The Fractured Labor Market with Hiring Collapse, Ten Million Fewer Full-Time Jobs, Youth Unemployment, World Inflation Waves and Global Financial and Economic Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I World Inflation Waves
IA World Inflation Waves
IB United States Inflation
IB1 Long-term US Inflation
IB2 Current US Inflation
IB3 Import Export Prices
II Hiring Collapse
IIA Hiring Collapse
IIB Labor Underutilization
IIC Ten Million Fewer Full-time Jobs
IID Youth Unemployment
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 Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendix I The Great Inflation
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 1.6 | 2.7 | 2.8 | 8.2 |
| Japan | -0.6 | 0.3 | 0.6 | 4.5 |
| China | 8.9 | 3.6 | -0.3 | |
| UK | 0.5 | 3.4* | 3.6* output | 8.4 |
| Euro Zone | 0.7 | 2.7 | 3.6 | 10.8 |
| Germany | 2.0 | 2.5 | 3.2 | 5.7 |
| France | 0.2 | 2.5 | 4.3 | 10.0 |
| Nether-lands | -0.7 | 2.9 | 4.2 | 4.9 |
| Finland | 1.2 | 3.0 | 3.9 | 7.4 |
| Belgium | 0.9 | 3.3 | 3.6 | 7.2 |
| Portugal | -2.7 | 3.6 | 4.2 | 15.0 |
| Ireland | NA | 1.3 | 3.8 | 14.7 |
| Italy | -0.5 | 3.4 | 3.2 | 9.3 |
| Greece | -7.0 | 1.7 | 6.9 | NA |
| Spain | 0.3 | 1.9 | 3.4 | 23.6 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.6 percent in IVQ2011 relative to IVQ2010 (Table 8, p 11 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp4q11_3rd.pdf). Japan’s GDP fell 0.6 percent in IVQ2011 relative to IVQ2010 and contracted 1.7 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 7.1 percent in IIIQ2011 to decline at the SAAR of 0.7 percent in IVQ 2011 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html); the UK grew at 0.5 percent in IVQ2011 relative to IVQ2010 and GDP fell 0.3 percent in IVQ2011 relative to IIIQ2011 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q4-2011/index.html); and the Euro Zone grew at 0.7 percent in IVQ2011 relative to IVQ2010 but declined 0.3 percent in IVQ2011 relative to IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html and http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06032012-AP/EN/2-06032012-AP-EN.PDF). These are stagnating or “growth recession” rates, which are positive growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.2 percent in the US but 18.3 percent for unemployment/underemployment (see Table I-4 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html), 4.5 percent for Japan, 8.4 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html) and 10.8 percent in the Euro Zone (section VD in http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 2.7 percent in the US, 0.3 percent for Japan, 3.6 percent for China, 2.7 percent for the Euro Zone and 3.4 percent for the UK (http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2012/index.html). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III in this post and the earlier post http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html) (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see section II http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html), weak hiring with the loss of 10 million full-time jobs (see section II in this post and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html and http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I Thirty Million Unemployed or Underemployed in http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see IV Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
The statement of the FOMC at the conclusion of its meeting on Jan 25, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm):
“Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. ”
There are several important issues in this statement.
1. Mandate. The FOMC 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”
2. Extending Average Maturity of Holdings of Securities. The statement of Jan 25, 2012, invokes the mandate that inflation is subdued but employment below maximum such that further accommodation is required. Accommodation consists of low interest rates. The new “Operation Twist” (http://cmpassocregulationblog.blogspot.com/2011_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html) or restructuring the portfolio of securities of the Fed by selling short-dated securities and buying long-term securities has the objective of reducing long-term interest rates. Lower interest rates would stimulate consumption and investment, or aggregate demand, increasing the rate of economic growth and thus reducing stress in job markets.
3. Target of Fed Funds Rate. The FOMC continues to maintain the target of fed funds rate at 0 to ¼ percent.
4. Advance Guidance. The FOMC increases transparency by advising on the expectation of the future path of fed funds rate. This guidance is the view that conditions such as “low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
5. Monitoring and Policy Focus. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
These policy statements are carefully crafted to express the intentions of the FOMC. The main objective of the statements is to communicate as clearly and firmly as possible the intentions of the FOMC to fulfill its dual mandate. During periods of low inflation and high unemployment and underemployment such as currently the FOMC may be more biased toward measures that stimulate the economy to reduce underutilization of workers and other productive resources. The FOMC also is vigilant about inflation and ready to change policy in the effort to attain its dual mandate.
The FOMC also released the economic projections of governors of the Board of Governors of the Federal Reserve and Federal Reserve Banks presidents shown in Table IV-2. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IVQ2011 is analyzed in the current post of this blog in section I. The Bureau of Economic Analysis (BEA) provides the GDP report with the second estimate for IVQ2011 to be released on Feb 29 and the third estimate on Mar 29 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/national/index.htm#personal), which is analyzed in this blog as soon as available. The next report will be released at 8:30 AM on Jan 30, 2012. PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for February will be released on Feb 3, 2012 (http://www.bls.gov/cps/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf).
It is instructive to focus on 2012, as 2013, 2014 and longer term are too far away, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jan 25 and the second row “Nov PR” the projection of the Nov meeting. There are three major changes in the view.
1. Growth “GDP ∆.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun to 2.5 to 2.9 percent in Nov and now to 2.2 to 2.7 percent at the Jan 25 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun to 8.5 to 8.7 percent in Nov but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun to virtually the same of 1.4 to 2.0 percent in Nov but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun of 1.4 to 2.0 percent and the Nov projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, January 2012 and November 2011
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 | 2.2 to 2.7 | 8.2 to 8.5 | 1.4 to 1.8 | 1.5 to 1.8 |
| 2013 | 2.8 to 3.2 | 7.4 to 8.1 | 1.4 to 2.0 | 1.5 to 2.0 |
| 2014 | 3.3 to 4.0 | 6.7 to 7.6 | 1.6 to 2.0 | 1.6 to 2.0 |
| Longer Run | 2.3 to 2.6 | 5.2 to 6.0 | 2.0 | |
| Range | ||||
| 2012 | 2.1 to 3.0 | 7.8 to 8.6 | 1.3 to 2.5 | 1.3 to 2.0 |
| 2013 | 2.4 to 3.8 | 7.0 to 8.2 | 1.4 to 2.3 | 1.4 to 2.0 |
| 2014 | 2.8 to 4.3 | 6.3 to 7.7 | 1.5 to 2.1 | 1.4 to 2.0 |
| Longer Run | 2.2 to 3.0 | 5.0 to 6.0 | 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; 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). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. The table is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). There are 14 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only three to be higher. Not much change is expected in 2013 either with 11 participants anticipating the rate at the current target of 0 to ¼ percent and only six expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for six participants with five expecting the rate to be in the range of 0.5 to 1 percent and two participants expecting rates from 1 to 1.5 percent but only 4 with rates exceeding 2.5 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, January 25, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.75 to 2.0 | 2.5 to 2.75 | 3.75 to 4.5 | |
| 2012 | 14 | 1 | 2 | |||
| 2013 | 11 | 4 | 2 | |||
| 2014 | 6 | 5 | 2 | 4 | ||
| Longer Run | 17 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2016. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, January 25, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 3 |
| 2013 | 3 |
| 2014 | 5 |
| 2015 | 4 |
| 2016 | 2 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
Inflation in advanced economies has been fluctuating at the production level alternation of surges and moderation of commodity price shocks. Table IV-5 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI increased 0.6 percent in Mar and also increased 0.6 percent in 12 months. Measured by 12-month rates, CGPI inflation has increased from minus 0.2 percent in Jul 2010 to a high of 2.8 percent in Jul 2011 and now to much lower 0.6 percent in Mar 2012. Fiscal-year inflation for 2011 is 2.0 percent, which is the highest after declines in 2009 and 2010 but lower than 4.5 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows five waves similar to those in other indices around the world. In the first wave, annual equivalent inflation reached 7.1 percent in Jan-Apr, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent deflation of 1.2 percent in May-Jun. In the third wave, renewed risk aversion caused annual equivalent deflation of 2.1 percent in Jul-Nov. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of 0.4 percent in Dec 2011 to Feb 2012. Finally, in the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 4.9 percent in Feb-Mar.
Table IV-5, Japan Corporate Goods Price Index (CGPI) ∆%
| Month | Year | |
| Mar 2012 | 0.6 | 0.6 |
| Feb 2012 | 0.2 | 0.6 |
| AE ∆% Feb-Mar | 4.9 | |
| Jan | 0.0 | 0.5 |
| Dec 2011 | -0.1 | 1.1 |
| AE ∆% Dec-Feb | 0.4 | |
| Nov | 0.0 | 1.6 |
| Oct | -0.7 | 1.6 |
| Sep | -0.2 | 2.4 |
| Aug | -0.2 | 2.6 |
| Jul | 0.2 | 2.8 |
| AE ∆% Jul-Nov | -2.1 | |
| Jun | 0.0 | 2.5 |
| May | -0.2 | 2.2 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 1.0 | 2.6 |
| Mar | 0.6 | 2.0 |
| Feb | 0.1 | 1.7 |
| Jan | 0.6 | 1.6 |
| AE ∆% Jan-Apr | 7.1 | |
| Dec 2010 | 0.4 | 1.2 |
| Nov | 0.0 | 0.9 |
| Oct | 0.2 | 0.9 |
| Sep | 0.0 | -0.1 |
| Aug | 0.0 | 0.0 |
| Jul | -0.1 | -0.2 |
| Fiscal Year | ||
| 2011 | 2.0 | |
| 2010 | -0.1 | |
| 2009 | -5.2 | |
| 2008 | 4.5 |
AE: annual equivalent
Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1203.pdf
Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-6. Manufactured products accounting for 91.9 percent of the products in the index increased 0.5 percent in Mar and increased 0.1 percent in 12 months. Petroleum and coal with weight of 5.4 percent rose 1.1 percent in Mar and increased 5.7 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of machinery and equipment, with weight of 10.8 percent, were fell 0.2 percent in Mar and were flat in 12 months. In general, most manufactured products experienced negative increases in prices while inflation rates were high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income.
Table IV-6, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%
| Mar 2012 | Weight | Month ∆% | 12 Month ∆% |
| Total | 1000.0 | 0.6 | 0.6 |
| Mfg Industry Products | 918.8 | 0.5 | 0.1 |
| Processed | 114.5 | 0.0 | -0.2 |
| Petroleum & Coal | 53.8 | 1.1 | 5.7 |
| Machinery & Equipment | 108.4 | -0.2 | 0.0 |
| Electric & Electronic | 129.0 | -0.1 | -3.2 |
| Electric Power, Gas & Water | 46.5 | 0.3 | 10.9 |
| Iron & Steel | 52.6 | -0.8 | -1.6 |
| Chemicals | 85.2 | 0.4 | 1.4 |
| Transport | 124.8 | 0.0 | -0.6 |
Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1203.pdf
Percentage point contributions to change of the corporate goods price index (CGPI) in Feb 2012 are provided in Table IV-7 divided into domestic, export and import segments. Petroleum and coal contributed 0.47 percentage points and nonferrous metals 0.05 percentage points to domestic CGPI inflation that increased 0.6 percent because of deductions of only 0.05 percentage points by iron & steel. The exports CGPI rose 0.2 percent on the basis of the contract currency and increased 3.6 percent on the basis of the yen with positive contributions of 0.19 percentage points by chemical and related products and 0.03 percentage points by other primary products and manufactured goods. The imports CGPI increased 2.0 percent on the contract currency basis and 6.0 percent on the yen basis. The most important contributions were 1.94 percentage points of petroleum, coal & natural gas and 0.05 percentage points of foodstuffs and feedstuffs and chemicals & related products while metals & related products deducted 0.03 percentage points.
Table IV-7, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index
| Groups Mar 2012 | Contribution to Change Percentage Points |
| A. Domestic Corporate Goods Price Index | Monthly Change: |
| Petroleum & Coal Products | 0.47 |
| Nonferrous Metals | 0.05 |
| Scrap & Waste | 0.03 |
| Chemicals & Related Products | 0.03 |
| Iron & Steel | -0.05 |
| B. Export Price Index | Monthly Change: 3.6% Yen basis |
| Chemicals & Related Products | 0.19 |
| Other Primary Products & Manufactured Goods | 0.03 |
| Metals & Related Products | -0.02 |
| C. Import Price Index | Monthly Change: 2.0 % contract currency basis 6.0% Yen basis |
| Petroleum, Coal & Natural Gas | 1.94 |
| Foodstuffs & Feedstuffs | 0.05 |
| Chemicals & Related Products | 0.05 |
| Metals & Related Products | -0.03 |
Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1203.pdf
China is experiencing similar inflation behavior as the advanced economies, as shown in Table IV-8. Mar 2012 inflation of the price indexes for industry in Mar is 0.3 percent; 12-month inflation is minus 0.3 percent in Mar; and inflation in Jan-Mar 2012 relative to Jan-Mar 2011 is 0.1 percent. Drivers of inflation in Mar 2012 in China are provided in Table IV-8 in column “Month Mar ∆%.” There were increases of prices of mining & quarrying of 0.8 percent in Mar and 3.7 percent in 12 months. Consumer goods increased 0.1 percent in Mar and increased 1.4 percent in 12 months. Prices of inputs in the purchaser price index increased 0.1 percent in Mar and 0.1 percent in 12 months. Fuel and power increased 0.8 percent and 5.1 percent in 12 months. An important category of inputs for exports is textile raw materials, increasing 0.2 percent in Mar and 1.3 percent in Jan-Feb 2012 relative to the same period a year earlier.
Table IV-8, China, Price Indexes for Industry ∆%
| Month Mar ∆% | 12-Month Mar ∆% | Jan-Mar 2012/Jan-Mar 2011 ∆% | |
| I Producer Price Indexes | 0.3 | -0.3 | 0.1 |
| Means of Production | 0.3 | -0.8 | -0.3 |
| Mining & Quarrying | 0.8 | 3.7 | 4.8 |
| Raw Materials | 0.8 | 0.8 | 1.2 |
| Processing | 0.1 | -2.0 | -1.6 |
| Consumer Goods | 0.1 | 1.4 | 1.7 |
| Food | 0.2 | 2.4 | 2.8 |
| Clothing | 0.1 | 2.6 | 2.9 |
| Daily Use Articles | 0.3 | 1.2 | 1.4 |
| Durable Consumer Goods | -0.1 | -0.7 | -0.4 |
| II Purchaser Price Indexes | 0.1 | 0.1 | 1.0 |
| Fuel and Power | 0.8 | 5.1 | 5.9 |
| Ferrous Metals | -0.2 | -4.2 | -2.9 |
| Nonferrous Metals | 0.2 | -4.0 | -3.3 |
| Raw Chemical Materials | 0.0 | -1.9 | -0.8 |
| Wood & Pulp | 0.1 | 1.1 | 1.5 |
| Building Materials | 0.1 | 2.4 | 2.5 |
| Other Industrial Raw Materials | -0.2 | -0.4 | 0.3 |
| Agricultural | 0.0 | 0.9 | 2.3 |
| Textile Raw Materials | 0.2 | 0.0 | 1.3 |
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/pressrelease/t20120410_402797821.htm
China’s producer price inflation follows four waves similar to those around the world, as shown in Table IV-9. In the first wave, annual equivalent inflation was 6.4 percent in Jan-Jun, driven by carry trades from zero interest rates to commodity futures. In the second wave, risk aversion unwound carry trades, resulting in annual equivalent inflation of minus 3.1 percent in Jul-Nov. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 2.4 percent in Dec-Jan. In the fourth wave, new carry trades resulted in annual equivalent inflation of 2.4 percent in Feb-Mar 2012.
Table IV-9, China, Month and 12-Month Rate of Change of Producer Price Index, ∆%
| 12-Month ∆% | Month ∆% | |
| Mar 2012 | -0.3 | 0.3 |
| Feb | 0.0 | 0.1 |
| AE ∆% Feb-Mar | 2.4 | |
| Jan | 0.7 | -0.1 |
| Dec 2011 | 1.7 | -0.3 |
| AE ∆% Dec-Jan | -2.4 | |
| Nov | 2.7 | -0.7 |
| Oct | 5.0 | -0.7 |
| Sep | 6.5 | 0.0 |
| Aug | 7.3 | 0.1 |
| Jul | 7.5 | 0.0 |
| AE ∆% Jul-Nov | -3.1 | |
| Jun | 7.1 | 0.0 |
| May | 6.8 | 0.3 |
| Apr | 6.8 | 0.5 |
| Mar | 7.3 | 0.6 |
| Feb | 7.2 | 0.8 |
| Jan | 6.6 | 0.9 |
| AE ∆% Jan-Jun | 6.4 | |
| Dec 2010 | 5.9 | 0.7 |
AE: Annual Equivalent
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120410_402797821.htm
Chart IV-1 of the National Bureau of Statistics of China provides monthly and 12-month rates of inflation of the price indexes for the industrial sector. Negative monthly rates in Oct, Nov, Dec, Jan and Mar pulled down the 12-month rates to 5.0 percent in Oct, 2.7 percent in Nov, 1.7 percent in Dec, 0.7 percent in Jan, 0.0 percent in Feb and minus 0.3 percent in Mar.
Chart IV-1, China, Producer Prices for the Industrial Sector Month and 12 months ∆%
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120410_402797821.htm
China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in Mar was 0.2 percent and 3.6 percent in 12 months, as shown in Table IV-10. Food prices increased 0.2 percent in Mar but increased 7.5 percent in 12 months and 8.0 percent in Jan-Mar 2012 relative to Jan-Mar 2011. Another area of concern is housing inflation of 0.4 percent in Mar and 2.0 percent in 12 months. Prices of services were flat in Mar and gained 1.5 percent in 12 months.
Table IV-10, China, Consumer Price Index
| 2012 | Mar Month ∆% | Mar 12- Month ∆% | Jan-Mar 2012 ∆% Jan-Mar 2011 |
| Consumer Prices | 0.2 | 3.6 | 3.8 |
| Urban | 0.2 | 3.6 | 3.8 |
| Rural | 0.1 | 3.6 | 3.8 |
| Food | 0.2 | 7.5 | 8.0 |
| Non-food | 0.2 | 1.8 | 1.8 |
| Consumer Goods | 0.3 | 4.4 | 4.6 |
| Services | 0.0 | 1.5 | 1.7 |
| Commodity Categories: | |||
| Food | 0.2 | 7.5 | 8.0 |
| Tobacco, Liquor | 0.2 | 3.6 | 3.7 |
| Clothing | 0.4 | 3.8 | 3.6 |
| Household | 0.0 | 2.2 | 2.4 |
| Healthcare & Personal Articles | 0.1 | 2.5 | 2.6 |
| Transportation & Communication | 0.2 | 0.3 | 0.2 |
| Recreation, Education, Culture & Services | -0.1 | 0.1 | 0.1 |
| Residence | 0.4 | 2.0 | 2.0 |
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/pressrelease/t20120410_402797823.htm
Month and 12-month rates of change of consumer prices are provided in Table IV-11. There are four waves of consumer price inflation in China similar to those around the world. In the first wave, consumer prices increased at the annual equivalent rate of 8.3 percent in Jan-Mar 2011, driven by commodity price increases resulting from unconventional monetary policy of zero interest rates. In the second wave, risk aversion unwound carry trades with annual equivalent inflation falling to the rate of 2.0 percent in Apr-Jun. In the third wave, inflation returned at 2.9 percent with renewed interest in commodity exposures. In the fourth wave, inflation returned at a high 5.8 percent annual equivalent in Dec 2011 to Mar 2012.
Table IV-11, China, Month and 12-Month Rates of Change of Consumer Price Index ∆%
| Month ∆% | 12-Month ∆% | |
| Mar 2012 | 0.2 | 3.6 |
| Feb | -0.1 | 3.2 |
| Jan | 1.5 | 4.5 |
| Dec 2011 | 0.3 | 4.1 |
| AE ∆% Dec to Mar | 5.8 | |
| Nov | -0.2 | 4.2 |
| Oct | 0.1 | 5.5 |
| Sep | 0.5 | 6.1 |
| Aug | 0.3 | 6.2 |
| Jul | 0.5 | 6.5 |
| AE ∆% Jul to Nov | 2.9 | |
| Jun | 0.3 | 6.4 |
| May | 0.1 | 5.5 |
| Apr | 0.1 | 5.3 |
| AE ∆% Apr to Jun | 2.0 | 2.0 |
| Mar | -0.2 | 5.4 |
| Feb | 1.2 | 4.9 |
| Jan | 1.0 | 4.9 |
| AE ∆% Jan to Mar | 8.3 | |
| Dec 2010 | 0.5 | 4.6 |
AE: Annual Equivalent
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120410_402797823.htm
Chart IV-2 of the National Bureau of Statistics of China provides monthly and 12-month rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates. Consumer prices fell 0.2 percent in Nov after increasing only 0.1 percent in Oct but increased 0.3 percent in Dec and a high 1.5 percent in Jan, declining 0.1 percent in Feb and rising 0.2 percent in Mar. The decline of 0.1 percent in Feb pulled down the 12-month rate to 3.2 percent, which bounced back to 3.6 percent in Mar with the monthly increase of 0.2 percent.
Chart IV-2, China, Consumer Prices ∆% Month and 12 Months Aug 2010 to Aug 2011
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120410_402797823.htm
There are five waves of consumer price inflation in Germany similar to those worldwide, as shown in Table IV-12. In the first wave, annual equivalent inflation was 4.9 percent in Feb-Apr 2011 during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent in May-Jun because of risk aversion caused by European sovereign debt. In the third wave, annual equivalent consumer price inflation was 2.4 percent in Jul-Dec as a result of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 1.8 percent in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 6.2 percent in Feb-Mar during another energy-commodity carry trade shock.
Table IV-12, Germany, Consumer Price Index ∆%
| 12-Month ∆% | Month ∆% | |
| Mar 2012 | 2.1 | 0.3 |
| Feb | 2.3 | 0.7 |
| AE ∆% Feb-Mar | 6.2 | |
| Jan | 2.1 | -0.4 |
| Dec 2011 | 2.1 | 0.7 |
| AE ∆% Dec-Jan | 1.8 | |
| Nov | 2.4 | 0.0 |
| Oct | 2.5 | 0.0 |
| Sep | 2.6 | 0.1 |
| Aug | 2.4 | 0.0 |
| Jul | 2.4 | 0.4 |
| AE ∆% Jul-Dec | 2.4 | |
| Jun | 2.3 | 0.1 |
| May | 2.3 | 0.0 |
| AE ∆% May-Jun | 0.6 | |
| Apr | 2.4 | 0.2 |
| Mar | 2.1 | 0.5 |
| Feb | 2.1 | 0.5 |
| Jan | 2.0 | -0.4 |
| AE ∆% Feb-Apr | 4.9 | |
| Dec 2010 | 1.7 | 1.0 |
| Nov | 1.5 | 0.1 |
| Oct | 1.3 | 0.1 |
| Sep | 1.3 | -0.1 |
| Aug | 1.0 | 0.0 |
| Annual Average ∆% | ||
| 2011 | 2.3 | |
| 2010 | 1.1 | |
| 2009 | 0.4 | |
| 2008 | 2.6 |
AE: Annual Equivalent
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/04/PE12_134_611.html
Chart IV-3, of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany from 2003 to 2012. There is an evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in more recent months with renewed strength in Dec, decline in Jan 2012 and another upward spike in Feb and Mar 2012. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.
Chart IV-3, Germany, Consumer Price Index, Unadjusted, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart IV-4 of the Statistiche Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany and trend from 2007 to 2012. Inflation moderated during the global recession but regained the sharper slope with the new carry trades from zero interest rates to commodity futures beginning in 2010. The annual equivalent rate of 6.2 percent in Feb-Mar 2012 is pulling up the trend.
Chart IV-4, Germany, Consumer Price Index, Unadjusted and Trend, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Table IV-13 provides the monthly and 12-month rate of inflation for segments of the consumer price index in Mar 2012. Inflation excluding energy increased 0.1 percent in Mar 2012 and rose 1.6 percent in 12 months. Excluding household energy inflation increased 0.4 percent in Mar and rose 0.4 percent in 12 months. There were price increases across categories such as 0.7 percent in nondurable consumer goods and 0.9 percent in food. There were also strong increases in energy-related prices. Heating oil rose 8.6 percent in 12 months but fell 0.2 percent in Mar. Motor fuels increased 4.0 percent in Mar and 7.7 percent in 12 months.
Table IV-13, Germany, Consumer Price Index ∆%
| Mar 2012 | Weight | 12- Month ∆% | Month ∆% |
| Total | 1,000.00 | 2.1 | 0.3 |
| Excluding heating oil and motor fuels | 955.42 | 1.8 | 0.2 |
| Excluding household energy | 940.18 | 1.8 | 0.4 |
| Excluding Energy | 904.81 | 1.6 | 0.1 |
| Total Goods | 493.00 | 3.2 | 0.8 |
| Nondurable Consumer Goods | 305.11 | 4.3 | 0.7 |
| Medium-Term Life Consumer Goods | 95.24 | 2.3 | 1.4 |
| Durable Consumer Goods | 92.65 | 0.0 | 0.0 |
| Services | 507.00 | 1.1 | -0.2 |
| Energy Components | |||
| Motor Fuels | 35.37 | 7.7 | 4.0 |
| Household Energy | 59.82 | 6.0 | 0.3 |
| Heating Oil | 9.21 | 8.6 | -0.2 |
| Food | 89.99 | 2.7 | 0.9 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/04/PE12_134_611.html
Table IV-14 provides monthly and 12 months consumer price inflation in France. There are the same five waves as in inflation worldwide (see Section I in this post and the earlier post http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html). In the first wave, annual equivalent inflation in Jan-Apr was 4.3 percent driven by the carry trade from zero interest rates to commodity futures positions in an environment of risk appetite. In the second wave, risk aversion caused the reversal of carry trades into commodity futures, resulting in the fall of the annual equivalent inflation rate to minus 0.8 percent in May-Jul. In the third wave, annual equivalent inflation rose to 2.7 percent in Aug-Nov with alternations of risk aversion and risk appetite. In the fourth wave, risk aversion originating in the European debt crisis caused annual equivalent inflation of 1.6 from Dec 2011 to Feb 2012. In the fifth wave, annual equivalent inflation increased to 7.4 percent in Feb-Mar 2012.
Table IV-14, France, Consumer Price Index, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| Mar 2012 | 0.8 | 2.3 |
| Feb 2012 | 0.4 | 2.3 |
| AE ∆% Feb-Mar | 7.4 | |
| Jan | -0.4 | 2.4 |
| Dec 2011 | 0.4 | 2.5 |
| AE ∆% Dec-Feb | 1.6 | |
| Nov | 0.3 | 2.5 |
| Oct | 0.2 | 2.3 |
| Sep | -0.1 | 2.2 |
| Aug | 0.5 | 2.2 |
| AE ∆% Aug-Nov | 2.7 | |
| Jul | -0.4 | 1.9 |
| Jun | 0.1 | 2.1 |
| May | 0.1 | 2.0 |
| AE ∆% May-Jul | -0.8 | |
| Apr | 0.3 | 2.1 |
| Mar | 0.8 | 2.0 |
| Feb | 0.5 | 1.7 |
| Jan | -0.2 | 1.8 |
| AE ∆% Jan-Apr | 4.3 | |
| Dec 2010 | 0.5 | 1.8 |
| Annual | ||
| 2011 | 2.1 | |
| 2010 | 1.5 | |
| 2009 | 0.1 | |
| 2008 | 2.8 | |
| 2007 | 1.5 | |
| 2006 | 1.6 | |
| 2005 | 1.8 | |
| 2004 | 2.1 | |
| 2003 | 2.1 | |
| 2002 | 1.9 | |
| 2001 | 1.7 | |
| 2000 | 1.7 | |
| 1999 | 0.5 | |
| 1998 | 0.7 | |
| 1997 | 1.2 | |
| 1996 | 2.0 | |
| 1995 | 1.8 | |
| 1994 | 1.6 | |
| 1993 | 2.1 | |
| 1992 | 2.4 | |
| 1991 | 3.2 |
AE: Annual Equivalent
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20120412
Table IV-14 provides in the lower panel the estimates of inflation by the Institut National de la Statistique et des Études Économiques (INSEE) for the years from 1991 to 2011. Inflation has been relatively moderate in France. The rise of inflation to 2.8 percent in 2008 was caused by the commodity price shock as investment funds shifted from other risk financial assets into carry trades driven by interest rates falling toward zero. INSEE estimates 2011 inflation at 2.1 percent.
Chart IV-5 of the Institut National de la Statistique et des Études Économiques of France shows headline and core consumer price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. Unconventional monetary policy with alternations of risk aversion resulted in higher inflation in France that stabilized in recent months until the increase of 0.2 percent in Oct, 0.3 percent in Nov and 0.4 percent in Dec that were followed by decline of 0.4 percent in Jan 2012 and increases of 0.4 percent in Feb and 0.8 percent in Mar.
Chart IV-5, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20120412
There are the same five waves of inflation in Italy and a sixth one with the Feb-Mar data. The first wave of commodity price increases in the first four months of 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-15. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in the six months Oct-Nov jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.5 percent in Feb-Mar 2012.
Table IV-15, Italy, Consumer Price Index
| Month | 12 Months | |
| Mar 2012 | 0.5 | 3.3 |
| Feb | 0.4 | 3.3 |
| AE ∆% Feb-Mar | 5.5 | |
| Jan | 0.3 | 3.2 |
| Dec 2011 | 0.4 | 3.3 |
| AE ∆% Dec-Jan | 4.3 | |
| Nov | -0.1 | 3.3 |
| Oct | 0.6 | 3.4 |
| AE ∆% Oct-Nov | 3.0 | |
| Sep | 0.0 | 3.0 |
| Aug | 0.3 | 2.8 |
| Jul | 0.3 | 2.7 |
| AE ∆% Jul-Sep | 2.4 | |
| Jun | 0.1 | 2.7 |
| May | 0.1 | 2.6 |
| AE ∆% May-Jun | 1.2 | |
| Apr | 0.5 | 2.6 |
| Mar | 0.4 | 2.5 |
| Feb | 0.3 | 2.4 |
| Jan | 0.4 | 2.1 |
| AE ∆% Jan-Apr | 4.9 | |
| Dec 2010 | 0.4 | 1.9 |
| Annual | ||
| 2011 | 2.8 | |
| 2010 | 1.5 | |
| 2009 | 0.8 | |
| 2008 | 3.3 | |
| 2007 | 1.8 | |
| 2006 | 2.1 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/59216
Consumer price inflation in Italy by segments in Mar 2012 is provided in Table IV-16. Total consumer price inflation in Feb was 0.5 percent and 3.3 percent in 12 months. Inflation of goods was 0.4 percent and 4.2 percent in 12 months. Prices of durable goods were flat in Mar and increased only 0.8 percent in 12 months, as typical in most countries. Prices of energy goods jumped 1.8 percent in Mar and 15.4 percent in 12 months. Food prices increased 0.1 percent in Mar and 2.5 percent in 12 months. Prices of services increased 0.5 percent in Mar and rose 2.3 percent in 12 months. Transport prices, also influenced by commodity prices, increased 1.4 percent in Mar and 5.3 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion.
Table IV-16, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%
| Mar 2012 | Month ∆% | 12-Month ∆% |
| Total | 0.5 | 3.3 |
| I Goods | 0.4 | 4.2 |
| Food | 0.1 | 2.5 |
| Energy | 1.8 | 15.4 |
| Durable | 0.0 | 0.8 |
| Nondurable | -0.6 | 0.3 |
| II Services | 0.5 | 2.3 |
| Housing | 0.3 | 2.6 |
| Communications | 0.1 | 2.0 |
| Transport | 1.4 | 5.3 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/59216
Chart IV-6 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy that could be reversed if commodity prices continue increasing.
Chart, IV-6, Italy, Consumer Price Index, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-16 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12-month rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct, 5.4 and down to 3.6 percent in Mar 2012. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by the output prices for the UK, which was originated in decline of commodity prices but was used as an argument for the unconventional monetary policy of zero interest rates and quantitative easing during the past decade.
Table IV-16, UK Output Prices 12 Months ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Mar 2012 | 3.6 | 2.5 | 3.5 |
| Feb | 4.1 | 3.0 | 4.1 |
| Jan | 4.0 | 2.4 | 4.0 |
| Dec 2011 | 4.8 | 3.0 | 4.8 |
| Nov | 5.4 | 3.1 | 5.6 |
| Oct | 5.7 | 3.3 | 5.9 |
| Sep | 6.3 | 3.7 | 6.4 |
| Aug | 6.0 | 3.5 | 6.2 |
| Jul | 6.1 | 3.4 | 6.2 |
| Jun | 5.8 | 3.2 | 5.9 |
| May | 5.4 | 3.4 | 5.5 |
| Apr | 5.6 | 3.6 | 5.8 |
| Mar | 5.6 | 3.1 | 5.5 |
| Feb | 5.3 | 3.1 | 5.2 |
| Jan | 5.0 | 3.3 | 5.0 |
| Dec 2010 | 4.2 | 2.7 | 4.0 |
| Year ∆% | Ex Food | ||
| 2011 | 5.6 | 3.4 | 5.7 |
| 2010 | 4.2 | 3.0 | 3.9 |
| 2009 | 1.6 | 2.5 | 1.0 |
| 2008 | 6.7 | 3.7 | 6.7 |
| 2007 | 2.3 | 1.4 | 2.1 |
| 2006 | 2.0 | 1.5 | 2.0 |
| 2005 | 1.9 | 1.0 | 1.9 |
| 2004 | 1.0 | -0.3 | 0.6 |
| 2003 | 0.6 | 0.1 | 0.5 |
| 2002 | -0.1 | -0.4 | -0.1 |
| 2001 | -0.3 | -0.6 | -0.3 |
| 2000 | 1.4 | -0.5 | 0.8 |
| 1999 | 0.6 | -1.0 | -0.3 |
| 1998 | 0.0 | -0.8 | -0.9 |
| 1997 | 0.9 | 0.3 | 0.1 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
Monthly and annual equivalent rates of change of output prices are shown in Table IV-17. There are four waves of inflation similar to those in other countries. In the first wave, annual equivalent inflation was 12.0 percent in Jan-Apr with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 2.0 percent in May-Oct. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.6 percent in Nov-Jan. In the fourth wave, the energy commodity shock caused by carry trades caused the jump of annual equivalent inflation to 7.4 percent in Feb-Mar 2012.
Table IV-17, UK Output Prices Month ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Mar 2012 | 0.6 | 0.1 | 0.5 |
| Feb | 0.6 | 0.5 | 0.6 |
| ∆% AE Feb-Mar | 7.4 | 3.7 | 8.0 |
| Jan | 0.4 | 0.3 | 0.3 |
| Dec 2011 | -0.2 | -0.1 | -0.2 |
| Nov | 0.2 | -0.1 | 0.2 |
| ∆% AE Nov-Jan | 1.6 | 0.4 | 1.2 |
| Oct | 0.0 | -0.1 | 0.1 |
| Sep | 0.3 | 0.3 | 0.2 |
| Aug | 0.0 | 0.1 | 0.1 |
| Jul | 0.3 | 0.4 | 0.3 |
| Jun | 0.2 | 0.2 | 0.2 |
| May | 0.2 | 0.2 | 0.2 |
| ∆% AE May-Oct | 2.0 | 2.2 | 2.2 |
| Apr | 1.1 | 0.8 | 0.9 |
| Mar | 1.1 | 0.5 | 1.1 |
| Feb | 0.5 | 0.0 | 0.5 |
| Jan | 1.1 | 0.8 | 1.1 |
| Jan-Apr | 12.0 | 6.5 | 11.4 |
| Dec 2010 | 0.5 | 0.0 | 0.6 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
Input prices in the UK have been more dynamic than output prices, as shown by Table IV-18. The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 18.1 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.8 percent in Mar 2012 and 4.3 percent excluding food, tobacco, beverages and petroleum. There is only comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.
Table IV-18, UK Input Prices 12 Months ∆% NSA
| Materials and Fuels Purchased | Excluding Food, Tobacco, Beverages and Petroleum | |
| Mar 2012 | 5.8 | 4.3 |
| Feb | 7.8 | 5.6 |
| Jan | 6.6 | 5.6 |
| Dec 2011 | 8.9 | 7.2 |
| Nov | 13.8 | 10.2 |
| Oct | 14.5 | 11.0 |
| Sep | 18.1 | 13.3 |
| Aug | 16.3 | 13.0 |
| Jul | 18.5 | 13.3 |
| Jun | 16.8 | 12.6 |
| May | 16.3 | 11.4 |
| Apr | 17.9 | 12.2 |
| Mar | 14.8 | 10.3 |
| Feb | 14.9 | 10.7 |
| Jan | 14.2 | 10.5 |
| Dec 2010 | 13.1 | 9.0 |
| Year ∆% | ||
| 2011 | 15.4 | 11.4 |
| 2010 | 9.9 | 5.7 |
| 2009 | -3.8 | 1.6 |
| 2008 | 22.2 | 16.9 |
| 2007 | 2.9 | 2.3 |
| 2006 | 9.8 | 7.3 |
| 2005 | 10.9 | 6.9 |
| 2004 | 3.3 | 1.6 |
| 2003 | 1.2 | -0.6 |
| 2002 | -4.4 | -4.8 |
| 2001 | -1.2 | -1.2 |
| 2000 | 7.4 | 3.7 |
| 1999 | -1.3 | -3.6 |
| 1998 | -9.1 | -4.6 |
| 1997 | -8.2 | -6.3 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
Table IV-19 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are four strong waves of inflation of input prices in the UK similar to those worldwide. In the first wave, input prices rose at the high rate of 35.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 3.1 percent in May-Oct. In the third wave, renewed risk aversion resulted in annual equivalent inflation of 1.2 percent in Nov-Dec. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 20.0 percent under relaxed risk aversion.
Table IV-19, UK Input Prices Month ∆%
| Materials and Fuels Purchased NSA | Excluding Food, Tobacco, Beverages and Petroleum SA | |
| Mar 2012 | 1.9 | -0.1 |
| Feb | 2.5 | 0.8 |
| Jan | 0.2 | 0.3 |
| ∆% AE Jan-Mar | 20.0 | 4.1 |
| Dec 2011 | -0.6 | -0.4 |
| Nov | 0.4 | 0.1 |
| ∆% AE Nov-Dec | -1.2 | 1.8 |
| Oct | -0.8 | -0.4 |
| Sep | 2.1 | 0.7 |
| Aug | -1.9 | 0.2 |
| Jul | 0.6 | 0.8 |
| Jun | 0.1 | 0.9 |
| May | -1.6 | -0.1 |
| ∆% AE May-Oct | -3.1 | 4.3 |
| Apr | 2.8 | 2.0 |
| Mar | 3.8 | 1.0 |
| Feb | 1.4 | 1.0 |
| Jan | 2.3 | 1.5 |
| ∆% AE Jan-Apr | 35.6 | 17.8 |
| Dec 2010 | 3.9 | 1.9 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-20. Petroleum is the third largest contributor with 0.53 percentage points to the 12-month rate behind 0.80 percentage points contributed by food products and 0.80 percentage points by tobacco and alcohol. There are diversified sources of contributions to 12 months output price inflation such as 0.46 percentage points by clothing, textile and leather and 0.27 percentage points by chemical and pharmaceutical. In general, contributions by products rich in commodities are the drivers of inflation. There were diversified contributions in percentage points to monthly inflation: 0.13 by tobacco and alcohol, 0.11 by other manufactured products, 0.32 by petroleum and 0.05 by chemical and pharmaceutical.
Table IV-20, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points
| Mar 2012 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total % | 3.6 | 3.6 | 0.5 | 0.6 |
| Food Products | 0.65 | 4.0 | -0.01 | -0.1 |
| Tobacco & Alcohol | 0.80 | 7.8 | 0.13 | 1.1 |
| Clothing, Textile & Leather | 0.46 | 4.2 | 0.04 | 0.4 |
| Paper and Printing | 0.06 | 1.5 | 0.00 | -0.1 |
| Petroleum | 0.53 | 4.5 | 0.32 | 2.4 |
| Chemical & Pharmaceutical | 0.27 | 3.0 | 0.05 | 0.5 |
| Metal, Machinery & Equipment | 0.08 | 2.4 | -0.01 | -0.2 |
| Computer, Electrical & Optical | 0.03 | 0.4 | 0.01 | 0.1 |
| Transport Equipment | 0.06 | 0.6 | -0.05 | -0.4 |
| Other Manufactured Products | 0.67 | 4.0 | 0.11 | 0.6 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices, shown in Table IV-21. Crude oil is the large contributor with 3.74 percentage points to the 12-month rate and 1.78 percentage points to the monthly rate in Mar. Inflation also transfers to the domestic economy through the prices of imported inputs.
Table IV-21, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points
| Mar 2012 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total | 5.8 | 5.8 | 0.5 | 1.9 |
| Fuel | 0.84 | 9.1 | -0.15 | -1.5 |
| Crude Oil | 3.74 | 13.5 | 1.78 | 6.3 |
| Domestic Food Materials | -0.01 | -0.1 | -0.09 | -0.9 |
| Imported Food Materials | 0.24 | 4.7 | 0.05 | 1.0 |
| Other Domestic Produced Materials | 0.12 | 3.2 | -0.01 | -0.1 |
| Imported Metals | -0.32 | -3.8 | 0.05 | 0.6 |
| Imported Chemicals | 0.22 | 2.0 | 0.04 | 0.3 |
| Imported Parts and Equipment | 0.33 | 2.3 | 0.07 | 0.5 |
| Other Imported Materials | 0.64 | 6.7 | 0.15 | 1.6 |
Source: http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2012/index.html
V World Economic Slowdown. The International Monetary Fund (IMF) has revised its World Economic Outlook (WEO) to an environment of lower growth (IMF 2012WEOJan24):
“The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. Global output is projected to expand by 3¼ percent in 2012—a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO).”
The IMF (2012WEOJan24) projects growth of world output of 3.8 percent in 2011 and 3.3 percent in 2012 after 5.2 percent in 2010. Advanced economies would grow at only 1.6 percent in 2011, 1.2 percent in 2012 and 3.9 percent in 2013 after growing at 3.2 percent in 2010. Emerging and developing economies would drive the world economy, growing at 6.2 percent in 2011, 5.4 percent in 2012 and 5.9 percent in 2012 after growing at 7.3 percent in 2010. The IMF is forecasting deceleration of the world economy.
World economic slowing would be the consequence of the mild recession in the euro area in 2012 caused by “the rise in sovereign yields, the effects of bank deleveraging on the real economy and the impact of additional fiscal consolidation” (IMF 2012WEOJan24). After growing at 1.9 percent in 2010 and 1.6 percent in 2010, the economy of the euro area would contract by 0.5 percent in 2012 and grow at 0.8 percent in 2013. The United States would grow at 1.8 percent in both 2011 and 2012 and at 2.2 percent in 2013. The IMF (2012WEO Jan24) projects slow growth in 2012 of Germany at 0.3 percent and of France at 0.2 percent while Italy contracts 2.2 percent and Spain contracts 1.7 percent. While Germany would grow at 1.5 percent in 2013 and France at 1.0 percent, Italy would contract 0.6 percent and Spain 0.3 percent.
The IMF (2012WEOJan24) also projects a downside scenario, in which the critical risk “is intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank deleveraging and sizable contractions in credit and output.” In this scenario, there is contraction of private investment by an extra 1.75 percentage points in relation to the projections of the WEO with euro area output contracting 4 percent relative to the base WEO projection. The environment could be complicated by failure in medium-term fiscal consolidation in the United States and Japan.
There is significant deceleration in world trade volume in the projections of the IMF (2012WEOJan24). Growth of the volume of world trade in goods and services decelerates from 12.7 percent in 2010 to 6.9 percent in 2011, 3.8 percent in 2012 and 5.4 percent in 2013. Under these projections there would be significant pressure in economies in stress such as Japan and Italy that require trade for growth. Even the stronger German economy is dependent on foreign trade. There is sharp deceleration of growth of exports of advanced economies from 12.2 percent in 2010 to 2.4 percent in 2012. Growth of exports of emerging and developing economies falls from 13.8 percent in 2010 to 6.1 percent in 2012. Another cause of concern in that oil prices in the projections fall only 4.9 percent in 2012, remaining at relatively high levels.
The JP Morgan Global Manufacturing and Services PMI™, The JPMorgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, was only marginally lower at 54.6 in Mar compared with 55.4 in Feb, indicating the second best reading in 13 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth at the seasonally-adjusted annual rate of 3.0 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, was marginally unchanged at 52.1 in Mar relative to 51.2 in Feb, for a fourth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). Higher oil and transportation prices were contributing to higher costs of inputs. David Hensley, Director of Global Economics Coordination at JPMorgan, finds that the global PMI™ is at a low level consistently with mild growth in goods and expenditures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). The HSBC Brazil Services PMI™ with Composite PMI data, compiled by Markit, fell marginally from 55.5 in Feb to 53.4 in Mar, suggesting strong activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI fell to 53.8 in Mar relative to 57.1 in Feb, but expansion of services in the Brazilian economist has continued during 32 consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). There is continuing strength in other indicators of the services sector. The HSBC Brazil Purchasing Managers’ IndexTM (PMI™)m fell slightly from 51.4 in Feb to 51.1 in Mar, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354). Andre Loes, Chief Economist, Brazil at HSBC, find improvement in output and new orders with subdued export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354).
VA United States. Table USA provides the data table for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Mar 12 months NSA ∆%: 2.7; ex food and energy ∆%: 2.3 Mar month ∆%: 0.3; ex food and energy ∆%: 0.2 |
| Producer Price Index | Mar 12 months NSA ∆%: 2.8; ex food and energy ∆% 2.9 |
| PCE Inflation | Feb 12 months NSA ∆%: headline 2.3; ex food and energy ∆% 1.9 |
| Employment Situation | Household Survey: Jan Unemployment Rate SA 8.3% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 |
| Personal Income and Consumption | Jan month ∆% SA Real Real Disposable Personal Income (RDPI) Feb month SA ∆% minus 0.1 |
| Quarterly Services Report | IVQ11/IIIQ11 SA ∆%: |
| Employment Cost Index | IVQ2011 SA ∆%: 0.4 |
| Industrial Production | Feb month SA ∆%: 0.0 Manufacturing Feb SA ∆% 0.3 Feb 12 months SA ∆% 5.1, NSA 5.2 |
| Productivity and Costs | Nonfarm Business Productivity IVQ2011∆% SAAE 0.9; IVQ2011/IVQ2010 ∆% 0.3; Unit Labor Costs IVQ2011 ∆% 2.8; IVQ2011/IVQ2010 ∆%: 3.1 Blog 03/11/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Feb 19.53 to Mar 20.21 |
| Philadelphia Fed Business Outlook Index | General Index from Feb 10.2 to Mar 12.5 |
| Manufacturing Shipments and Orders | Feb New Orders SA ∆%: +1.3; ex transport ∆%: +0.9 |
| Durable Goods | Feb New Orders SA ∆%: minus 2.2; ex transport ∆%: 1.6 |
| Sales of New Motor Vehicles | Mar 2012 3,467,840; Mar 2011 3,059,805. Mar SAAR 15.10 million, Feb SAAR 15.10 million, Mar 2011 SAAR 13.07 million Blog 4/8/12 |
| Sales of Merchant Wholesalers | Jan-Feb 2012/Jan-Feb 2010 NSA ∆%: Total 12.2; Durable Goods: 15.3; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Jan 12/Jan 11 NSA ∆%: Sales Total Business 8.6; Manufacturers 8.4 |
| Sales for Retail and Food Services | Feb 2012/Feb 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 8.0 |
| Value of Construction Put in Place | Feb SAAR month SA ∆%: minus 1.1 Feb 12-month NSA: 7.8 |
| Case-Shiller Home Prices | Jan 2012/Jan 2011 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 3.8 |
| FHFA House Price Index Purchases Only | Feb SA ∆% 0.0; |
| New House Sales | Feb 2012 month SAAR ∆%: |
| Housing Starts and Permits | Feb Starts month SA ∆%: minus1.6; Permits ∆%: +5.1 |
| Trade Balance | Balance Feb SA -$46,025 million versus Jan -$52,522 million |
| Export and Import Prices | Mar 12 months NSA ∆%: Imports 3.4; Exports 0.9 |
| Consumer Credit | Feb ∆% annual rate: 4.2 |
| Net Foreign Purchases of Long-term Treasury Securities | Nov Net Foreign Purchases of Long-term Treasury Securities: $101.0 billion Jan versus Dec $19.1 billion |
| Treasury Budget | Fiscal Year Oct-Mar 2012/2011 ∆%: Receipts 4.4; Outlays -0.3; Individual Income Taxes 1.8 Deficit Fiscal Year 2012 Oct-Mar $778,988 million CBO Forecast 2012FY Deficit $1.079 trillion Blog 4/15/2012 |
| Flow of Funds | IVQ2011 ∆ since 2007 Assets -$7315B Real estate -$5183B Financial -$2507 Net Worth -$6743 Blog 03/11/12 |
| Current Account Balance of Payments | IVQ2011 -$124B %GDP 3.2 Blog 03/18/12 |
Links to blog comments in Table USA:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html
Sales and inventories of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-1 for Feb 2012 and percentage changes from the prior month and for Jan-Feb 2012 relative to Jan-Feb 2011. These data are volatile aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 12.2 percent in Jan-Feb 2012 relative to Jan-Feb 2011 and increased 1.2 percent in Feb 2012 relative to Jan 2012. The value of total sales is quite high at $765.4 billion, exceeding four trillion dollars in a year. Value in the breakdown is useful in identifying relative importance of individual categories. Sales of durable goods in Jan-Feb 2012 reached $341.3 billion, over two trillion for a year, increasing 0.9 percent in Feb relative to Jan and increasing 15.3 percent in Jan-Feb 2012 relative to Jan-Feb 2011. Sales of automotive products reached $61.8 billion in Jan-Feb 2012, increasing 0.2 percent in the month and increasing 28.7 percent relative to a year earlier. There is strong performance of 24.0 percent in machinery and 9.4 percent in electrical products. Sales of nondurable goods rose 9.9 percent. The influence of commodity prices moderated as shown by decrease of 6.5 percent in farm products and increase of only 13.6 percent in petroleum products even with increase of 3.9 percent in Feb alone. The final three columns in Table VA-13 provide the value of inventories and percentage changes from the prior month and relative to the same month a year earlier. US total inventories of wholesalers increased 1.4 percent in Feb and increased 9.1 percent relative to a year earlier. Inventories of durable goods of $278.3 billion are 57.5 percent of total inventories of $483.9 billion and rose 10.2 percent relative to a year earlier. Automotive inventories jumped 15.1 percent relative to a year earlier. Machinery inventories of $72.4 billion rose 15.4 percent relative to a year earlier. Inventories of nondurable goods of $205.6 billion are 42.5 percent of the total and increased 7.7 percent relative to a year earlier. Inventories of farm products increased 0.7 percent in Feb relative to Jan and declined 15.3 percent relative to a year earlier. Inventories of petroleum products increased 9.2 percent in Feb and 16.4 percent relative to a year earlier.
Table VA-1, US, Sales and Inventories of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, Month ∆%
| 2012 | Sales $ Billions Jan-Feb 2012 | Sales Feb ∆% SA | Sales∆% Jan-Feb 2012 from Jan-Feb 2011 NSA | INV $ Billions Feb 2012 NSA | INV Feb ∆% SA | INV ∆% Feb 2012 from Feb 2011 NSA |
| US Total | 765.4 | 1.2 | 12.2 | 483.9 | 1.4 | 9.1 |
| Durable | 341.3 | 0.9 | 15.3 | 278.3 | 1.3 | 10.2 |
| Automotive | 61.8 | 0.2 | 28.7 | 46.2 | 1.5 | 15.1 |
| Prof. Equip. | 57.2 | 1.5 | 4.9 | 31.3 | -0.5 | 1.8 |
| Computer Equipment | 14.8 | 2.3 | 1.2 | 11.2 | -4.2 | -4.5 |
| Electrical | 31.6 | 0.9 | 9.4 | 40.3 | -0.6 | 6.3 |
| Machinery | 29.9 | -1.0 | 24.0 | 72.4 | 3.6 | 15.4 |
| Not Durable | 424.2 | 1.4 | 9.9 | 205.6 | 1.4 | 7.7 |
| Drugs | 70.7 | -0.2 | 8.7 | 32.9 | -0.8 | -9.9 |
| Apparel | 21.9 | -0.4 | 7.6 | 21.5 | -3.6 | 10.5 |
| Groceries | 91.9 | 1.9 | 15.4 | 34.0 | 0.4 | 12.5 |
| Farm Products | 35.8 | -1.6 | -6.5 | 25.4 | 0.7 | -15.3 |
| Petroleum | 121.0 | 3.9 | 13.6 | 30.1 | 9.2 | 16.4 |
Note: INV: inventories
Source: US Census Bureau
http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf
Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-2. The total for the US has remained almost unaltered at 1.17 in Jan-Feb 2012 and Feb 2011. Inventory/sales ratios are higher in durable goods industries but still remain relatively stable with 1.49 in Feb 2012 relative to 1.50 in Jan 2012 and 1.52 in Feb 2011. Computer equipment operates with low inventory/sales ratios of 0.72 in Feb 2012 relative to 0.74 in Feb 2011 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.90 in Feb 2012, which is equal to 0.90 in Jan 2012 and almost equal to 0.89 in Feb 2011. There are exceptions such as 1.90 in Feb 2012 in apparel that is higher than 1.89 in Feb 2011 and 1.79 in Feb 2011 perhaps because of the expectation of stronger spring and summer sales.
Table VA-2, Inventory/Sales Ratios of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, % SA
| Feb 2012 | Jan 2012 | Feb 2011 | |
| US Total | 1.17 | 1.17 | 1.17 |
| Durable | 1.49 | 1.50 | 1.52 |
| Automotive | 1.35 | 1.37 | 1.46 |
| Prof. Equip. | 0.99 | 1.00 | 0.99 |
| Comp. Equip. | 0.72 | 0.72 | 0.74 |
| Electrical | 1.30 | 1.29 | 1.31 |
| Machinery | 2.24 | 2.22 | 2.31 |
| Not Durable | 0.90 | 0.90 | 0.89 |
| Drugs | 0.94 | 0.93 | 0.92 |
| Apparel | 1.90 | 1.89 | 1.79 |
| Groceries | 0.71 | 0.71 | 0.71 |
| Farm Products | 1.24 | 1.19 | 1.32 |
| Petroleum | 0.46 | 0.45 | 0.45 |
Sources: US Census Bureau http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf
Chart VA-1 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2002 to 2011 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks.
Chart VA-1, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2002-2011
Source: US Census Bureau
http://www2.census.gov/wholesale/img/mwtsbrf.jpg
Table VA-3 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted. The US trade balance improved from deficit of $52,522 million in Jan 2012 to lower deficit of $46.025 million in Feb 2012 mostly because of decline of imports by 2.7 percent while exports increased only 0.1 percent. The US trade balance deteriorated sharply from Nov to Jan with growth of imports by cumulative 4.9 percent and cumulative growth of exports of only 0.8 percent, resulting in deficits of $47,524 million in Nov, $50,421 million in Dec and $52,522 million in Jan, which are the highest since $51,774 million in Jun. There was mild improvement in the balance of international trade in goods and services of the US from Jul to Oct, declining from deficit of $50,210 million in May and $51,774 million in Jun to deficit of $43,121 million in Oct, as shown in Table VA-12. In the months of Jun to Oct, exports increased 2.2 percent while imports fell 1.4 percent. The trade balance deteriorated from cumulative deficit of $500,027 million in Jan-Dec 2010 to deficit of $559,956 million in Jan-Dec 2011.
Table VA-3, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%
| Trade Balance | Exports | Month ∆% | Imports | Month ∆% | |
| Feb 2012 | -46,025 | 181,161 | 0.1 | 227,185 | -2.7 |
| Jan | -52,522 | 180,921 | 1.5 | 233,443 | 2.1 |
| Dec 2011 | -50,421 | 178,229 | 0.4 | 228,650 | 1.6 |
| Nov | -47,524 | 177,567 | -1.1 | 225,091 | 1.1 |
| Oct | -43,121 | 179,593 | -0.9 | 222,714 | -1.1 |
| Sep | -44,009 | 181,156 | 1.4 | 225,165 | 0.6 |
| Aug | -45,091 | 178,639 | 0.1 | 223,730 | -0.1 |
| Jul | -45,613 | 178,395 | 3.8 | 224,008 | 0.2 |
| Jun | -51,774 | 171,806 | -2.2 | 223,580 | -1.1 |
| May | -50,210 | 175,744 | -0.3 | 225,954 | 2.9 |
| Apr | -43,231 | 176,315 | 1.3 | 219,547 | -0.2 |
| Mar | -46,059 | 173,997 | 5.0 | 220,056 | 4.2 |
| Feb | -45,381 | 165,741 | -1.3 | 211,123 | -2.0 |
| Jan | -47,521 | 167,864 | 2.4 | 215,385 | 5.3 |
| Dec 2010 | -40,454 | 164,006 | 1.7 | 204,459 | 2.2 |
| Jan-Dec | -559,956 | 2,105,046 | 2,665,002 | ||
| Jan-Dec | -500,027 | 1,837,577 | 2,337,604 |
Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding.
Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
Table VA-3 provides the US international trade balance, exports and imports on an annual basis from 1992 to 2011. The trade balance deteriorated sharply over the long term. The current account deficit of the US declined from $123.4 billion in IIQ2010, or 3.3 percent of GDP to $107.6 billion in IIIQ2011, or 2.8 percent of GDP, but increased to $124.1 billion in IVQ2011, or 3.2 percent of GDP. In IVQ2010, the deficit reached $112.2 billion or 3.3 percent of GDP (for the balance of payments in IVQ2011 see http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html).
In IVQ2010, “the deficit decreased to 3.0 percent of current-dollar GDP from 3.4 percent, the first decrease after five straight quarterly increases” (http://www.bea.gov/scb/pdf/2011/04%20April/0411_itaq-text.pdf 1). The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The current account deficit reached 6.1 percent of GDP in 2006. The external imbalance of the US measured by the current account deficit must be financed with foreign borrowings. The US borrows heavily from other countries. China is the largest holder of US Treasury securities with $1159.5 billion in Jan 2012, decreasing 0.4 percent from $1154.7 billion in Jan 2011. Japan increased its holdings from $886.0 billion in Jan 2011 to $1079.0 billion in Jan 2012. The United Kingdom decreased its holdings to $142.3 billion in Jan 2012 relative to $277.6 billion in Jan 2011. Caribbean banking centers increased their holdings from $165.3 billion in Jan 2011 to $227.8 billion in Jan 2012. Total foreign holdings of Treasury securities rose from $4435.6 billion in Jan 2011 to $5048.0 billion in Jan 2011, or 13.8 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Table VA-11 at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html).
Table VA-4, US, International Trade Balance, Exports and Imports SA, Millions of Dollars
| Period | Balance | Exports | Imports |
| Total | |||
| Annual | |||
| 1992 | -39,212 | 616,882 | 656,094 |
| 1993 | -70,311 | 642,863 | 713,174 |
| 1994 | -98,493 | 703,254 | 801,747 |
| 1995 | -96,384 | 794,387 | 890,771 |
| 1996 | -104,065 | 851,602 | 955,667 |
| 1997 | -108,273 | 934,453 | 1,042,726 |
| 1998 | -166,140 | 933,174 | 1,099,314 |
| 1999 | -263,160 | 967,008 | 1,230,168 |
| 2000 | -376,749 | 1,072,783 | 1,449,532 |
| 2001 | -361,771 | 1,007,726 | 1,369,496 |
| 2002 | -417,432 | 980,879 | 1,398,311 |
| 2003 | -490,984 | 1,023,519 | 1,514,503 |
| 2004 | -605,357 | 1,163,146 | 1,768,502 |
| 2005 | -708,624 | 1,287,441 | 1,996,065 |
| 2006 | -753,288 | 1,459,823 | 2,213,111 |
| 2007 | -696,728 | 1,654,561 | 2,351,289 |
| 2008 | -698,338 | 1,842,682 | 2,541,020 |
| 2009 | -381,272 | 1,575,037 | 1,956,310 |
| 2010 | -500,027 | 1,837,577 | 2,337,604 |
| 2011 | -559,956 | 2,105,046 | 2,665,002 |
Source: http://www.bea.gov/international/index.htm#trade
Chart VA-2 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. There was slight improvement at the margin from Jul to Oct 2011 but new increase in the gap in Nov, Dec and Jan as exports stagnate in value while imports are more dynamic. Weaker world and internal demand and moderating commodity price increases explain the declining or less dynamic changes in exports and imports in Chart VA-2.
Chart VA-2, US Balance, Exports and Imports of Goods and Services $ Billions
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr042.html
The balance of international trade in goods of the US seasonally-adjusted is shown in Table VA-5. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The balance in international trade of goods deteriorated from $59.4 billion in Feb 2011 to $61.4 billion in Feb 2012. Deterioration occurred both in the petroleum balance, exports less imports of petroleum, as well as in the non-petroleum balance, exports less imports of non-petroleum goods. Exports rose 9.0 percent with non-petroleum exports growing 8.3 percent. Total imports rose 7.2 percent with petroleum imports increasing 12.8 percent and non-petroleum imports increasing 5.9 percent.
Table VA-5, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA
| Feb 2012 | Feb 2011 | ∆% | |
| Total Balance | -61,389 | -59,363 | |
| Petroleum | -27,790 | -25,332 | |
| Non Petroleum | -32,869 | -33,494 | |
| Total Exports | 127,987 | 117,409 | 9.0 |
| Petroleum | 9,537 | 7,682 | 24.1 |
| Non Petroleum | 117,022 | 108,013 | 8.3 |
| Total Imports | 189,376 | 176,773 | 7.2 |
| Petroleum | 37,227 | 33,014 | 12.8 |
| Non Petroleum | 149,891 | 141,507 | 5.9 |
Details may not add because of rounding and seasonal adjustment
Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
US exports and imports of goods not seasonally adjusted in Jan-Feb 2012 and Jan-Feb 2011 are shown in Table VA-6. The rate of growth of exports was 10.0 percent, which is equal to 10.0 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that fell 5.2 percent and of mineral fuels that increased 18.1 percent both because of higher prices of raw materials and commodities. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose 11.6 percent while imports rose 9.8 percent. Significant part of the US trade imbalance originates in imports of mineral fuels growing by 9.8 percent and crude oil increasing 11.7 percent. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates.
Table VA-6, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %
| Jan-Feb 2012 $ Millions | Jan-Feb 2011 $ Millions | ∆% | |
| Exports | 241,700 | 219,794 | 10.0 |
| Manufactured | 158,794 | 142,328 | 11.6 |
| Agricultural | 23,051 | 24,327 | -5.2 |
| Mineral Fuels | 20,730 | 17,557 | 18.1 |
| Crude Oil | 307 | 194 | 58.2 |
| Imports | 355,438 | 323,232 | 10.0 |
| Manufactured | 260,668 | 237,452 | 9.8 |
| Agricultural | 17,386 | 15,324 | 13.5 |
| Mineral Fuels | 70,540 | 64,228 | 9.8 |
| Crude Oil | 52,223 | 46,770 | 11.7 |
Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
The US Treasury budget for fiscal year 2012 in the first six months of Oct-Dec 2011 and Jan-Mar 2012 is shown in Table VA-6. Receipts increased 4.4 percent in the first six months of fiscal year 2012 relative to the same six months in fiscal year 2011 or Oct-Dec 2010 and Jan-Mar 2011. Individual income taxes have grown 1.8 percent relative to the same period a year earlier in sharp decline of the rate of growth of 4.9 percent cumulatively in the first four months. Outlays were lower by 0.3 percent relative to a year earlier compared with decline of 3.2 percent in the first four months. The final two rows of Table VA-9 provide the projection of the Congressional Budget Office (CBO) of the deficit for fiscal year 2012 at $1.3 trillion not very different from that in fiscal year 2011. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.1 trillion in four years, which is the worst fiscal performance since World War II.
Table VA-7, US, Treasury Budget in Fiscal Year to Date Million Dollars
| Fiscal Year 2012 | Oct 2011 to Mar 2012 | Oct 2010 to Mar 2011 | ∆% |
| Receipts | 1,064,384 | 1,019,896 | 4.4 |
| Outlays | 1,843,372 | 1,849,315 | -0.3 |
| Deficit | -778,988 | -829,418 | NA |
| Individual Income Taxes | 484,143 | 475,598 | 1.8 |
| Social Insurance | 272,225 | 278,974 | -2.4 |
| Receipts | Outlays | Deficit (-), Surplus (+) | |
| $ Billions | |||
| CBO Forecast Fiscal Year 2012 | 2,522 | 3,601 | -1,079 |
| Fiscal Year 2011 | 2,302 | 3,599 | -1,296 |
| Fiscal Year 2010 | 2,162 | 3,456 | -1,294 |
| Fiscal Year 2009 | 2,105 | 3,518 | -1,413 |
| Fiscal Year 2008 | 2,524 | 2,983 | -459 |
Source: http://www.fms.treas.gov/mts/index.html
CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan.
VB. Japan. Private-sector activity in Japan expanded sharply with the Markit Composite Output PMI™ Index advancing from 51.2 in Feb to a record 53.2 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Alex Hamilton, economist at Markit and author of the report, finds broad strength in the index through rare strengthening activity in both services and manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit Business Activity Index of Services increased from 51.2 in Feb to 53.2 in Mar, also showing strength (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, increased from 50.5 in Feb to 51.1, for the highest reading in seven months, indicating improving manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346). Alex Hamilton, economist at Markit and author of the report, finds that investment goods drove the recovery and that new orders registered strong growth but that foreign demand and yen overvaluation are important risk of continuing improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346).
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Mar ∆% 0.6 |
| Consumer Price Index | Feb NSA ∆% 0.2 |
| Real GDP Growth | IVQ2011 ∆%: -0.2 on IIIQ2011; IVQ2011 SAAR minus 0.7% |
| Employment Report | Feb Unemployed 2.89 million Change in unemployed since last year: minus 140 thousand |
| All Industry Indices | Jan month SA ∆% minus 1.0 Blog 3/25/12 |
| Industrial Production | Feb SA month ∆%: minus 1.2 |
| Machine Orders | Total Feb ∆% -14.5 Private ∆%: -3.0 |
| Tertiary Index | Jan month SA ∆% minus 1.7 |
| Wholesale and Retail Sales | Feb 12 months: |
| Family Income and Expenditure Survey | Feb 12-month ∆% total nominal consumption 2.7, real 2.3 Blog 04/01/12 |
| Trade Balance | Exports Feb 12 months ∆%: minus 2.7 Imports Feb 12 months ∆% +9.2 Blog 03/25/12 |
Links to blog comments in Table JPY:
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
Japan’s machinery orders in Table VB-1 fell sharply in Feb by 14.5 percent. Total orders grew 21.6 percent in Jan after falling 7.2 percent in Dec. Private-sector orders excluding volatile orders, which are closely watched, increased 4.8 percent in Feb after growing Jan 3.4 percent in Jan but falling 22.2 percent in Dec. Orders for manufacturing increased 16.0 percent in Feb after falling 1.8 percent in Jan and 7.1 percent in Dec but increasing 4.7 percent in Nov. Overseas orders fell 18.3 percent in Feb after jumping 20.1 percent in Jan. There is significant volatility in industrial orders in advanced economies.
Table VB-1, Japan, Machinery Orders, Month ∆%, SA
| 2011-2012 | Feb | Jan | Dec | Nov |
| Total | -14.5 | 21.6 | -7.2 | 14.7 |
| Private Sector | -3.0 | 4.6 | -22.2 | 21.5 |
| Excluding Volatile Orders | 4.8 | 3.4 | -7.1 | 14.8 |
| Mfg | 16.0 | -1.8 | -7.1 | 4.7 |
| Non Mfg ex Volatile | 2.3 | 2.3 | -6.0 | -6.2 |
| Government | -7.3 | -17.7 | 50.7 | -5.3 |
| From Overseas | -18.3 | 20.1 | 5.6 | 20.3 |
| Through Agencies | 5.7 | -2.5 | 3.0 | 0.6 |
Note: Mfg: manufacturing
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/1202juchu-e.html
Total orders for machinery and total private-sector orders excluding volatile orders for Japan are shown in Chart VB-1 of Japan’s Economic and Social Research Institute at the Cabinet Office. The trend of private-sector orders excluding volatile orders was increasing smoothly but may be flattening or even declining now even after the jump in Nov and increase in Feb. There could be reversal of the trend of increase in total orders with recent increases. Fluctuations still prevent detecting longer term trends.
Chart VB-1, Japan, Machinery Orders
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/1202juchu-e.html
Table VB-2 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 1,992,950 million are divided between JPY 851,704 overseas orders, or 42.7 percent of the total, and domestic orders of JPY 1,048,746, or 52.6 percent of the total, with orders through agencies of JPY 88,919 million, or 4.5 percent of the total. Orders through agencies are not shown in the table because of the minor value. Twelve-month percentages changes in Feb 2012 were weak: minus 9.3 percent for total orders, minus 8.9 percent for overseas orders, minus 11.2 percent for domestic orders and 8.9 percent for private orders excluding volatile items. Performance in Jan 2012 was quite strong with growth of total orders of 9.8 percent, 18.3 percent of overseas orders and 5.7 percent of private orders excluding volatile items. There is sharp reversal of 12-month percentage changes in Nov with increase of 11.0 percent in total orders, 8.0 percent in overseas orders, 13.5 percent in domestic orders and 12.5 percent in private orders excluding volatile items. The pace of increase declined in Dec with growth in 12 months of 0.8 percent for total orders, 12.6 percent for overseas orders, decline of 8.5 percent for domestic orders and growth of private orders excluding volatile items of 6.3 percent. There was strong impact from the global recession with total orders falling 23.3 percent in 2008, overseas orders dropping 29.4 percent and domestic orders decreasing 17.4 percent. Recovery was vigorous in 2010 with increase of total orders by 9.4 percent, overseas orders by 3.5 percent and domestic orders by 14.1 percent. The heavy impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 also affected machinery orders.
Table VB-2, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series
| Total | Overseas | Domestic | Private ex Volatile | |
| Value Feb 2012 | 1,992,950 | 851,704 | 1,048,746 | 712,679 |
| % Total | 100.0 | 42.7 | 52.6 | 35.8 |
| Value Feb 2011 | 2,197,512 | 935,523 | 1,181,398 | 654,721 |
| % Total | 100.0 | 42.6 | 53.8 | 29.8 |
| 12-month ∆% | ||||
| Feb 2012 | -9.3 | -8.9 | -11.2 | 8.9 |
| Jan 2012 | 9.8 | 18.3 | 0.5 | 5.7 |
| Dec 2011 | 0.8 | 12.6 | -8.5 | 6.3 |
| Nov 2011 | 11.0 | 8.0 | 13.5 | 12.5 |
| Oct 2011 | -6.8 | -15.6 | -1.0 | 1.5 |
| Dec 2010 | 9.4 | 3.5 | 14.1 | -0.6 |
| Dec 2009 | 1.8 | 0.4 | 3.6 | -1.9 |
| Dec 2008 | -23.3 | -29.4 | -17.4 | -24.7 |
| Dec 2007 | 1.3 | 9.8 | -4.3 | -6.4 |
| Dec 2006 | 0.8 | 0.9 | -0.1 | 0.1 |
Note: Total machinery orders = overseas + domestic demand + orders through agencies. Orders through agencies in Oct 2011 were JPY 88,919 million, or 4.5 percent of the total, and are not shown in the table. The data are the original numbers without any adjustments and differ from the seasonally-adjusted data.
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/1202juchu-e.html
VC. China. The HSBC China Services PMI™, compiled by Markit, finds stagnating business activity in China with the HSBC Composite Output, combining manufacturing and services, declining to 49.9 in Mar from 51.8 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth and weakness in export orders that require more easing measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, fell to 48.3 in Mar from 49.6 in Feb, in a fourth consecutive month of declining conditions in manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). The index for the first quarter of 2012 is the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth with weakening impulse from new export orders, requiring monetary and fiscal stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). Table CNY provides the country table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Mar 12 months ∆%: minus 0.3 Mar month ∆%: 0.3 |
| Consumer Price Index | Mar month ∆%: 0.2 Mar 12 month ∆%: 3.6 |
| Value Added of Industry | Feb month ∆%: 0.98 Jan-Feb 2012/Jan-Feb 2011 ∆%: 11.4 |
| GDP Growth Rate | Year IQ2012 ∆%: 8.1 |
| Investment in Fixed Assets | Total Jan-Feb 2012 ∆%: 21.5 Jan-Dec ∆% real estate development: 27.8 |
| Retail Sales | Jan month ∆%: 1.6 Jan-Feb ∆%: 14.7 |
| Trade Balance | Mar balance $5.35 billion Cumulative Mar: $1.11 billion |
Links to blog comments in Table CNY:
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html
03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
Growth of GDP in China has decelerated from earlier high levels, as shown in Table VC-1. Growth of GDP in IQ2012 relative to a year earlier was 8.1 percent, which is significantly lower than the range of 10.7 percent in IIIQ2010 to 12.1 percent in IVQ2010 and IQ2010 and also lower than the range of 8.9 percent in IVQ2011 to 9.7 percent in IQ2011. In IQ2012, GDP in China grew at the quarterly rate of 1.8 percent, which is equivalent to 7.4 percent per year.
Table VC-1, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2011 | IIQ 2011 | IIIQ 2011 | IVQ 2011 | IQ 2012 | |
| GDP | 9.7 | 9.5 | 9.1 | 8.9 | 8.1 |
| Primary Industry | 3.5 | 3.2 | 3.8 | 4.5 | 3.8 |
| Secondary Industry | 11.1 | 11.0 | 10.8 | 10.6 | 9.1 |
| Tertiary Industry | 9.1 | 9.2 | 9.0 | 8.9 | 7.5 |
| GDP ∆% Relative to a Prior Quarter | 2.2 | 2.3 | 2.4 | 1.9 | 1.8 |
| IQ 2010 | IIQ 2010 | IIIQ 2010 | IVQ 2010 | ||
| GDP | 12.1 | 11.2 | 10.7 | 12.1 | |
| Primary Industry | 3.8 | 3.6 | 4.0 | 3.8 | |
| Secondary Industry | 14.5 | 13.3 | 12.6 | 14.5 | |
| Tertiary Inustry | 10.5 | 9.9 | 9.7 | 10.5 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/t20120413_402798871.htm
Table VC-2 provides China’s exports, imports, trade balance and percentage changes from Dec 2010 to Mar 2012. Exports increased 8.9 percent in Mar 2012 relative to a year earlier and imports increased 5.4 percent. China reversed the large trade deficit of USD 31.48 billion in Feb 2012 with a surplus of $5.35 billion in Mar 2012. Exports fell 0.5 percent in the 12 months ending in Jan while imports fell 15.3 percent for a still sizeable trade surplus of $27.28 billion. In Feb, exports increased 18.4 percent while imports jumped 39.6 percent for a sizeable deficit of $31.48 billion. There are distortions from the New Year holidays.
Table VC-2, China, Exports, Imports and Trade Balance USD Billion and ∆%
| Exports | ∆% Relative | Imports USD | ∆% Relative | Balance | |
| Mar 2012 | 165.66 | 8.9 | 160.31 | 5.4 | 5.35 |
| Feb | 114.47 | 18.4 | 145.95 | 39.6 | -31.48 |
| Jan | 149.94 | -0.5 | 122.66 | -15.3 | 27.28 |
| Dec 2011 | 174.72 | 13.4 | 158.20 | 11.8 | 16.52 |
| Nov | 174.46 | 13.8 | 159.94 | 22.1 | 14.53 |
| Oct | 157.49 | 15.9 | 140.46 | 28.7 | 17.03 |
| Sep | 169.67 | 17.1 | 155.16 | 20.9 | 14.51 |
| Aug | 173.32 | 24.5 | 155.56 | 30.2 | 17.76 |
| Jul | 175.13 | 20.4 | 143.64 | 22.9 | 31.48 |
| Jun | 161.98 | 17.9 | 139.71 | 19.3 | 22.27 |
| May | 157.16 | 19.4 | 144.11 | 28.4 | 13.05 |
| Apr | 155.69 | 29.9 | 144.26 | 21.8 | 11.42 |
| Mar | 152.20 | 35.8 | 152.06 | 27.3 | 0.14 |
| Feb | 96.74 | 2.4 | 104.04 | 19.4 | -7.31 |
| Jan | 150.73 | 37.7 | 144.27 | 51.0 | 6.46 |
| Dec 2010 | 154.15 | 17.9 | 141.07 | 25.6 | 13.08 |
Source:
http://english.customs.gov.cn/publish/portal191/
http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1
Table VC-3 provides cumulative exports, imports and the trade balance of China together with percentage growth of exports and imports. The trade balance in 2011 of $155.14 billion is lower than those from 2008 to 2010. There is a rare cumulative deficit of $4.2 billion in Feb 2012 reversed to a small surplus in Mar 2012. More observations are required to detect trends of Chinese trade.
Table VC-3, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%
| Exports | ∆% Relative | Imports USD | ∆% Relative | Balance | |
| Mar 2012 | 430.06 | 7.6 | 428.95 | 6.9 | 1.11 |
| Feb | 264.40 | 6.9 | 268.64 | 7.7 | -4.24 |
| Jan | 149.94 | -0.5 | 122.66 | -15.3 | 27.28 |
| Dec 2011 | 1,898.60 | 20.3 | 1,743.46 | 24.9 | 155.14 |
| Nov | 1,724.01 | 21.1 | 1585.61 | 26.4 | 138.40 |
| Oct | 1,549.71 | 22.0 | 1,425.68 | 26.9 | 124.03 |
| Sep | 1,392.27 | 22.7 | 1,285.17 | 26.7 | 107.10 |
| Aug | 1,222.63 | 23.6 | 1,129.90 | 27.5 | 92.73 |
| Jul | 1,049.38 | 23.4 | 973.17 | 26.9 | 76.21 |
| Jun | 874.3 | 24.0 | 829.37 | 27.6 | 44.93 |
| May | 712.37 | 25.5 | 689.41 | 29.4 | 22.96 |
| Apr | 555.30 | 27.4 | 545.02 | 29.6 | 10.28 |
| Mar | 399.64 | 26.5 | 400.66 | 32.6 | -1.02 |
| Feb | 247.47 | 21.3 | 248.36 | 36.0 | -0.89 |
| Jan | 150.7 | 37.7 | 144.27 | 51.0 | 6.46 |
| Dec 2010 | 1577.93 | 31.3 | 1394.83 | 38.7 | 183.10 |
Source:
http://english.customs.gov.cn/publish/portal191/
http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1
VC Euro Area. The Markit Eurozone Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.3 in Feb to 49.1 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The quarterly average in Jan-Mar 2012 of 49.6 is higher than 47.2 in the final quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). Chris Williamson, Chief Economist at Markit, finds that growth of services activity was not sufficient to compensate for the decline in manufacturing output for the first time in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI® declined to a three-month low at 47.7 in Mar from 49.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Chris Williamson, Chief Economist at Markit, finds that euro area manufacturing contracted in Mar, preventing the fall of the economy back into recession by eliminating the marginal gains in the first two months of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Table EUR provides the economic indicators for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 3/11/12 |
| Unemployment | Feb 2012: 10.8% unemployment rate Feb 2012: 17.134 million unemployed Blog 4/8/12 |
| HICP | Feb month ∆%: 0.5 12 months Feb ∆%: 2.7 |
| Producer Prices | Euro Zone industrial producer prices Feb ∆%: 0.6 |
| Industrial Production | Feb month ∆%: 0.5 Feb 12 months ∆%: -1.8 |
| Industrial New Orders | Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 |
| Construction Output | Jan month ∆%: minus 0.8 |
| Retail Sales | Feb month ∆%: -0.1 |
| Confidence and Economic Sentiment Indicator | Sentiment 93.2 Mar 2012 Confidence minus 11.8 Mar 2012 Blog 4/1/12 |
| Trade | Jan-Dec 2011/2010 Exports ∆%: 12.7 Jan 2012 12-month Exports ∆% 10.9 Imports ∆% 3.6 |
| HICP, Rate of Unemployment and GDP | Historical from 1999 to 2011 Blog 3/18/12 |
Links to blog comments in Table EUR:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html
2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
Industrial production in the euro area increased 0.5 percent in Feb 2012 after declining in three of five months from Sep 2011 to Jan 2012 and being flat in Oct and Jan, as shown in Table VD-1 with revised estimates by EUROSTAT. Production fell cumulatively 3.9 percent in Sep-Jan or at the annual equivalent rate of decline of 9.0 percent. Growth in Feb 2012 was driven by increase of 7.7 percent in energy during inclement winter weather with sharp declines of 2.0 percent in durable goods, 1.6 percent of nondurable goods and 1.4 percent of intermediate goods. All segments of industrial production fell in Dec with exception of no change in durable goods but all increased in Jan with exception of decline of capital goods by 0.4 percent. Production of capital goods fell 3.6 percent in Sep, increasing in all subsequent months with exception of decline of 1.2 percent in Dec and 0.4 percent in Jan but fell cumulatively 4.2 percent from Sep to Jan or at the annual equivalent rate of 9.8 percent. Industrial production is highly volatile in the euro zone.
Table VD-1, Euro Zone, Industrial Production Month ∆%
| Total | INT | ENE | CG | DUR | NDUR | |
| Feb 2012 | 0.5 | -1.4 | 7.7 | 0.7 | -2.0 | -1.6 |
| Jan | 0.0 | 0.6 | 0.7 | -0.4 | 0.5 | -0.8 |
| Dec 2011 | -0.9 | -1.0 | -2.3 | -1.0 | 0.0 | -0.1 |
| Nov | -0.4 | -0.1 | 0.0 | 0.0 | 0.1 | -1.6 |
| Oct | 0.0 | -0.7 | -0.9 | 0.8 | -1.2 | 0.5 |
| Sep | -2.6 | -2.0 | -1.9 | -3.6 | -3.8 | -1.4 |
Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12042012-AP/EN/4-12042012-AP-EN.PDF
Table VD-2 provides monthly and 12-month percentage changes of industrial production and major industrial categories in the euro zone. Industrial production decreased 1.8 percent in the 12 months ending in Feb. There is positive 12-month growth of 0.8 percent for capital goods and 3.6 percent for energy because of the surge in winter weather in Feb 2012.
Table VD-2, Euro Zone, Industrial Production 12-Month ∆%
| 2012 | Feb Month ∆% | Feb 12-Month ∆% |
| Total | 0.5 | -1.8 |
| Intermediate Goods | -1.4 | -4.5 |
| Energy | 7.7 | 3.6 |
| Capital Goods | 0.7 | 0.8 |
| Durable Consumer Goods | -2.0 | -6.4 |
| Nondurable Consumer Goods | -1.6 | -5.3 |
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12042012-AP/EN/4-12042012-AP-EN.PDF
There has been significant decline in percentage changes of industrial production and major categories in 12-month rates throughout 2011 and into 2012 as shown in Table VD-3. The 12-month rate of growth in Aug of 0.9 percent has fallen to minus 1.8 percent in Feb. Trend is difficult to identify because of significant volatility. Capital goods were growing at 5.9 percent in the 12 months ending in Sep and only at 0.8 percent in the 12 months ending in Feb.
Table VD-3, Euro Zone, Industrial Production 12-Month ∆%
| Total | INT | ENE | CG | DUR | NDUR | |
| Feb 2012 | -1.8 | -4.5 | 3.6 | 0.8 | -6.4 | -5.3 |
| Jan | -1.7 | -1.6 | -6.9 | 1.6 | -3.1 | -2.3 |
| Dec 2011 | -1.6 | 0.1 | -12.4 | 2.3 | -3.3 | -0.5 |
| Nov | 0.0 | -0.3 | -6.4 | 4.7 | -3.4 | -1.8 |
| Oct | 0.9 | 0.2 | -5.0 | 4.9 | -3.2 | 0.6 |
| Sep | 2.1 | 2.1 | -3.3 | 5.9 | -1.0 | 0.1 |
Notes: INT: Intermediate; ENE: Energy; CG: Capital Goods; DUR: Durable Consumer Goods; NDUR: Nondurable Consumer Goods
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12042012-AP/EN/4-12042012-AP-EN.PDF
Blanchard (2011WEOSep) analyzes the difficulty of fiscal consolidation efforts during periods of weak economic growth. Table VD-4 provides monthly and 12-month percentage changes of industrial production in the euro zone for various members and the UK, which is not a member. The only positive growth of industrial production in the 12 months ending in Feb is 1.6 percent for Germany.
Table VD-4, Euro Zone, Industrial Production, Month and 12-Month ∆%
| Month ∆% Feb 2012 | Month ∆% Jan 2012 | 12 Months ∆% Feb 2012 | 12 Months ∆% Jan 2012 | |
| Euro Zone | 0.5 | 0.0 | -1.8 | -1.7 |
| Germany | -0.1 | 1.2 | 1.6 | -0.3 |
| France | -1.3 | -2.6 | -2.2 | -2.1 |
| Netherlands | 6.7 | -5.1 | NA | NA |
| Finland | -1.7 | -5.1 | -6.0 | 1.6 |
| Belgium | NA | -2.3 | NA | 1.5 |
| Portugal | -6.8 | -5.3 | -9.0 | -4.0 |
| Ireland | -3.2 | 0.1 | -0.4 | -3.9 |
| Italy | NA | NA | -5.0 | -1.8 |
| Greece | -8.5 | -6.0 | -13.5 | -5.2 |
| Spain | -5.1 | -4.3 | -4.2 | -3.5 |
| UK | -3.1 | -4.8 | -4.4 | -2.3 |
| European Union | 0.2 | 0.0 | -1.8 | -1.4 |
Source: Eurostat
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12042012-AP/EN/4-12042012-AP-EN.PDF
VE Germany. The Markit Germany Composite Output Index, combining services and manufacturing activity with high association with German GDP, fell from 53.2 in Feb to 51.6 in Mar, indicating modest growth of private-sector activity but at the lowest rate in the quarter (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Tim Moore, Senior Economist at Markit and author of the report, finds that the index is consistent with growth of GDP of only 0.2 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). The Markit/BME Germany Purchasing Managers’ Index® (PMI®) fell from 50.2 in Feb to 48.4 in Mar, which is the lowest since Dec 2011, indicating modest conditions in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). Tim Moore, Senior Economist at Markit and author of the report, finds that the contraction of export orders in Germany during nine months is the longest in ten years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 2/26/12 |
| Consumer Price Index | Mar month SA ∆%: +0.3 |
| Producer Price Index | Feb month ∆%: 0.4 |
| Industrial Production | Mfg Feb month SA ∆%: -0.3 |
| Machine Orders | Feb month ∆%: 0.3 |
| Retail Sales | Feb Month ∆% 1.7 12-Month ∆% minus 1.6 Blog 4/1/12 |
| Employment Report | Unemployment Rate Feb 5.9% |
| Trade Balance | Exports Feb 12 months NSA ∆%: 8.6 Blog 4/15/12 |
Links to blog comments in Table DE:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html
Twelve-month rates of growth Germany’s exports and imports are shown in Table VE-1. There was sharp decline in the rates in Jun and Jul to single-digit levels especially for exports. In the 12 months ending in Aug, exports rose 14.4 percent and imports 13.2 percent. In Sep, exports grew 10.5 percent relative to a year earlier and imports grew 12.0 percent. Growth rates in 12 months ending in Oct fell significantly to 3.7 percent for exports and 8.9 percent for imports. Lower prices may explain part of the decline in nominal values. Exports grew 8.6 percent in 12 months ending in Feb 2012 and imports 6.1 percent. Growth had been much stronger in the recovery during 2010 and 2011 from the fall from 2007 to 2009. Germany’s trade grew at high rates in 2006 and 2005.
Table VE-1, Germany, Exports and Imports NSA Euro Billions and 12-Month ∆%
| Exports EURO Billions | 12- Month | Imports | 12-Month | |
| Feb 2012 | 91.3 | 8.6 | 76.5 | 6.1 |
| Jan | 86.0 | 9.3 | 72.8 | 6.2 |
| Dec 2011 | 85.0 | 4.9 | 72.1 | 5.4 |
| Nov | 94.8 | 8.2 | 78.9 | 7.0 |
| Oct | 89.2 | 3.7 | 77.9 | 8.9 |
| Sep | 95.0 | 10.5 | 77.8 | 12.0 |
| Aug | 85.1 | 14.4 | 73.5 | 13.2 |
| Jul | 85.7 | 5.3 | 75.3 | 10.0 |
| Jun | 88.1 | 3.3 | 75.6 | 6.2 |
| May | 92.0 | 20.8 | 77.4 | 17.2 |
| Apr | 84.3 | 12.1 | 73.4 | 18.1 |
| Mar | 98.2 | 14.7 | 79.4 | 14.5 |
| Feb | 84.1 | 20.1 | 72.1 | 27.1 |
| Jan | 78.6 | 24.1 | 68.5 | 24.4 |
| Dec 2010 | 81.0 | 20.0 | 68.4 | 24.3 |
| Nov | 87.6 | 21.2 | 73.7 | 30.9 |
| Oct | 86.0 | 18.7 | 71.5 | 19.1 |
| Sep | 86.0 | 21.2 | 69.5 | 17.0 |
| Aug | 74.4 | 23.8 | 64.9 | 27.1 |
| Jul | 81.4 | 15.3 | 68.4 | 24.4 |
| Jun | 85.3 | 27.5 | 71.2 | 33.9 |
| May | 76.2 | 25.6 | 66.0 | 31.2 |
| Apr | 75.2 | 16.7 | 62.2 | 14.5 |
| Mar | 85.6 | 22.0 | 69.3 | 18.0 |
| Feb | 70.0 | 9.7 | 56.8 | 3.2 |
| Jan | 63.4 | -0.3 | 55.1 | -1.9 |
| Dec 2009 | 67.5 | 1.2 | 55.0 | -7.3 |
| Dec 2008 | 66.7 | -8.6 | 59.4 | -5.0 |
| Dec 2007 | 73.0 | -0.6 | 62.5 | -0.1 |
| Dec 2006 | 73.4 | 10.2 | 62.6 | 8.5 |
| Dec 2005 | 66.6 | 11.5 | 57.7 | 18.1 |
| Dec 2004 | 59.7 | 9.2 | 48.9 | 10.8 |
| Dec 2003 | 54.7 | 7.6 | 44.1 | 3.9 |
| Dec 2002 | 50.8 | 5.5 | ||
| Dec 2001 | 48.2 | -3.7 | ||
| Dec 2000 | 50.0 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/04/PE12_129_51.html
Table VE-2 provides monthly rates of growth of exports and imports of Germany. Exports surged in Jan and Feb after sharp negative growth in Dec. Export growth and import growth were vigorous in Jan-Mar 2011 when Germany’s economy outperformed most advanced economies but less dynamic and consistently in following months.
Table VE-2, Germany, Exports and Imports Month ∆% Calendar and Seasonally Adjusted
| Exports | Imports | |
| Feb 2012 | 1.6 | 3.9 |
| Jan | 3.4 | 2.4 |
| Dec 2011 | -4.3 | -3.9 |
| Nov | 2.8 | -0.2 |
| Oct | -3.2 | 0.1 |
| Sep | 0.9 | -0.9 |
| Aug | 3.2 | 0.0 |
| Jul | -1.0 | 0.5 |
| Jun | -0.5 | -0.3 |
| May | 2.9 | 3.0 |
| Apr | -4.1 | -1.9 |
| Mar | 5.6 | 2.6 |
| Feb | 1.7 | 3.2 |
| Jan | 1.1 | 3.6 |
| Dec 2010 | -1.1 | -2.6 |
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/04/PE12_129_51.html
Chart VE-1 of the Statistisches Bundesamt Deutschland shows exports and trend of German exports. Growth has been with fluctuations around a strong upward trend.
Chart VE-1, Germany, Exports Original Value and Trend 2007-2011
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart VE-2 of the Statistisches Bundesamt Deutschland provides German imports and trend. Imports also fell sharply and have been recovering with fluctuations around a strong upward trend that could be flattening.
Chart VE-2, Germany, Imports Original Value and Trend 2007-2011
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
Chart VE-3 of the Statistisches Bundesamt Deutschland shows the trade balance of Germany since 2007. There was sharp decline during the global recession and fluctuations around a mild upward trend during the recovery with stabilization followed by stronger trend in recent months.
Chart VE-3, Germany, Trade Balance Original and Trend 2007-2011
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/DE/ZahlenFakten/Indikatoren/Konjunkturindikatoren/Konjunkturindikatoren.html
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table VE-3 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Feb. German exports to other European Union (EU) members are 58.5 percent of total exports in Feb 2012 and 58.9 percent in Jan-Feb 2012. Exports to the euro area are 38.8 percent in Feb and 39.3 percent in Jan-Feb. Exports to third countries are 37.9 percent of the total in Feb and 41.1 percent in Jan-Feb. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of its high share in exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table VE-3, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Feb 2012 | Feb 12-Month | Jan–Feb 2012 € Billions | Jan-Feb 2012/ | |
| Total | 91.3 | 8.6 | 177.3 | 8.9 |
| A. EU | 53.4 % 58.5 | 5.4 | 104.4 % 58.9 | 5.4 |
| Euro Area | 35.4 % 38.8 | 3.3 | 69.7 % 39.3 | 4.0 |
| Non-euro Area | 18.0 % 19.7 | 9.7 | 34.7 % 19.6 | 8.5 |
| B. Third Countries | 37.9 % 41.5 | 13.4 | 72.9 % 41.1 | 14.4 |
| Total Imports | 76.5 | 6.1 | 149.3 | 6.2 |
| C. EU Members | 48.7 % 63.7 | 6.6 | 93.6 % 62.7 | 6.9 |
| Euro Area | 34.1 % 44.6 | 5.5 | 65.5 % 43.9 | 6.3 |
| Non-euro Area | 14.6 % 19.1 | 9.3 | 28.1 % 18.8 | 8.6 |
| D. Third Countries | 27.8 % 36.3 | 5.2 | 55.8 % 37.4 | 4.9 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2012/04/PE12_129_51.html
VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 50.2 in Feb to 48.7 in Mar, for the first downturn of activity in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds stagnation of French services activity for a second consecutive month but improving confidence on future activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). The Markit France Manufacturing Purchasing Managers’ Index® fell to 46.7 in Mar from 50.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds that manufacturing output was restricted by the deepest decline in new orders in about years, particularly with weak internal demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340).Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Mar month ∆% 0.8 |
| PPI | Feb month ∆%: 0.8 Blog 04/01/12 |
| GDP Growth | IVQ2011/IIIQ2011 ∆%: 0.2 |
| Industrial Production | Feb/Jan SA ∆%: |
| Industrial New Orders | Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12 |
| Consumer Spending | Feb Manufactured Goods |
| Employment | IVQ2011 Unemployed 2.678 million |
| Trade Balance | Feb Exports ∆%: month 1.0, 12 months 7.2 Feb Imports ∆%: month 2.8, 12 months 6.7 Blog 4/8/12 |
| Confidence Indicators | Historical averages 100 Mar: France 95 Mfg Business Climate 96 Retail Trade 94 Services 93 Building 98 Household 82 Blog 3/25/12 |
Links to blog comments in Table FR:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html
France’s industrial production by segments is provided in Table VF-1. Total industry increased 0.3 percent in Feb after increasing 0.2 percent in Jan. Construction fell 0.4 percent in Feb after increasing 0.6 percent in Jan. Mining grew 10.2 percent in Feb after 3.0 percent in Jan. There were declines for all categories relative to the same quarter a year earlier with exception of growth of construction by 3.2 percent.
Table VF-1, France, Industrial Production ∆%
| 2011-2012 | Feb/Jan | Jan/Dec | QOQ | YOY |
| Industry | 0.3 | 0.2 | -0.5 | -1.7 |
| Manufacturing | -1.2 | -0.1 | -1.1 | -1.6 |
| Mining, Mining, Energy, Water, Waste Mgt | 10.2 | 3.0 | 3.2 | -2.2 |
| Construction | -0.4 | 0.6 | 0.8 | 3.2 |
Note: QOQ: quarter on quarter; YOY:most recent quarter on the same quarter a year earlier
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120410
Table VF-2 provides longer historical perspective of manufacturing in France. The fall of 1.2 percent in Feb pulled down the 12-month percentage change to minus 3.7 percent. In the quarter Dec 2011 to Feb 2012, manufacturing fell 2.8 at the annual equivalent rate of minus 10.7 percent. There is strength earlier in the recovery in 2010 and early 2011 with less strong performance in the latter part of 2011. Manufacturing fell 12.8 percent in 2008 during the global contraction and an additional 2.9 percent in 2009.
Table VF-2, France, Manufacturing, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| Feb 2012 | -1.2 | -3.7 |
| Jan | -0.1 | -1.7 |
| Dec 2011 | -1.5 | 0.7 |
| Nov | 1.3 | 2.4 |
| Oct | 0.2 | 2.9 |
| Sep | -2.1 | 1.8 |
| Aug | 0.3 | 4.7 |
| Jul | 1.7 | 4.0 |
| Jun | -2.0 | 3.2 |
| May | 1.2 | 4.1 |
| Apr | -0.3 | 3.5 |
| Mar | -1.2 | 4.5 |
| Feb | 0.9 | 7.5 |
| Jan | 2.3 | 6.7 |
| Dec 2010 | 0.2 | 5.0 |
| Dec 2009 | -2.9 | |
| Dec 2008 | -12.8 | |
| Dec 2007 | -0.2 | |
| Dec 2006 | 2.4 | |
| Dec 2005 | -0.1 | |
| Dec 2004 | 1.5 | |
| Dec 2003 | 0.3 | |
| Dec 2002 | -0.5 | |
| Dec 2001 | -4.8 | |
| Dec 2000 | 5.1 | |
| Average ∆% 1990-2000 | 1.5 |
Source:
Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120410
Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques shows indices of manufacturing in France from 2008 to 2012. Manufacturing, which is CZ in Chart VF-1, fell deeply in 2008 and part of 2009. All curves of industrial indices tend to flatten recently with oscillations.
Chart VF-1, France, Industrial Production Indices 2007-2011
Legend : CZ : Manufacturing - (C1) : Manufacture of food products and beverages - (C3) : Electrical and electronic equipment; machine equipment - (C4) : Manufacture of transport equipment - (C5) : Other manufacturing
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20120410
VG Italy. The Markit/ADACI Business Activity Index remained almost unchanged at 44.3 in Mar relative to 44.1 in Feb, indicating sharp contraction of output of Italy’s services sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the services sector of Italy has experienced continuing contraction during the past ten months with likely contraction of GDP in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/ADACI Purchasing Managers’ Index® (PMI®), remained almost unchanged at 47.9 in Mar relative to 47.8 in Feb for an eighth consecutive month of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396).Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Mar month ∆%: 0.5 |
| Producer Price Index | Feb month ∆%: 0.4 Blog 4/1/12 |
| GDP Growth | IVQ2011/IVQ2010 SA ∆%: minus 0.4 |
| Labor Report | Feb 2012 Participation rate 62.8% Employment ratio 56.9% Unemployment rate 9.3% Blog 4/8/12 |
| Industrial Production | Feb month ∆%: -0.7 |
| Retail Sales | Jan month ∆%: 0.7 Jan 12-month ∆%: minus 0.8 Blog 3/25/12 |
| Business Confidence | Mfg Mar 92.1, Nov 94.1 Construction Feb 81.8, Nov 87.5 Blog 4/1/12 |
| Consumer Confidence | Consumer Confidence Mar 96.8, Feb 94.4 Economy Mar 87.4, Feb 86.8 Blog 4/1/12 |
| Trade Balance | Balance Jan SA -€199 million versus Dec €466 |
Links to blog comments in Table IT:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
Italy’s industrial production fell 0.7 percent in Feb 2012 and a sharp 6.8 percent in 12 months, after falling 2.6 percent in Jan and 4.6 percent in 12 months, as shown in Table VG-1. There have been negative changes with oscillations in monthly industrial production. Industrial production fell 18.8 percent in 2009 after falling 3.2 percent in 2008.
Table VG-1, Italy, Industrial Production ∆%
| Month ∆% SA | 12-Month ∆% Calendar Adjusted | |
| Feb 2012 | -0.7 | -6.8 |
| Jan | -2.6 | -4.6 |
| Dec 2011 | 1.2 | -1.7 |
| Nov | 0.1 | -4.1 |
| Oct | -0.8 | -3.8 |
| Sep | -4.6 | -2.6 |
| Aug | 3.4 | 4.8 |
| Jul | -0.9 | -1.1 |
| Jun | -0.8 | 0.4 |
| May | -0.7 | 2.1 |
| Apr | 0.6 | 3.9 |
| Mar | -0.2 | 3.3 |
| Feb | 1.5 | 2.5 |
| Jan | -0.7 | 0.1 |
| Dec 2010 | -0.6 | 6.7 |
| Nov | 0.8 | 5.5 |
| Oct | 0.0 | 4.1 |
| Sep | 0.3 | 5.8 |
| Aug | -0.6 | 11.4 |
| Jul | 0.4 | 7.5 |
| Jun | 0.8 | 9.9 |
| May | 1.0 | 9.0 |
| Apr | 0.6 | 9.5 |
| Mar | -0.3 | 8.5 |
| Feb | -0.3 | 4.5 |
| Jan | 4.0 | 0.6 |
| Dec 2009 | -1.3 | -6.6 |
| Year | ||
| 2011 | 0.1 | |
| 2010 | 6.8 | |
| 2009 | -18.8 | |
| 2008 | -3.2 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/59197
Chart VG-1 of Italy’s 12-month percentage changes of Italy’s industrial production are provided in Chart VG-1 of Istituto Nazionale di Statistica. There is trend of deterioration after Aug 2011, sharply deteriorating after Dec 2011 into 2012.
Chart VG-1, Italy, Industrial Production, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Month and 12-month rates of growth of Italy’s industrial production and major categories are provided in Table VG-2 for Feb 2012. Monthly and 12-month rates of change are all negative and relatively high with the exception of energy during inclement winter weather.
Table VG-2, Italy, Industrial Production Rate of Change ∆%
| Feb 2012 | Month ∆% | 12-Month ∆% |
| Total | -0.7 | -6.8 |
| Consumer Goods | -2.3 | -9.6 |
| Durable | -1.3 | -12.0 |
| Nondurable | -2.6 | -9.1 |
| Capital Goods | 2.0 | -1.5 |
| Intermediate Goods | -1.9 | -10.6 |
| Energy | 5.7 | 3.3 |
Source:
Istituto Nazionale di Statistica http://www.istat.it/it/archivio/59197
VH United Kingdom. The Business Activity Index of the Markit/CIPS UK Services PMI® increased from 53.8 in Feb to 55.3 in Mar for the highest reading since IIQ2010, indicating improvement over the entire IQ2012 and robust conditions in the UK’s services sector (
http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). Chris Williamson, Chief Economist at Markit, finds that the combination of construction, manufacturing and services activity suggests that GDP growth in the UK in IQ2012 could be as high as 0.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) increased to 52.1 in Mar relative to 51.5 in Feb, for a high of ten months with the average reading of IQ2012 of 51.8 being the highest since IIQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds that the data suggest growth of manufacturing output of about 0.3 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367).Table UK provides the country data table for the UK.
Table UK, UK Economic Indicators
| CPI | Feb month ∆%: 0.6 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IVQ2011 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: 0.5 |
| Industrial Production | Feb 2011/Feb 2011 NSA ∆%: Production Industries minus 2.3; Manufacturing minus 1.4 |
| Retail Sales | Feb month SA ∆%: -0.8 |
| Labor Market | Nov-Jan Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.4% |
| Trade Balance | Balance Feb minus ₤3396 million |
Links to blog comments in Table UK:
4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html
4/1/25 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html
3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html
03/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html
The UK’s trade account is shown in Table VH-1. In Feb 2012, the UK ran a deficit in trade of goods and services (total trade) of ₤3396 million. The deficit in trade of goods was ₤8772 million and ₤8092 million in goods excluding oil. A surplus in services of ₤5376 million contributed to the smaller overall deficit in goods and services (-₤8772 million plus ₤5376 equal to -₤3396). Services have contributed to lower trade account deficits and also softened the impact of the global recession on the UK economy. Exports of goods and services fell 2.0 percent in Feb 2012 and rose 1.5 percent in the quarter Dec 2011-Feb 2012 relative to the same quarter a year earlier with imports increasing 0.2 percent in Feb and rising 2.3 percent in Dec 2011-Feb 2012 relative to the same quarter a year earlier. Excluding oil, UK exports of goods decreased 4.4 percent in Feb and increased 2.1 percent in Dec 2011-Feb 2012 relative to a year earlier while imports increased 0.8 percent in Feb and increased 0.5 percent in Dec 2011-Feb 2012 relative to a year earlier. The great advantage of the UK similar to the US is the substantial surplus in services. Services exports increased 0.7 percent in Feb and fell 2.9 percent in Dec 2011-Feb 2012 relative to a year earlier and imports increased 1.0 percent in Feb and increased 1.3 percent Dec 2011-Feb 2012 relative to a year earlier.
Table VH-1, Value of UK Trade in Goods and Services, Balance of Payments Basis, ₤ Million and ∆%
| ₤ Million SA Feb 2012 | Month ∆% | Dec 2011 to Feb 2012 ∆% Dec 2010 to Feb 2011 | |
| Total Trade | |||
| Exports | 39,838 | -2.0 | 1.5 |
| Imports | 43,234 | 0.2 | 2.3 |
| Balance | -3,396 | ||
| Trade in Goods | |||
| Exports | 24,839 | -3.4 | 4.3 |
| Imports | 33,611 | 0.0 | 2.7 |
| Balance | -8,772 | ||
| Trade in Goods Excluding Oil | |||
| Exports | 21,232 | -4.4 | 2.1 |
| Imports | 29,324 | 0.8 | 0.5 |
| Balance | -8,092 | ||
| Trade in Services | |||
| Exports | 14,999 | 0.6 | -2.9 |
| Imports | 9,623 | 1.0 | 1.3 |
| Balance | 5,376 |
Source: http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/february-2012/index.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 VI-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 VI-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 9.7 percent by Fri Apr 13, 2012. 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 VI-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 VI-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 | 4/13/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3078 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 4/13/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2982 |
| 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
Table VI-2 extracts four rows of Table VI-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 VI-4 below, the dollar has devalued again to USD 1.3078/EUR or by 9.7 percent {[(1.3078/1.192)-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 6.2982/USD on Fri Apr 13, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 percent. The CNY revalued by 0.3 percent in the week of Mar 23 and by 0.1 percent in the week of Mar 30. 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 VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-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. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. In the week of Feb 10 China revalued by an additional 0.1 percent. There was marginal devaluation of 0.1 percent in the week of Feb 17. The rate remained virtually unchanged at CNY 6.2986 in the week of Feb 24. There was virtually no change to the rate of 6.2992 on Mar 2. The rate of CNY 6.3105/USD fixed on Mar 9 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. The rate of CNY 6.3226/USD on Mar 16, 2012 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. In two weeks, the CNY depreciated by 0.4 percent. In the week of Mar 30, China resumed revaluation of 0.1 percent to CNY 6.2976/USD. The yuan depreciated 0.1 percent in the week of Apr 6, 2012 and appreciated 0.1 percent in the week of Apr 13. The rate of CNY 6.2982/USD on Apr 13, 2012 is equivalent to revaluation of 7.7 percent from CNY 6.8211 on Jul 15, 2008 {[(6.2982/6.8211) – 1]100} and cumulative 23.9 percent from CNY 8.2765 on Jul 21, 2005 {[(6.2982/8.2765) -1]100}. 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. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):
“Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:
Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.
In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.”
Table VI-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 | 4/13 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3078 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 4/13/2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2982 |
| Weekly Rates | 3/23/2012 | 3/30/2012 | 4/6/2012 | 4/13/2012 |
| CNY/USD | 6.3008 | 6.2976 | 6.3068 | 6.2982 |
| ∆% from Earlier Week* | 0.3 | 0.1 | -0.1 | 0.1 |
*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 VI-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 VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| 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
The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (http://www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm) and of fiscal affairs with the Fiscal Monitor (http://www.imf.org/external/pubs/ft/fm/2012/update/01/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks, which are analyzed in the comments of this blog.
Economic risks include the following:
1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IQ2012 of 1.8 percent is equivalent to 7.4 percent per year (see subsection VC). There is also ongoing political development in China during a decennial political reorganization
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.6 percent in 2011 (Section I in http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html). (ii) The labor market continues fractured with 29.4 million unemployed or underemployed (see Section I http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html). (iii) There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012. The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases
3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier. The euro zone’s GDP fell 0.3 percent in IVQ2011; Germany’s GDP fell 0.2 percent in IVQ2011; and the UK’s GDP fell 0.3 percent in IVQ2011. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html)
A list of financial uncertainties includes:
1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk. Adjustment programs consist of immediate adoption of economic reforms that would increase future growth permitting fiscal consolidation, which would reduce risk spreads on sovereign debt. Fiscal consolidation is challenging in an environment of weak economic growth as analyzed by Blanchard (2011WEOSep). Adjustment of countries such as Italy requires depreciation of the currency to parity, as proposed by Caballero and Giavazzi (2012Jan15), but it is not workable within the common currency and zero interest rates in the US. Bailouts of euro area member countries with temporary liquidity challenges cannot be permanently provided by stronger members at the risk of impairing their own sovereign debt credibility
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation. After deep global recession, regulation, trade and devaluation wars were to be expected (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars”
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 32.7 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 34.0 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent
4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Mar 13, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014” (http://www.federalreserve.gov/newsevents/press/monetary/20120313a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see 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 and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.
The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see 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).
It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. 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 VI-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 now complicated by political developments, 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. 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 VI-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 4/13/12,” 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. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: 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, Jan 27 and Feb 3 followed by weakness in the week of Feb 10 but strength in the weeks of Feb 17 and 24 followed by uncertainty on financial counterparty risk in the weeks of Mar 2 and Mar 9. All financial values with exception of China’s Shanghai Composite show positive change in valuation in column “∆% Trough to 4/13/12” after surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. Financial markets were under stress in the week of Apr 16 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012. The highest valuations are by US equities indexes: DJIA 32.7 percent and S&P 500 34.0 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached in intraday trading 13,331.77 on Mar 16, which is the highest level in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). 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 4/13/12” had double digit gains relative to the trough around Jul 2, 2010 but now only three valuation show increase of less than 10 percent: China’s Shanghai Composite is 1.0 percent below the trough; STOXX 50 of Europe is 3.2 percent above the trough; and Japan’s Nikkei Average is 9.2 percent above the trough. DJ UBS Commodities is 12.5 percent above the trough; Dow Global is 12.1 percent above the trough; and DAX is 16.1 percent above the trough. Japan’s Nikkei Average is 9.8 percent above the trough on Aug 31, 2010 and 15.0 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9637.99 on Fri Apr 13, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 6.0 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 9.7 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 4/13/12” in Table VI-4 shows declines of all valuations of risk financial assets in the week of Apr 13, 2012, with exception of gain of 2.3 percent by China’s Shanghai Composite and gain of 0.2 percent for DJ Asia Pacific, because of the new issues of world economic and financial risks. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth tradeoffs. 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 VI-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 4/13/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Apr 6, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 4/13/12” but also relative to the peak in column “∆% Peak to 4/13/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 14.7 percent, S&P 500 12.6 percent and Dax 4.0 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 14.0 percent, Nikkei Average by 15.4 percent, Shanghai Composite by 25.5 percent, STOXX 50 by 12.6 percent and Dow Global by 8.5 percent. DJ UBS Commodities Index is now 3.8 percent below 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.
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 4/13 /12 | ∆% Week 4/13/ 12 | ∆% Trough to 4/13 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 14.7 | -1.6 | 32.7 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 12.6 | -2.0 | 34.0 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -14.0 | -2.3 | 7.9 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -8.5 | -2.1 | 12.1 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -2.3 | 0.2 | 11.6 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -15.4 | -0.5 | 9.2 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -25.5 | 2.3 | -1.0 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -12.6 | -2.4 | 3.2 |
| DAX | 4/26/ | 5/25/ | -10.5 | 4.0 | -2.8 | 16.1 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 13.6 | 0.1 | -9.7 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -3.8 | -1.6 | 12.5 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.987 |
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 VI-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 VI-5 for Apr 13, 2012, shows that the S&P 500 is now 13.1 percent above the Apr 26, 2010 level and the DJIA is 14.7 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 VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from prior date | ∆% DJIA from | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| 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 |
| Feb 3 | 1.6 | 14.8 | 2.2 | 11.0 |
| Feb 10 | -0.5 | 14.2 | -0.2 | 10.8 |
| Feb 17 | 1.2 | 15.6 | 1.4 | 12.3 |
| Feb 24 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
| Apr 6 | -1.1 | 16.6 | -0.7 | 15.3 |
| Apr 13 | -1.6 | 14.7 | -2.0 | 13.1 |
Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014
Table VI-6, updated with every blog comment, 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 VI-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 9.8 percent to ZAR 7.9507/USD on Apr 13, 2012, which is still 31.3 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.4 percent stronger at SGD 1.2481/USD on Apr 13 relative to the trough of depreciation but still stronger by 19.6 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 5.8 percent relative to the trough to BRL 1.8379/USD on Apr 13, 2012 but still stronger by 24.4 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the fourth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3440&IDPAI=NEWS):
“Copom reduces the Selic rate to 9.75 percent
07/03/2012 7:00:00 PM
Brasília - Continuing the process of adjustment of monetary conditions, the Copom decided to reduce the Selic rate to 9.75 percent, without bias, with five votes for the monetary policy action and two votes in favor of reducing the Selic rate by 50 basis points.”
Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-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 VI-6, Exchange Rates
| Peak | Trough | ∆% P/T | Apr 13, 2012 | ∆T Apr 13, 2012 | ∆P Apr 13, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 4/13 2012 | |||
| Rate | 1.59 | 1.192 | 1.3078 | |||
| ∆% | -33.4 | 8.9 | -21.6 | |||
| JPY USD | 8/18 | 9/15 | 4/13 2012 | |||
| Rate | 110.19 | 83.07 | 80.92 | |||
| ∆% | 24.6 | 2.6 | 26.6 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 4/13 2012 | |||
| Rate | 1.225 | 1.025 | 0.9195 | |||
| ∆% | 16.3 | 10.3 | 24.9 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 4/13 2012 | |||
| Rate | 2.006 | 1.388 | 1.5847 | |||
| ∆% | -44.5 | 12.4 | -26.6 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 4/13 | |||
| Rate | 1.0215 | 1.6639 | 1.0372 | |||
| ∆% | -62.9 | 41.1 | 5.6 | |||
| ZAR USD | 10/22 2008 | 8/15 | 4/13 2012 | |||
| Rate | 11.578 | 7.238 | 7.9507 | |||
| ∆% | 37.5 | -9.8 | 31.3 | |||
| SGD USD | 3/3 | 8/9 | 4/13 | |||
| Rate | 1.553 | 1.348 | 1.2481 | |||
| ∆% | 13.2 | 7.4 | 19.6 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 4/13 | |||
| Rate | 7.813 | 7.752 | 7.7591 | |||
| ∆% | 0.8 | 0.1 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 4/13 2012 | |||
| Rate | 2.43 | 1.737 | 1.8379 | |||
| ∆% | 28.5 | -5.8 | 24.4 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 4/13 | |||
| Rate | 22.19 | 18.693 | 18.391 | |||
| ∆% | 15.7 | 1.6 | 17.1 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 4/13 2012 | |||
| Rate | 9.313 | 7.108 | 6.7981 | |||
| ∆% | 23.7 | 4.4 | 27.0 | |||
| CNY USD | 7/20 2005 | 7/15 | 4/13 | |||
| Rate | 8.2765 | 6.8211 | 6.2982 | |||
| ∆% | 17.6 | 7.7 | 23.9 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2012. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.
Chart VI-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar
Source: Board of Governors of the Federal Reserve System
Chart VI-2 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.
Chart VI-2, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Table VI-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 VI-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 1.987 percent at the close of market on Fri Apr 13, 2012 would be equivalent to price of 105.7603 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.4 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 first to the last row of Table VI-7. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. 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 VI-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html 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 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On Apr 11, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2849 billion, or $2.8 trillion, with portfolio of long-term securities of $2587 billion, or $2.6 trillion, consisting of $1585 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $96 billion Federal agency debt securities and $837 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1567 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.
Table VI-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 |
| 02/03/12 | 1.923 | 106.3586 | 5.0 |
| 02/10/12 | 1.974 | 105.8815 | 4.6 |
| 02/17/12 | 2.000 | 105.6392 | 4.3 |
| 02/24/12 | 1.977 | 105.8535 | 4.5 |
| 03/02/12 | 1.977 | 105.8535 | 4.5 |
| 03/09/12 | 2.031 | 105.3512 | 4.0 |
| 03/16/12 | 2.294 | 102.9428 | 1.7 |
| 03/23/12 | 2.234 | 103.4867 | 2.2 |
| 03/30/12 | 2.214 | 103.6687 | 2.4 |
| 04/06/12 | 2.058 | 105.1010 | 3.8 |
| 04/13/12 | 1.987 | 105.7603 | 4.4 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
VII Economic Indicators. Crude oil input in refineries decreased 0.2 percent to 14,480 thousand barrels per day on average in the four weeks ending on Apr 6, 2012 from 14,507 thousand barrels per day in the four weeks ending on Mar 30, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.0 percent on Apr 6, 2012, which is slightly higher than 83.5 percent on Apr 8, 2011 and slightly higher than 83.8 percent on Mar 30, 2012. Imports of crude oil decreased 0.5 percent from 8,958 thousand barrels per day on average in the four weeks ending on Mar 30 to 8,909 thousand barrels per day in the week of Mar 30. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.5 million barrels per day last week, down by 1.3 million barrels per day from the previous week [Mar 30]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries with decreasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 2.8 million barrels from 362.4 million barrels on Mar 30 to 365.2 million barrels on Apr 6. Motor gasoline production increased 0.3 percent to 8,851 thousand barrels per day in the week of Apr 6 from 8,828 thousand barrels per day on average in the week of Mar 30. Gasoline stocks decreased 4.3 million barrels and stocks of fuel oil decreased 4.0 million barrels. Supply of gasoline fell from 8,994 thousand barrels per day on Apr 8, 2011, to 8,638 thousand barrels per day on Apr 6, 2012, or by 3.9 percent, while fuel oil supply fell 3.6 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VII-1 does not provide a quote for crude oil price on Apr 6 that is not available in the weekly petroleum status report. Gasoline prices rose 3.9 percent from Apr 11, 2011 to Apr 9, 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. Gasoline prices are increasing to the highest levels at this time of the year.
Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 4/6/12 | 3/30/12 | 4/8/11 |
| Crude Oil Refineries Input | 14,480 Week ∆%: -0.2 | 14,507 | 14,267 |
| Refinery Capacity Utilization % | 84.0 | 83.8 | 83.5 |
| Motor Gasoline Production | 8,851 Week ∆%: 0.3 | 8,828 | 8,876 |
| Distillate Fuel Oil Production | 4,281 Week ∆%: 0.6 | 4,254 | 4,228 |
| Crude Oil Imports | 8,909 Week ∆%: -0.5 | 8,958 | 8,875 |
| Motor Gasoline Supplied | 8,638 ∆% 2012/2011= -3.9% | 8,572 | 8,994 |
| Distillate Fuel Oil Supplied | 3,586 ∆% 2012/2011 = -3.6% | 3,561 | 3,720 |
| 4/6/12 | 3/30/12 | 4/8/11 | |
| Crude Oil Stocks | 365.2 ∆= +2.8 MB | 362.4 | 359.3 |
| Motor Gasoline Million B | 217.6 ∆= -4.3 MB | 221.9 | 209.7 |
| Distillate Fuel Oil Million B | 131.9 | 135.9 | 150.8 |
| WTI Crude Oil Price $/B | NA ∆% 2012/2011 NA | 103.03 | 112.27 |
| 4/9/12 | 4/2/12 | 4/11/11 | |
| Regular Motor Gasoline $/G | 3.939 ∆% 2012/2011 | 3.941 | 3.791 |
B: barrels; G: gallon
Chart VII-1 of the US Energy Information Administration shows 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 followed by several sharp weekly increases.
Chart VII-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 VII-2 of the US Energy Information Administration provides closer view of crude oil stocks since Jun 2010. There is a recent spike in crude oil stocks.
Chart VII-2, US, Distillate Fuel Oil Stocks
Source: US Energy Information Administration
Chart VII-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 IIC-13, 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 VII-2. Seasonally adjusted claims increased 13,000 from 367,000 on Mar 31 to 380,000 on Apr 7. Claims not adjusted for seasonality increased 62,530 from 319,345 on Mar 31 to 381,875 on Apr 7. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Apr 7, 12 | 380,000 | 381,875 | 368,500 |
| Mar 31, 12 | 367,000 | 319,345 | 364,250 |
| Change | +13,000 | +62,530 | +4,250 |
| Mar 24, 12 | 363,000 | 323,373 | 366,000 |
| Prior Year | 416,000 | 448,029 | 406,000 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Table VII-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 623,279 on Apr 4, 2009 to 448,029 on Apr 9, 2011, and now to 381,875 on Apr 7, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Section II Hiring Collapse and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Mar 31, 2001 | 328,576 | 388,000 |
| Mar 30, 2002 | 386,296 | 479,000 |
| Mar 29, 2003 | 371,692 | 436,000 |
| Mar 27, 2004 | 296,776 | 340,000 |
| Apr 2, 2005 | 294,994 | 335,000 |
| Apr 1, 2006 | 253,985 | 291,000 |
| Mar 31, 2007 | 268,218 | 30,000 |
| Mar 29, 2008 | 342,189 | 386,000 |
| Apr 4, 2009 | 623,279 | 657,000 |
| Apr 3, 2010 | 421,130 | 484,000 |
| Apr 9, 2011 | 448,029 | 416,000 |
| Apr 7, 2012 | 381,875 | 380,000 |
Source: http://www.workforcesecurity.doleta.gov/unemploy/wkclaims/report.asp
VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the quarter Jan to Mar 2012, CPI inflation for all items seasonally adjusted was 3.7 percent in annual equivalent, that is, compounding inflation in Jan-Mar 2012 and assuming it would be repeated for a full year. In the 12 months ending in Mar, CPI inflation of all items not seasonally adjusted was 2.7 percent. Inflation in Mar 2012 not seasonally adjusted was 0.3 percent relative to Feb 2011 (http://www.bls.gov/cpi/), which is equivalent to 3.7 percent per year. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 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 0.08 percent for three months, 0.12 percent for six months, 0.17 percent for 12 months, 0.27 percent for two years, 0.40 percent for three years, 0.84 percent for five years, 1.37 percent for seven years, 1.98 percent for ten years and 3.13 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 VIII-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 VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| ∆% 12 Months Mar 2012/Mar | ∆% Annual Equivalent Jan-Mar 2012 SA | |
| CPI All Items | 2.7 | 3.7 |
| CPI ex Food and Energy | 2.3 | 2.0 |
Source: http://www.bls.gov/cpi/
IX 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 stagnates in 12 months and declines at the margin. There are around 30 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)
References
Abraham, Katharine G., John C. Haltiwanger, Kristin Sandusky and James Spletzer. 2009. Exploring differences in employment between household and establishment data. Cambridge, MA, National Bureau of Economic Research, Mar 2009.
Bagehot, Walter. 1873. Lombard Street, 14th edn. London: Kegan, Paul & Co, 1917.
Ball, Laurence and N. Gregory Mankiw. 2002. The NAIRU in theory and practice. Journal of Economic Perspectives 16 (4, Autumn): 115-36.
Bank of Japan. 2012Feb14APP. Amendment to “Principal Terms and Conditions for the Asset Purchase Program.” Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/rel120214a.pdf
Bank of Japan. 2012Feb14PSG. The price stability goal in the medium to long term. Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/k120214b.pdf
Bank of Japan. 2012Feb14EME. Enhancement of monetary easing. Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/k120214a.pdf
Barro, Robert J. and David B. Gordon. 1983. A positive theory of monetary policy in a natural rate model. Journal of Political Economy 91 (4, Aug): 589-610.
Barsky, Robert B. and Lutz Kilian. 2004. Oil and the macroeconomy since the 1970s. Journal of Economic Perspectives 18 (4, Autumn): 115-34.
Beim, David O. 2011Oct9. Can the euro be saved? New York City, Columbia University, Oct 9 http://www1.gsb.columbia.edu/mygsb/faculty/research/pubfiles/5573/Can%20the%20Euro%20be%20Saved.pdf
Black, Fischer and Myron Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81 (May/June): 637-54.
Batini, Nicoletta and Edward Nelson. 2002. The lag from monetary policy actions to inflation: Friedman revisited. London, Bank of England, External MPC Unit Discussion Paper No. 6, Jan.
Bernanke, Ben S. 2003. A perspective on inflation targeting. Business Economics 38 (3, Jul): 7–15.
Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html
Bernanke, Ben S. 2011Oct4JEC. Statement. Washington, DC, Joint Economic Committee, US Congress, Oct 4 http://www.federalreserve.gov/newsevents/testimony/bernanke20111004a.pdf
Bernanke, Ben S. and Frederic S. Mishkin. 1997. Inflation targeting: a new framework for monetary policy? Journal of Economic Perspectives 11 (2, Spring): 97–116.
Blanchard, Olivier. 2011WEOSep. Foreword to IMF 2011WEOSep: XIII-XIV.
Blanchard, Olivier and Lawrence F. Katz. 1997. What we know and do not know about the natural rate of unemployment. Journal of Economic Perspectives 11 (1, Winter): 51-72.
Buiter, Willem. 2011Oct31. EFSF needs bigger bazooka to maximize its firepower. Financial Times, Oct 31 http://www.ft.com/intl/cms/s/0/c4886f7a-03d3-11e1-bbc5-00144feabdc0.html#axzz1cMoq63R5
Bureau of Labor Statistics. 2011Feb11. Overview of seasonal adjustment of the current employment statistics program. Washington, Feb 11, 2011 http://www.bls.gov/ces/cessa_oview.pdf
Bureau of Labor Statistics. 2012Feb3. Seasonal adjustment files and documentation. Washington, BLD, Feb 3 http://www.bls.gov/web/empsit/cesseasadj.htm
Caballero, Ricardo and Francsco Giavazzi. 2012Jan15. Parity may be euro’s last chance. Bloomberg, Jan 15 http://www.bloomberg.com/news/2012-01-16/dollar-parity-may-be-euro-salvation-commentary-by-caballero-and-giavazzi.html
Brunner, Karl and Allan H. Meltzer. 1973. Mr. Hicks and the “monetarists.” Economica NS 40 (157, Feb): 44-59.
CBO. 2012JanBEO. The budget and economic outlook: fiscal years 2012 to 2022. Washington, DC: Congressional Budget Office, Jan http://www.cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf
Cline, William. 2001. The role of the private sector in resolving financial crises in emerging markets. Cambridge, MA, NBER, Jun.
Cline, William. 2002. Private sector involvement: definition, measurement and implementation. London, Bank of England Conference, Jul-23-4.
Cobet, Aaron E. and Gregory A. Wilson. 2002. Comparing 50 years of labor productivity in US and foreign manufacturing. Monthly Labor Review (Jun): 51-65.
Cochrane, John H. 2011Jan. Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review 55 (1, Jan): 2-30.
Cochrane, John H. and Luigi Zingales. 2009. Lehman and the financial crisis. Wall Street Journal, Sep 15.
Cole, Harold L. and Lee E. Ohanian. 1999. The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review 23 (1, Winter): 2-24.
Culbertson, J. M. 1960. Friedman on the lag in effect of monetary policy. Journal of Political Economy 68 (6, Dec): 617-21.
Culbertson, J. M. 1961. The lag in effect of monetary policy: reply. Journal of Political Economy 69 (5, Oct): 467-77.
Darby, Michael R. Darby. 1974. The permanent income theory of consumption—a restatement. Quarterly Journal of Economics (88, 2): 228-50.
De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.
Draghi, Mario. 2011Dec1. Introductory statement by Mario Draghi, President of the ECB. Brussels, Hearing before the Plenary of the European Parliament, Dec 1 http://www.ecb.int/press/key/date/2011/html/sp111201.en.html
Draghi, Mario. 2011Dec8. Introductory statement to the press conference. Frankfurt am Main, ECB, Dec 8 http://www.ecb.int/press/pressconf/2011/html/is111208.en.html
Duffie, Darell and Kenneth J. Singleton. 2003. Credit risk: pricing, measurement and management. Princeton: Princeton University Press.
European Council. 2011Dec9. Statements by the euro area heads of state or government. Brussels, European Union, Dec 9 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/126658.pdf
De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.
Diamond, Douglas W. and Philip H. Dybvig. 1983. Bank runs, deposit insurance and liquidity. Journal of Political Economy 91 (3, Jun): 401-49.
Diamond, Douglas W. and Philip H. Dybvig. 1986. Banking theory, deposit insurance and bank regulation. Journal of Business 59 (1, Jan): 55-68.
Diamond, Douglas W. and Raghuram G. Rajan. 2000. A theory of bank capital. Journal of Finance 55 (6, Dec): 2431-65.
Diamond, Douglas W. and Raghuram G. Rajan. 2001a. Banks and liquidity. American Economic Review 91 (2, May): 422-5.
Diamond, Douglas W. and Raghuram G. Rajan. 2001b. Banks and liquidity. American Economic Review 91 (2, May): 422-5.
Dornbusch, Rudiger. 1976. Expectations and exchange rate dynamics. Journal of Political Economy 84 (6, Dec): 1161-76.
Draghi, Mario. 2011Dec15. The euro, monetary stability and the design of a fiscal compact. Berlin, Dec 15 http://www.ecb.int/press/key/date/2011/html/sp111215.en.html
European Central Bank. 2011MBDec. Editorial. Monthly Bulletin December 2011, 5-9 http://www.ecb.int/pub/pdf/mobu/mb201112en.pdf
European Commission. 2011Oct26SS. Euro summit statement. Brussels, European Commission, Oct 26 http://ec.europa.eu/news/economy/111027_en.htm
European Commission. 2011Oct26MRES. Main results of Euro Summit. Brussels, European Commission, Oct 26 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/125645.pdf
European Council. 2011Dec9. Statements by the euro area heads of state or government. Brussels, European Union, Dec 9 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/126658.pdf
Feldstein, Martin. 2012Mar19. Obama’s tax hikes threaten a new US recession. Financial Times, Mar 19 http://www.ft.com/intl/cms/s/0/0d0e7acc-6f7d-11e1-9c57-00144feab49a.html#axzz1pexRlsiQ
Friedman, Milton. 1957. A Theory of the Consumption Function. Princeton: Princeton University Press.
Friedman, Milton. 1961. The lag in effect of monetary policy. Journal of Political Economy 69 (5, Oct): 447-66.
Friedman, Milton. 1968. The role of monetary policy. American Economic Review 58 (1, Mar): 1-17.
Friedman, Milton. 1970. Controls on interest rates paid by banks. Journal of Money, Credit and Banking 2 (1, Feb): 15-32.
FOMC. 2006Dec12. Meeting of the Federal Open Market Committee December 12, 2006. Washington, DC, Federal Reserve, Dec 12 http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf
Gorton, Gary. 2009EFM. The subprime panic. European Financial Management 15 (1): 10-46.
Greenspan, Alan. 2004. Risk and uncertainty in monetary policy. American Economic Review 94 (2, May): 33-40. Also available at http://www.federalreserve.gov/boarddocs/speeches/2004/20040103/default.htm
Hamilton, Alexander. 1780. The national Bank. In Henry Cabot Lodge, ed. The works of Alexander Hamilton. New York and London: G. P. Putnam & Sons, 1904: 319-45. http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=1380&chapter=64319&layout=html#a_1594266
Harris, Jennifer M. 2011BA. Benchmark article. Washington, DC, Bureau of Labor Statistics http://www.bls.gov/ces/cesbmart.pdf
Hicks, John R. 1975. The scope and status of welfare economics. Oxford Economic Papers 27 (3): 307-26.
Hobbs, Frank and Nicole Stoops. 2002. Demographic trends in the 20th century. Washington, DC, US Government Printing Office http://www.census.gov/prod/2002pubs/censr-4.pdf
IMF. 2011WEOSep. World economic outlook Sep 11: slowing growth, rising risks. Washington, DC, IMF Sep http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf
IMF. 2011JSRNov23. Japan sustainability report. Washington, DC, IMF, Nov 23 http://www.imf.org/external/np/country/2011/mapjapanpdf.pdf
IMF. 2012GFSRJan24. Global Financial Stability Report: market update. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm
IMF. 2012FMJan24. Fiscal Monitor Update. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/fm/2012/update/01/fmindex.htm
IMF. 2012WEOJan24. World Economic Outlook Update: an update of the key WEO projections. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm
Ingersoll, Jonathan. 1987. Theory of Financial Decision Making. New Jersey: Rowman.
Jensen, Michael C. 1993. The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance 48 (3, Jul): 831-80.
Kohn, Donald L. 2009Apr18. Monetary policy in the financial crisis. Nashville, TN, Conference in Honor of Dewey Daane, Apr 18 http://www.federalreserve.gov/newsevents/speech/kohn20090418a.htm
Kohn, Donald L. 2009Sep10. Comments on “Interpreting the Unconventional US Monetary policy of 2007-2009.” Washington, Brookings Institution, Sep 10 http://www.federalreserve.gov/newsevents/speech/kohn20090910a.htm
Kydland, Finn E. and Edward C. Prescott. 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85 (3, Jun): 473-92.
Lazear, Edward P. 2012Jan19. The jobs picture is still far from rosy. Wall Street Journal, Jan 19 http://professional.wsj.com/article/SB10001424052970204468004577165292033648810.html
Lazear, Edward P. and James R. Spletzer. 2012Mar. Hiring, churn and the business cycle. Cambridge, MA, NBER, Mar http://www.nber.org/papers/w17910
McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Washington, DC: Brookings Institution.
McKinnon, Ronald I. 2011Dec18. Oh, for Alexander Hamilton to save Europe! Financial Times, Dec 18 http://www.ft.com/intl/cms/s/0/811611d6-273a-11e1-b7ec-00144feabdc0.html#axzz1gzoHXOj6
Meltzer, Allan H. 2005. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review 87 (2, Part 2, Mar/Apr): 145-72.
Meltzer, Allan H. 2010a. A history of the Federal Reserve, Volume 2, Book 1, 1951-1969. Chicago: University of Chicago Press.
Meltzer, Allan H. 2010b. A history of the Federal Reserve, Volume 2, Book 2, 1970-1986. Chicago: University of Chicago Press.
Metzler, Lloyd A. The nature and stability of inventory cycles. 1941. Review of Economics and Statistics 23 (3, Aug): 113-29.
Merton, Robert C. 1973. Theory of rational option pricing. Bell Journal of Economics and Management Science 4 (1, Spring): 141-83.
Merton, Robert C. 1974. On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 29 (2, May): 449-70.
Merton, Robert C. 1998. Applications of option-pricing theory: twenty-five years later. American Economic Review 88 (3): 323-49.
Pelaez, Carlos A. 2008. The reform of Alexander Hamilton. Philadelphia, University of Pennsylvania Law School, Unpublished manuscript.
Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.
Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos Manuel. 1986. O Cruzado e o Austral. São Paulo: Editora Atlas.
Pelaez, Carlos Manuel. 1987. Economia Brasileira Contemporânea. São Paulo: Editora Atlas.
Phelps, Edmund S. 1968. Money-wage dynamics and labor market equilibrium. Journal of Political Economy 76 (4, 2, Jul-Aug): 678-711.
Reinhart, Carmen M. and Kenneth Rogoff. 2010GTD. Growth in a time of debt. American Economic Review 100 (2): 1-9.
Rajan, Raghuram G. 2005. Has financial development made the world riskier? Jackson Hole, WY, Symposium sponsored by the Federal Reserve Bank of Kansas City. http://www.kc.frb.org/publicat/sympos/2005/PDF/Rajan2005.pdf
Rajan, Raghuram G. and Luigi Zingales. 2001. The influence of the financial revolution on the nature of the firm. American Economic Review 91 (2): 206-11.
Robinson, Joan. 1947. Beggar-my-neighbour remedies for unemployment. In Joan Robinson, Essays in the Theory of Employment, Oxford, Basil Blackwell, 1947.
Rogoff, Kenneth. 2002MF. Dornbusch’s overshooting model after twenty-five years. Washington, DC, IMF, Mundell-Fleming Lecture http://www.imf.org/external/np/speeches/2001/kr/112901.pdf
Roll, Richard. 1977. A critique of the asset pricing theory’s tests. Part I: on past and potential testability of the theory. Journal of Financial Economics 4 (2, Mar): 129-76.
Romer, Christina D. and David H. Romer. 2004. A new measure of monetary shocks: derivation and implications. American Economic Review 94 (4, Sep): 1055-84.
Samuelson, Paul A. 1974. Lessons from the current economic expansion. American Economic Review 64 (2, May): 75-7.
Sargent, Thomas J. and Neil Wallace. 1973. The stability of models of money and growth with perfect foresight. Econometrica 41 (6, Nov): 1043-8.
Sargent, Thomas J. and Neil Wallace. 1981. Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3, Fall): 1-17.
Sargent, Thomas J. and William L. Silber. 2012Mar20. The challenges of the Fed’s bid for transparency. Financial Times, Mar 20 http://www.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ
Shaw, Edward S. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.
Standard & Poor’s Rating Services (S&PRS). 2012Jan13. Standard & Poor’s takes various rating actions on 16 eurozone sovereign governments. Frankfurt, S&P Rating Services, Jan 13 http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327294763
Standard & Poor’s Rating Services (S&PRS). 2012Jan16. European Financial Stability Facility long-term Ratings Cut to ‘AA+’; short-term ratings affirmed; outlook developing. Frankfurt, S&P Rating Services, Jan 16 http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327337060
Svensson, Lars E. 2003. What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature 41 (2 Jun): 426–77.
Taylor, John B. 1993. Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39 (1993): 195-214.
Taylor, John B. 1997. Comment. In Christina Romer and David Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.
Taylor, John B. 1998LB. Monetary policy and the long boom. Federal Reserve Bank of St. Louis Review (Nov-Dec): 3-11.
Taylor, John B. 1999. An historical analysis of monetary policy rules. In John B. Taylor, ed. Monetary policy rules. Chicago: University of Chicago Press.
Taylor, John B. 2012FP. First principles: five keys to restoring America’s prosperity. New York: W. W. Norton.
Taylor, John B. 2012Mar27. Testimony before the Joint Economic Committee at the Hearing on “Monetary Policy Going Forward: Why a Sound Dollar Boosts Growth and Employment.” Washington, DC, JEC, Mar 27 http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=f002b5f0-9fc0-45f9-9d53-e563137c040e
Taylor, John B. 2012Mar28. The dangers of an interventionist Fed. Wall Street Journal, Mar 28 http://professional.wsj.com/article/SB10001424052702303816504577307403971824094.html?mod=WSJ_hps_sections_opinion
Taylor, John B. 2012JMCB. Monetary policy rules work and discretion doesn’t: a tale of two eras. Palo Alto, CA, Stanford University, Mar 2012, forthcoming in the Journal of Money, Credit and Banking, 2012 http://www.stanford.edu/~johntayl/JMCB%20lecture.pdf
Tobin, James. 1969. A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking 1 (1, Feb): 15-29.
Tobin, James. 1974. Monetary policy in 1974 and beyond. Brookings Papers on Economic Activity 1 (1974): 219-32.
Wriston, Walter B. 1982. Banking against disaster. New York Times, Sep 14.
Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf
Zingales, Luigi. 2000. In search of new foundations. Journal of Finance 55 (4, Aug): 1623-54.
© Carlos M. Pelaez, 2010, 2011, 2012
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.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
No comments:
Post a Comment