percent, Shanghai Composite by 26.7 percent, STOXX 50 by 10.4 percent, Dow Global by 7.6 percent and Dow Asia Pacific by 3.9 percent. DJ UBS Commodities Index is now 1.1 percent above the peak. 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 VII-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 01/27 /12	∆% Week 01/27/ 12	∆% Trough to 01/27 12
DJIA	4/26/ 10	7/2/10	-13.6	13.0	-0.5	30.7
S&P 500	4/23/ 10	7/20/ 10	-16.0	8.1	0.1	28.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	-16.8	0.6	4.4
Dow Global	4/15/ 10	7/2/10	-18.4	-7.6	1.1	13.2
Asia Pacific	4/15/ 10	7/2/10	-12.5	-3.9	1.9	9.7
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-22.4	0.9	0.2
China Shang.	4/15/ 10	7/02 /10	-24.7	-26.7	3.3	-2.7
STOXX 50	4/15/10	7/2/10	-15.3	-10.4	-0.8	5.8
DAX	4/26/ 10	5/25/ 10	-10.5	2.8	1.7	14.8
Dollar Euro	11/25 2009	6/7 2010	21.2	12.6	-2.2	-10.9
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	1.1	3.8	18.3
10-Year T Note	4/5/ 10	4/6/10	3.986	1.893

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 VII-5 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 VII-5 for Jan 27, 2012, shows that the S&P 500 is now 8.6 percent above the Apr 26, 2010 level and the DJIA is 13.0 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. Relaxed risk aversion has contributed to recovery of valuations. 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 VII-5, 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
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6

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

Table VII-6, 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 VII-6 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 7.1 percent to ZAR 7.751/USD on Jan 27, 2012, which is still 33.1 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 7.2 percent stronger at SGD 1.251/USD on Jan 6 relative to the trough of depreciation but still stronger by 19.4 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 0.3 percent relative to the trough to BRL 1.743/USD on Jan 27, 2012 but still stronger by 28.3 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 VII-6 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 VII-6, Exchange Rates

	Peak	Trough	∆% P/T	Jan 27, 2012	∆T Jan 27, 2012	∆P Jan 27 2012
EUR USD	7/15 2008	6/7 2010		01/27 2012
Rate	1.59	1.192		1.322
∆%			-33.4		9.8	-20.2
JPY USD	8/18 2008	9/15 2010		01/27 2012
Rate	110.19	83.07		76.68
∆%			24.6		7.7	30.4
CHF USD	11/21 2008	12/8 2009		01/27 2012
Rate	1.225	1.025		0.919
∆%			16.3		10.3	24.9
USD GBP	7/15 2008	1/2/ 2009		01/27 2012
Rate	2.006	1.388		1.573
∆%			-44.5		11.8	-27.5
USD AUD	7/15 2008	10/27 2008		01/27 2012
Rate	1.0215	1.6639		1.066
∆%			-62.9		43.6	8.2
ZAR USD	10/22 2008	8/15 2010		01/27 2012
Rate	11.578	7.238		7.751
∆%			37.5		-7.1	33.1
SGD USD	3/3 2009	8/9 2010		01/27 2012
Rate	1.553	1.348		1.251
∆%			13.2		7.2	19.4
HKD USD	8/15 2008	12/14 2009		01/27 2012
Rate	7.813	7.752		7.754
∆%			0.8		0.0	0.8
BRL USD	12/5 2008	4/30 2010		01/27 2012
Rate	2.43	1.737		1.743
∆%			28.5		-0.3	28.3
CZK USD	2/13 2009	8/6 2010		01/27 2012
Rate	22.19	18.693		18.986
∆%			15.7		-1.6	14.4
SEK USD	3/4 2009	8/9 2010		01/27 2012
Rate	9.313	7.108		6.738
∆%			23.7		5.2	27.6
CNY USD	7/20 2005	7/15 2008		01/27 2012
Rate	8.2765	6.8211		6.334
∆%			17.6		7.1	23.5

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

Chart VII-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

Chart VII-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=122e3bcb627e8e53f1bf72a1a09cfb81&lastObs=260&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/JRXWTFB_N.B,H10/H10/JRXWTFN_N.B,H10/H10/JRXWTFO_N.B%7d

Table VII-7, 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 VII-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.893 percent at the close of market on Fri Jan 27, 2012 would be equivalent to price of 106.6404 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.3 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 VII-7. 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 VII-7 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 Jan 4, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2902 billion, or $2.9 trillion, with portfolio of long-term securities of $2570 billion, or $2.6 trillion, consisting of $1565 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $836 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $157 billion or $1.6 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section 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 VII-7, 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
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1
12/30/11	1.871	106.8476	5.5
01/06/12	1.957	106.0403	4.7
01/13/12	1.869	106.8664	5.5
01/20/12	2.026	105.3976	4.1
01/27/12	1.893	106.6404	5.3

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

Source:

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

VIII Economic Indicators. Crude oil input in refineries fell to 14,646 thousand barrels per day on average in the four weeks ending on Jan 20, 2012 from 14,716 thousand barrels per day in the four weeks ending on Jan 13, 2012, as shown in Table VIII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.1 percent on Jan 20, 2012, which is lower than 84.8 percent on Jan 21, 2011, and 84.6 percent on Jan 13, 2012. Imports of crude oil fell 0.4 percent from 9,010 thousand barrels per day on average in the four weeks ending on Jan 13 to 8,976 thousand barrels per day in the week of Jan 20. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 8.9 million barrels per day last week [Jan 13]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries but with about flat imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 3.6 million barrels from 331.2 million barrels on Jan 13 to 334.8 million barrels on Jan 20. Motor gasoline production decreased 2.4 percent from 8,966 thousand barrels per day in the week of Jan 13 to 8,751 thousand barrels per day on average in the week of Jan 20. Gasoline stocks decreased 0.4 million barrels and stocks of fuel oil decreased 2.5 million barrels. Supply of gasoline fell from 8,770 thousand barrels per day on Jan 21, 2011, to 8,207 thousand barrels per day on Jan 20, 2011, or by 6.4 percent, while fuel oil supply fell 2.0 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VIII-1 also shows increase in the WTI price of crude oil by 11.3 percent from Jan 21, 2011 to Jan 20, 2012. Gasoline prices rose 11.3 percent from Jan 24, 2011 to Jan 23, 2012. 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 VIII-1, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	01/20/12	01/13/12	01/21/11
Crude Oil Refineries Input	14,646 Week ∆%: -0.5	14,716	14,546
Refinery Capacity Utilization %	84.1	84.6	84.8
Motor Gasoline Production	8,751 Week ∆%: -2.4	8,966	8,832
Distillate Fuel Oil Production	4,612 Week ∆%: -2.6	4,736	4,428
Crude Oil Imports	8,976 Week ∆%: -0.4	9,010	8,898
Motor Gasoline Supplied	8,207 ∆% 2011/2010= -6.4%	8,414	8,770
Distillate Fuel Oil Supplied	3,582 ∆% 2011/2010 = -2.0%	3,562	3,656
	1/20/12	1/13/12	1/21/11
Crude Oil Stocks Million B	334.8 ∆= +3.6 MB	331.2	340.6
Motor Gasoline Million B	227.1     ∆= -0.4 MB	227.5	230.1
Distillate Fuel Oil Million B	145.5 ∆= -2.5 MB	148.0	165.7
WTI Crude Oil Price $/B	98.15 ∆% 2011/2010 11.3	98.69	88.22
	1/23/12	1/16/12	1/24/11
Regular Motor Gasoline $/G	3.389 ∆% 2011/2010 8.9	3.391	3.110

B: barrels; G: gallon

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

Chart VIII-1 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 but with fluctuations.

Chart VIII-1, 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 VIII-2 of the US Energy Information Administration provides closer view of US crude oil stocks since Jun 2010. Crude oil stocks rose in a clear trend in 2011 but began to drop on a downward trend after 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 weeks of Nov 25 and Dec 2 and the declines in the weeks of Dec 9 and Dec 16 with increases in the weeks of Dec 23, Dec 30 and Jan 6, 2012. The last change in Chart VII-2 is the decrease in stocks in the week of Jan 13, moderating with the increase by 3.6 million barrels in the week of Jan 20.

Chart VIII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

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

Chart VIII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during 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 VIII-3, 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 VIII-2. Seasonally adjusted claims increased 21,000 from 356,000 on Jan 14, 2012 to 377,000 on Jan 21. Claims not adjusted for seasonality decreased but by much higher 112,817 from 526,939 on Jan 14 to 414,122 on Jan 21. Strong seasonality is preventing clear analysis of labor markets.

Table VIII-2, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Jan 21, 12	377,000	414,122	377,500
Jan 14, 12	356,000	526,939	380,000
Change	+21,000	-112,817	-2,500
Jan 7, 11	402,000	646,219	382,500
Prior Year	443,000	485,950	428,250

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

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

Table VIII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 763,987 on Jan 17, 2009 to 485,950 on Jan 22, 2011, and now to 414,122 on Jan 21, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Table VIII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Jan 20, 2001	398,188	343,000
Jan 19, 2002	558,297	405,000
Jan 18, 2003	542,563	402,000
Jan 17, 2004	490,763	362,000
Jan 22, 2005	360,583	329,000
Jan 21, 2006	317,926	290,000
Jan 27, 2007	359,959	310,000
Jan 19, 2008	415,397	318,000
Jan 17, 2009	763,987	582,000
Jan 23, 2010	507,651	470,000
Jan 22, 2011	485,950	443,000
Jan 21, 2012	414,122	377,000

Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.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 IX-1 provides inflation of the CPI. In Oct-Dec 2011, CPI inflation for all items seasonally adjusted was minus 0.4 percent in annual equivalent, that is, compounding inflation in Oct-Dec and assuming it would be repeated for a full year. In the 12 months ending in Dec, CPI inflation of all items not seasonally adjusted was 3.0 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.05 percent for three months, 0.08 percent for six months, 0.11 percent for 12 months, 0.21 percent for two years, 0.30 percent for three years, 0.75 percent for five years, 1.30 percent for seven years, 1.89 percent for ten years and 3.06 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 IX-1. 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 IX-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Dec 2011/Dec 2010 NSA	∆% Annual Equivalent Oct-Dec 2011 SA
CPI All Items	3.0	-0.4
CPI ex Food and Energy	2.2	2.0

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

X Conclusion. The US economy is in growth standstill at an annual equivalent rate in the four quarters of 2011 of 1.6 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. Unconventional monetary policy of zero interest rates and large-scale purchases of assets using the central bank’s balance sheet is designed to increase aggregate demand by stimulating consumption and investment. In practice, there is no control of how cheap money will be used. An alternative allocation of cheap money is through the carry trade from zero interest rates and short dollar positions to exposures in risk financial assets such as equities, commodities and so on. After a decade of unconventional monetary policy it may be prudent to return to normalcy so as to avoid adverse side effects of financial turbulence and inflation waves. Normal monetary policy would also encourage financial intermediation required for financing sound long-term projects that can stimulate economic growth and full utilization of resources. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

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

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Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Carlos M. Pelaez, 2010, 2011, 2012