Decelerating United States Recovery without Growth and Jobs, United States Housing Collapse and World Economic Slowdown with Global Recession Risk: Part II

 

Decelerating United States Recovery without Growth and Jobs, United States Housing Collapse and World Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Mediocre and Decelerating United States Economic Growth

II United States Housing Collapse

IIA United States New House Sales

IIB United States House Prices

IIC Factors of US Housing Collapse

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

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

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

 

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) to show GDP in dollars in 2010 and the growth rate of real GDP of the world and selected regional countries from 2011 to 2014. The IMF revised some of the projections in its World Economic Outlook Update released on Jul 16, 2012 (http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm). Table V-1 incorporates these revisions with lines “Rev” where appropriate. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.5 percent in 2012 but accelerating to 3.9 percent in 2013 instead of 4.1 percent in the earlier projection, 4.4 percent in 2014 and 4.5 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,670 billion of world output of $69,660 billion, or 48.3 percent, but are projected to grow at much lower rates than world output, 2.0 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole, incorporating the revisions. While the world would grow 17.3 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.4 percent. The difference in dollars of 2011 is rather high: growing by 17.3 percent would add $12.1 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.4 percent would add $5.9 trillion of output to the world, or about the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,237 billion, or 36.2 percent of world output. The EMDEs would grow cumulatively 26.3 percent or at the average yearly rate of 6.0 percent, contributing $6.6 trillion from 2012 to 2015 or the equivalent of somewhat less than the GDP of $7,298 billion of China in 2011. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,317 billion, or 19.1 percent of world output, which is equivalent to 39.6 percent of the combined output of the major advanced economies of the G7.

Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth

	GDP USD 2011	Real GDP ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World Rev	69,660	3.5	4.1 3.9	4.4	4.5
G7 Rev	33,670	1.5 1.4	1.9 1.9	2.3	2.5
Canada	1,737	2.1	2.2	2.4	2.4
France Rev	2,776	0.5 0.3	1.1 0.8	1.9	1.9
DE Rev	3,577	0.6 1.0	1.5 1.4	1.3	1.3
Italy	2,199	-1.9	-0.3	0.5	1.0
Japan Rev	5,869	2.0 2.4	1.7 1.5	1.5	1.3
UK	2,418	0.8	2.0	2.5	2.6
US Rev	15,094	2.1 0.2	2.4 1.4	2.9	3.3
Euro Area Rev	13,115	-0.3	0.9 0.7	1.4	1.6
DE Rev	3,577	0.6 1.0	1.5 1.4	1.3	1.3
France Rev	2,776	0.5 0.3	1.1 0.8	1.9	1.9
Italy	2,199	-1.9	-0.3	0.5	1.0
POT	239	-3.3	0.3	2.1	1.9
Ireland	218	0.5	2.1	2.5	2.8
Greece	303	-4.7	0.0	2.5	3.1
Spain Rev	1,494	-1.8 -1.5	0.1 -0.6	1.6	1.6
EMDE Rev	25,237	5.7 5.6	6.0 5.9	6.2	6.3
Brazil Rev	2,493	3.0 2.5	4.2 4.6	4.0	4.1
Russia	1,850	4.0	3.9	3.9	3.9
India Rev	1,676	6.9 6.1	7.3 6.5	7.5	7.7
China Rev	7,298	8.2 8.0	8.8 8.5	8.7	8.7

Notes: Rev: Revision of July 19, 2012; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm

Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table ESV-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 12.7 percent for Portugal (POT), 14.4 percent for Ireland, 17.3 percent for Greece, 21.6 percent for Spain and 8.4 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.7 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force

	% Labor Force 2011	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015
World	NA	NA	NA	NA	NA
G7	7.7	7.4	7.3	7.0	6.7
Canada	7.5	7.4	7.3	7.1	6.9
France	9.7	9.9	10.1	9.8	9.4
DE	6.0	5.6	5.5	5.3	5.3
Italy	8.4	9.5	9.7	9.8	9.5
Japan	4.5	4.5	4.4	4.3	4.2
UK	8.0	8.3	8.2	7.8	7.4
US	8.9	8.2	7.9	7.5	6.9
Euro Area	10.1	10.9	10.8	10.5	10.1
DE	6.0	5.6	5.5	5.3	5.3
France	9.7	9.9	10.1	9.8	9.4
Italy	8.4	9.5	9.7	9.8	9.5
POT	12.7	14.3	13.9	13.2	12.4
Ireland	14.4	14.5	13.8	12.9	12.0
Greece	17.3	19.4	19.4	18.2	16.8
Spain	21.6	24.2	23.9	22.8	21.9
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	7.5	6.5	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.0	4.0	4.0	4.0

Notes: DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog. Growth is weak throughout most of the world. Japan’s GDP increased 1.2 percent in IQ2012 and 2.8 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). China’s GDP grew 7.6 percent in IIQ2012 relative to IQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. GDP was flat in the euro area in IQ2012 and fell 0.1 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. US GDP increased 0.4 percent in IIQ2012 and 2.2 percent relative to a year earlier (Section I Mediocre and Decelerating United States Economic Growth) but with substantial underemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html).

Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	QOQ: 0.5        SAAR: 2.0	2.4
Japan	1.2	2.8
China	1.8	8.1
Euro Area	0.0	-0.1
Germany	0.5	1.7
France	0.0	0.3
Italy	-0.8	-1.4
United Kingdom	-0.3	-0.2
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.4         SAAR: 1.5	2.2
China	1.8	7.6
United Kingdom	-0.7	-0.8

QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate

Source: Country Statistical Agencies

http://www.bea.gov/national/index.htm#gdp http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html http://www.stats.gov.cn/enGliSH/

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, fell from 52.1 in May to 50.3 in Jun, indicating expansion at a lower rate but close to stagnation and to the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). This index has remained above the contraction territory of 50.0 during 34 months. Both global manufacturing and services have slowed down considerably. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth in IIQ2012 could be the slowest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell to 48.9 in Jun from 50.6 in May, for the lowest reading in three years and the first change of direction to contraction since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). David Hensley, Director of Global Economics Coordination at JPMorgan, finds that inventory adjustment is the driver of the only second change to contraction in the current expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). The HSBC Brazil Composite Output Index, compiled by Markit, rose from marginal contraction of 49.6 in May to moderate expansion at 51.5 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). Andre Loes, Chief Economist, Brazil, at HSBC, finds that PMI data for IIQ2012 could signal weaker activity in services, which can restrain growth of GDP in the year, although the HSBC Services PMI Business Activity Index increased from 49.7 in May to 53.0 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) fell to 48.5 in Jun from 49.3 in May, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733). Andre Loes, Chief Economist, Brazil at HSBC, finds that the manufacturing index average of 49.0 in IIQ2012 is lower than the prior quarter’s average of 51.0 with Brazil experiencing competitive pressures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted declined from 52.5 in Jun to 51.8 in Jul, indicating the second weakest reading since late 2009 during the current recovery with the lowest in Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9832). Chris Williamson, Chief Economist at Markit, finds the worst consecutive declines in manufacturing export orders in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9832).

The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® fell 3.8 percentage points from 53.5 in May to 49.7 in Jun, for the first contraction since Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm). The index of new orders fell 12.3 percentage points from 60.1 in May to 47.8 in Jun, interrupting growth in 37 months for the first contraction since Apr 2009. The Non-Manufacturing ISM Report on Business^® PMI fell 1.6 percentage points from 53.7 in May to 52.1 in Jun while the index of new orders decreased 3.9 percentage points from 55.6 in May to 55.3 in Jun (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Table USA provides the country economic indicators for the US.

Table USA, US Economic Indicators

Consumer Price Index	Jun 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.2 Jun month ∆%: 0.0; ex food and energy ∆%: 0.2 Blog 7/22/12
Producer Price Index	Jun 12-month NSA ∆%: 0.7; ex food and energy ∆% 2.6 Jun month SA ∆% = 0.1; ex food and energy ∆%: 0.2 Blog 7/15/12 7/22/12
PCE Inflation	May 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.8 Blog 7/8/12
Employment Situation	Household Survey: Jun Unemployment Rate SA 8.2% Blog calculation People in Job Stress Jun: 28.7 million NSA Establishment Survey: Jun Nonfarm Jobs +80,000; Private +84,000 jobs created  May 12-month Average Hourly Earnings Inflation Adjusted ∆%: -0.6% Blog 7/8/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring May 2012 4.796 million lower by 1.190 million than 5.986 million in Apr May 2007 Blog 7/15/12
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.2 J]IQ2011 SAAR 2.0 IIQ2012 SAAR 1.5 Blog 7/29/12
Personal Income and Consumption	May month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.3 Real Personal Consumption Expenditures (RPCE): 0.1 12-month May NSA ∆%: RDPI: 1.1; RPCE ∆%: 1.2 Blog 7/8/2012
Quarterly Services Report	IQ12/IQ11 SA ∆%: Information 3.8 Professional 10.3 Administrative 4.9 Hospitals 5.2 Blog 6/10/12
Employment Cost Index	IQ2012 SA ∆%: 0.4 Mar 12 months ∆%: 1.9 Blog 4/29/12
Industrial Production	Jun month SA ∆%: 0.4 Jun 12 months SA ∆%: 4.7 Manufacturing Jun SA ∆% 0.7 Jun 12 months SA ∆% 5.6, NSA 5.5 Capacity Utilization: 78.9 Blog 7/22/12
Productivity and Costs	Nonfarm Business Productivity IQ2012∆% SAAE -0.9; IQ2012/IQ2011 ∆% 0.4; Unit Labor Costs SAAE IQ2012 ∆% 1.3; IQ2012/IQ2011 ∆%: 0.9 Blog 6/10/2012
New York Fed Manufacturing Index	General Business Conditions From Jun 2.29 to Jul 7.39 New Orders: From Jun 2.18 to Jul -2.69 Blog 7/22/12
Philadelphia Fed Business Outlook Index	General Index from Jun minus 16.6 to Jul minus 12.9 New Orders from Jun minus 18.8 to Jul minus 6.9 Blog 7/22/12
Manufacturing Shipments and Orders	May New Orders SA ∆%: 0.7; ex transport ∆%: 0.4 Jan-May New Orders NSA ∆%: 6.1; ex transport ∆% 5.6 Blog 7/8/12
Durable Goods	Jun New Orders SA ∆%: 1.6; ex transport ∆%: 1.1 Jan-Jun 12/Jan-Jun 11 NSA New Orders ∆%: 7.9; ex transport ∆% : 6.6 Blog 7/29/12
Sales of New Motor Vehicles	Jun 2012 7,272,160; Jun 2011 6,332,566. Jun SAAR 14.08 million, May SAAR 13.78 million, Jun 2011 SAAR 11.56 million Blog 7/8/12
Sales of Merchant Wholesalers	Jan-May 2012/Jan-May 2011 NSA ∆%: Total 8.4; Durable Goods: 10.6; Nondurable Goods 6.7 Blog 7/15/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	May 12/May 11 NSA ∆%: Sales Total Business 7.2; Manufacturers 6.2 Retailers 6.9; Merchant Wholesalers 8.7 Blog 7/22/12
Sales for Retail and Food Services	Jan-Jun 2012/Jan-Jun 2011 ∆%: Retail and Food Services 6.4; Retail ∆% 6.1 Blog 7/22/12
Value of Construction Put in Place	May SAAR month SA ∆%: 0.9 May 12-month NSA: 7.4 Blog 7/8/12
Case-Shiller Home Prices	Apr 2012/Apr 2011 ∆% NSA: 10 Cities minus 2.2; 20 Cities: minus 1.9 ∆% Apr SA: 10 Cities 0.7 ; 20 Cities: 0.7 Blog 7/2/12
FHFA House Price Index Purchases Only	May SA ∆% 0.8; 12 month ∆%: 3.8 Blog 7/29/12
New House Sales	Jun 2012 month SAAR ∆%: -8.4 Jan-Jun 2012/Jan-Jun 2011 NSA ∆%: 20.3 Blog 7/29/12
Housing Starts and Permits	Jun Starts month SA ∆%: 6.9 ; Permits ∆%: -3.7 Jan-Jun 2012/Jan-Jun 2011 NSA ∆% Starts 26.5; Permits  ∆% 29.1 Blog 7/22/12
Trade Balance	Balance May SA -$48684 million versus Apr -$50597 million Exports May SA ∆%: 0.2 Imports May SA ∆%: -0.7 Goods Exports Jan-May 2012/2011 NSA ∆%: 6.8 Goods Imports Jan-May 2011/2011 NSA ∆%: 7.3 Blog 7/15/12
Export and Import Prices	Jun 12-month NSA ∆%: Imports -2.1; Exports -2.6 Blog 7/15/12
Consumer Credit	May ∆% annual rate: 8.0 Blog 7/15/12
Net Foreign Purchases of Long-term Treasury Securities	May Net Foreign Purchases of Long-term Treasury Securities: $55.0 billion Major Holders of Treasury Securities: China $1169 billion; Japan $1105 billion; Total Foreign US Treasury Holdings Apr $5264 billion Blog 7/22/12
Treasury Budget	Fiscal Year Oct-Jun 2012/2011 ∆%: Receipts 5.2; Outlays 0.9; Individual Income Taxes 3.1 Deficit Fiscal Year 2011 $1,300 billion Deficit Fiscal Year 2012 Oct-Jun $904,236 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 7/15/2012
Flow of Funds	IQ2012 ∆ since 2007 Assets -$4113B Real estate -$4916B Financial $367.3MM Net Worth -$3300B Blog 6/17/12
Current Account Balance of Payments	IQ2012 -$137B %GDP 3.6 Blog 06/17/12

Links to blog comments in Table USA:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/17/12 http://cmpassocregulationblog.blogspot.com/search?updated-min=2012-01-01T00:00:00-08:00&updated-max=2013-01-01T00:00:00-08:00&max-results=48

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

Manufacturers’ shipments of durable goods increased 0.1 percent in Jun after increasing 1.2 percent in May following increase of 0.7 percent in Apr. New orders increased 1.6 percent in Jun after increasing 1.6 percent in May and falling 0.3 percent in Apr, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by decrease of 46.6 percent of orders nondefense aircraft in Mar, increase of 0.1 percent in Apr, increase of 7.6 percent in May and increase of 14.3 percent in Jun. New orders excluding transportation equipment decreased 1.1 percent in Jun after increasing 0.8 percent in May following decline of 0.7 percent in Apr. Capital goods new orders, indicating investment, increased 6.8 percent in Jun after increase of 3.5 percent in May but decrease of 3.4 percent in Apr. New orders of nondefense capital goods increased 1.2 percent in Jun after increase of 2.7 percent in May and decrease of 0.9 percent in Apr. Excluding more volatile aircraft, capital goods orders decreased 1.4 percent in Jun after increase of 2.7 percent in Mar and decrease of 1.5 percent in Apr.

Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Jun 2012  ∆%	May 2012 ∆%	Apr 2012  ∆%
Total
S	0.1	1.2	0.7
NO	1.6	1.6	-0.3
Excluding Transport
S	0.5	1.1	-0.4
NO	-1.1	0.8	-0.7
Excluding Defense
S	-0.1	0.9	1.2
NO	0.7	1.1	0.9
Machinery
S	3.1	1.2	-3.2
NO	-1.1	-5.2	-3.4
Computers & Electronic Products
S	0.2	3.9	1.4
NO	-4.9	-0.1	1.6
Computers
S	-3.9	2.4	-0.4
NO	-1.5	4.4	-2.0
Transport Equipment
S	-1.0	1.5	3.5
NO	8.0	3.7	0.8
Motor Vehicles
S	-0.8	0.2	6.1
NO	-0.6	0.3	5.7
Nondefense Aircraft
S	-4.4	2.2	5.8
NO	14.3	7.6	0.1
Capital Goods
S	0.8	1.9	-1.5
NO	6.8	3.5	-3.4
Nondefense Capital Goods
S	0.6	1.0	-0.6
NO	1.2	2.7	-0.9
Capital Goods ex Aircraft
S	1.2	1.1	-1.5
NO	-1.4	2.7	-1.5

Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

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

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Jun 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Jun 2012 total $1344.2 billion and new orders total $1328.2 billion, growing respectively by 9.1 percent and 7.9 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 8.5 percent and new orders increased 7.7 percent. Excluding defense, shipments grew 8.0 percent and new orders grew 6.6 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $467.1 billion for shipments, growing 7.5 percent, and new orders $489.4 billion, growing 4.6 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $382.0 billion, growing by 7.9 percent, and new orders $394.8 billion, growing 5.5 percent. There is no suggestion in these data that the US economy is close to recession but performance at the margin appears somewhat weaker without enough data to discern trends.

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Jun 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/  2011
Total	1,344,185	9.1	1,328,154	7.9
Excluding Transport	959,805	8.0	937,432	6.6
Excluding Defense	1,279,842	10.1	1,262,049	9.5
Machinery	193,216	11.1	197,765	1.7
Computers & Electronic Products	166,085	-0.4	133,285	4.3
Computers & Related Products	16,500	-2.7	16,648	-1.5
Transport Equipment	384,380	12.2	390,722	10.9
Motor Vehicles	263,466	14.1	262,603	13.9
Nondefense Aircraft	55,208	26.3	64,355	30.1
Capital Goods	467,092	7.5	489,432	4.6
Nondefense Capital Goods	417,278	10.1	438,295	8.7
Capital Goods ex Aircraft	382,040	7.9	394,790	5.5

Note: Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

In IVQ2011, manufacturing had share of $1318.2 billion or 10.0 percent of National Income without capital consumption adjustment or 10.0 percent of the total and durable goods had share of $763.0 billion or 5.8 percent of the total, as shown in Table VA-3.

Table VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IQ2012	% Total
National Income WCCA	13,777.4	100.0
Domestic Industries	13,562.4	98.7
Private Industries	11,911.8	86.7
Agriculture	134.0	1.0
Mining	210.7	1.3
Utilities	211.9	1.4
Construction	584.2	4.1
Manufacturing	1518.3	10.4
Durable Goods	861.0	6.0
Nondurable Goods	657.3	4.4
Wholesale Trade	831.9	5.8
Retail Trade	948.3	6.8
Transportation & WH	415.6	2.8
Information	486.0	3.5
Finance, insurance, RE	2299.7	18.7
Professional, BS	1953.0	14.0
Education, Health Care	1377.6	10.1
Arts, Entertainment	539.7	3.8
Other Services	401.0	3.9
Government	1650.7	12.1
Rest of the World	214.9	1.3

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Sources: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf). For fiscal 2012, the forecast is of growth of GDP between 2.1 and 2.4 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.4 to 0.7 percent and the all items CPI less fresh food of 0.1 to 0.4 percent.

Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year

Fiscal Year Date of Forecast	Real GDP	Domestic CGPI	CPI All Items Less Fresh Food
2011
Apr 2012	-0.2 to –0.2 [-0.2]	+1.7	0.0
Jan 2012	-0.4 to –0.3 [-0.4]	+1.8 to +1.9 [+1.8]	-0.1 to 0.0 [-0.1]
2012
Apr 2012	+2.1 to +2.4 [+2.3]	+0.4 to +0.7 [+0.6]	+0.1 to +0.4 [+0.3]
Jan 2012	+1.8 to +2.1 [+2.0]	-0.1 to +0.2 [+0.1]	0.0 to +0.2 [+0.1]
2013
Apr 2012	+1.6 to +1.8 [+1.7]	+0.7 to +0.9 [+0.8]	+0.5 to +0.7 [+0.7]
Jan 2012	+1.4 to +1.7 [+1.6]	+0.6 to 1.0 [+0.8]	+0.4 to +0.5 [+0.5]

Figures in brackets are the median of forecasts of Policy Board members

Source: Policy Board, Bank of Japan

http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf

Private-sector activity in Japan contracted at a moderate rate with the Markit Composite Output PMI^™ Index declining from 50.1 in May to 49.1 in Jun in the first contraction of activity of the private sector since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). Alex Hamilton, economist at Markit and author of the report, finds deceleration originating in combination of doubts on the global economy and internal reconstruction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit Business Activity Index of Services decreased from 49.8 in May to 49.3 in Jun, also showing slower pace and the second reading below 50.0 in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, fell from 50.7 in May to 49.9 in Jun, indicating virtual standtill in manufacturing in Japan in the weakest reading in seven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713). Alex Hamilton, economist at Markit and author of the report, finds reduction in work originating from the reconstruction effort from the Tōhoku Hurricane and Tsunami of Mar 11, 2011 with simultaneous decline of output and new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713).Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 8/9/11 Table 26
Corporate Goods Prices	Jun ∆% -0.6 12 months ∆% minus 1.3 Blog 7/15/12
Consumer Price Index	Jun NSA ∆% -0.5; Jun 12 months NSA ∆% -0.2 Blog 7/29/12
Real GDP Growth	IQ2012 ∆%: 1.2 on IVQ2011;  IQ2012 SAAR 4.7; ∆% from quarter a year earlier: 2.8 % Blog 6/10/12
Employment Report	May Unemployed 2.97 million Change in unemployed since last year: minus 170 thousand Unemployment rate: 4.4% Blog 7/2/12
All Industry Indices	May month SA ∆% -0.3 12-month NSA ∆% 3.2 Blog 7/22/12
Industrial Production	May SA month ∆%: -3.1 12-month NSA ∆% 6.2 Blog 7/2/12
Machine Orders	Total May ∆% -14.5 Private ∆%: -21.0 May ∆% Excluding Volatile Orders -14.8 Blog 7/15/12
Tertiary Index	May month SA ∆% 0.7 May 12 months NSA ∆% 3.0 Blog 7/15/12
Wholesale and Retail Sales	Jun 12 months: Total ∆%: -2.8 Wholesale ∆%: -2.8 Retail ∆%: +0.2 Blog 7/29/12
Family Income and Expenditure Survey	May 12-month ∆% total nominal consumption 4.3, real 4.0 Blog 7/8/12
Trade Balance	Exports Jun 12 months ∆%: -2.3 Imports Jun 12 months ∆% -2.2 Blog 7/29/12

Links to blog comments in Table JPY:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

Japan is experiencing weak internal demand as in most advanced economies, interrupted by strong growth in IQ2012. Table VB-1 provides Japan’s wholesale and retail sales. Retail sales increased 0.2 percent in the 12 months ending in Jun 2012. Total sales decreased 2.8 percent in the 12 months ending in Jun 2012. Retail sales are recovering from the deep drops in Mar and Apr 2012 following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Retail sales have been increasing in 12-month percentage changes from Dec 2011 through Jun 2012.

Table VB-1, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Jun 2012	-2.8	-2.8	0.2
May	2.5	2.1	3.6
Apr	1.7	0.3	5.7
Mar	2.9	0.5	10.3
Feb	-0.1	-1.3	3.4
Jan	-2.0	-3.5	1.8
Dec 2011	-0.8	-2.0	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2011	1.0	1.8	-1.2
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

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

The structure of exports and imports of Japan is in Table VB-2. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 32.8 percent of Japan’s imports and increased 5.4 percent in the 12 months ending in Jun 2012. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.3 percent of Japan’s exports with decrease of 3.0 percent in the 12 months ending in Jun. Machinery contributes 20.0 percent of Japan’s exports with decrease of 10.2 percent in the 12 months ending in Jun. Electrical machinery contributes 17.9 percent of Japan’s exports with increase of 0.4 percent in the 12 months ending in Jun. The best outcome is exports of transport equipment with share of 25.0 percent in total exports and increase of 13.2 percent in the 12 months ending in Jun largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-2 shows increase of the major categories of motor vehicles of 8.6 percent: cars increased 7.8 percent with strong growth of 10.6 percent in the minor category of buses and trucks, increase of 22.1 percent for parts of motor vehicles, decrease of 19.3 percent for motorcycles and increase of 25.5 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversion of carry trades from zero interest rates to commodity prices.

Table VB-2, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Jun 2012	Value JPY Millions	% of Total	12 Months ∆%	Contribution Degree %
Exports	5,643,806	100.0	-2.3	-2.3
Foodstuffs	29,834	0.5	1.3	0.0
Raw Materials	90,527	1.6	8.4	0.1
Mineral Fuels	94,824	1.7	-23.1	-0.5
Chemicals	526,700	9.3	-4.4	-0.4
Manufactured Goods	750,850	13.3	-3.0	-0.4
Machinery	1,127,160	20.0	-10.2	-2.2
Electrical Machinery	1,012,602	17.9	0.4	0.1
Transport Equipment	1,409,860	25.0	13.2	2.9
Motor Vehicles	816,444	14.5	8.6	1.1
Cars	678,344	12.0	7.8	0.8
Buses & Trucks	125,679	2.2	10.6	0.2
Parts of Motor Vehicles	289,014	5.1	22.1	0.9
Motorcycles	16,344	0.3	-19.3	-0.1
Ships	241,623	4.3	25.5	0.8
Other	601,448	10.7	-14.6	-1.8
Imports	5,582,152	100.0	-2.2	-2.2
Foodstuffs	475,239	8.5	-8.2	-0.7
Raw Materials	396,489	7.1	-13.0	-1.0
Mineral Fuels	1,828,777	32.8	5.4	1.7
Chemicals	469,107	8.4	-12.7	-1.2
Manufactured Goods	457,803	8.2	-15.9	-1.5
Machinery	416,139	7.5	-2.9	-0.2
Electrical Machinery	692,627	12.4	-3.7	-0.5
Transport Equipment	188,081	3.4	31.3	0.8
Other	657,530	11.8	4.5	0.5

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

Table VB-3 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.4 percent while imports grew at 3.3 percent per year in the years from 1979 to 2011. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.

Table VB-3, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,546	68,111	-2,565

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-4 for Jun 2012. The share of Asia in Japan’s trade is more than one half, 54.9 percent of exports and 44.9 percent of imports. Within Asia, exports to China are 18.3 percent of total exports and imports from China 20.8 percent of total imports. The second largest export market for Japan in Jun 2012 is the US with share of 17.5 percent of total exports and share of imports from the US of 8.9 percent in total imports. Western Europe has share of 9.4 percent in Japan’s exports and of 10.2 percent in imports. High growth rates of exports and imports in May 2012 relative to May 2011 reflect the low levels after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201 Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 2.3 percent in Jun 2012 and imports by 2.2 percent but higher levels after the earthquake and declining prices may be another factor.

Table VB-4, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Jun 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,643,806	-2.3	5,582,152	-2.2
Asia	3,101,678	-4.4	2,509,395	-2.5
China	1,031,765	-7.3	1,159,054	-4.5
USA	989,305	15.1	495,208	-3.5
Canada	68,091	24.4	86,153	-12.2
Brazil	41,568	-3.6	74,041	-15.1
Mexico	74,390	2.1	27,977	10.5
Western Europe	530,524	-22.5	571,746	-4.1
Germany	140,583	-15.4	145,316	2.8
France	42,657	-16.4	93,050	13.3
UK	77,932	-33.5	43,457	-9.2
Middle East	186,521	3.2	1,032,323	-1.3
Australia	123,924	-5.6	321,938	-13.9

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

The geographical distribution of Japan’s trade balance is provided in Table VB-5. The combined trade surpluses with the US, UK and Mexico of JPY 574,985 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,043,816 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 127,289 million in Jun 2012.

Table VB-5, Japan, Trade Balance, Millions of Yen

Jun 2012	Millions of Yen
Total	-61,654
Asia	592,283
China	-127,289
USA	494,097
Canada	-18,062
Brazil	-32,473
Mexico	46,413
Western Europe	-41,222
Germany	-4,733
France	-50,393
UK	34,475
Middle East	-845,802
Australia	-198,014

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm). Table CIPMS provides this index and components from Jan to Jun 2012. The index fell from 57.3 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012.

Table CIPMS, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Jun	56.7	53.7	52.1	48.6	65.5
May	55.2	52.5	53.6	48.5	65.4
Apr	56.1	52.7	57.9	50.3	66.1
Mar	58.0	53.5	60.2	52.0	66.6
Feb	57.3	52.7	59.0	51.2	63.8
Jan	55.7	52.2	58.2	51.1	65.3

Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm

Chart CIPMS provides China’s nonmanufacturing purchasing managers’ index from Jun 2011 to Jun 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012.

Chart CIPMS, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.htm

China estimates a manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm). Chart CIPMM provides the index from Jun 2011 to Jun 2012. There is deceleration from 52.0 in May 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.2 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011.

Chart CIPMM, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm

The HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9823) improved. The overall Flash China Manufacturing PMI^™ increased from 48.2 in Jun to 49.5 in Jul for a five-month high, while the Flash China Manufacturing Output Index increased from 49.3 in Jun to 51.2 in Jul, at a nine-month high and in expansion territory above 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that improvement in the headline index suggests stimulus measures are beginning to support activity while the reading below 50 indicates weak demand and employment, requiring more stimulus measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9823).The HSBC China Services PMI^™, compiled by Markit, moderating business activity in China with the HSBC Composite Output, combining manufacturing and services, decreasing from 51.9 in May to 50.6 in Jun, which is the lowest level in three months with contraction in manufacturing and slower activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds weak employment growth, suggesting that with lower inflation there is room for further stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788).The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, fell slightly to 48.2 in Jun from 48.4 in May, for the lowest reading in IIQ2012 since IQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds continuing slowdown in China’s economy in IIQ2012, which requires further reduction of bank reserve requirements and the policy interest rate together with fiscal measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721).

Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy. Xinhuanet, writing on “China announces surprise rate cuts amid economic downshift,” on Jun 5, 2012 (http://news.xinhuanet.com/english/china/2012-07/05/c_131697843.htm), informs that the central bank of China People’s Bank of China reduced the one year deposit rate by 25 basis points and the one year lending rate by 31 basis points effective Jun 6, 2012. The People’s Bank of China posts the new rates (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jun 12-month ∆%: minus 2.1 Jun month ∆%: minus 0.7 Blog 7/15/12
Consumer Price Index	Jun month ∆%: -0.6 Jun 12 months ∆%: 2.2 Blog 7/15/12
Value Added of Industry	Jun month ∆%: 0.76 Jan-Jun 2012/Jan-Jun 2011 ∆%: 10.5 Blog 7/15/12
GDP Growth Rate	Year IIQ2012 ∆%: 7.6 Quarter IIQ2012 ∆%: 1.8 Blog 7/15/12
Investment in Fixed Assets	Total Jan-Jun 2012 ∆%: 20.4 Real estate development: 16.6 Blog 7/15/12
Retail Sales	Jun month ∆%: 1.08 Jun 12 month ∆%: 13.7 Jan-Jun ∆%: 14.4 Blog 7/22/12
Trade Balance	Jun balance $31.7 billion Exports ∆% 11.3 Imports ∆% 6.3 Cumulative Jun: $69.4 billion Blog 7/15/12

Links to blog comments in Table CNY:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

VD Euro Area. Table VD-EUR provides inflation, unemployment and real GDP growth in the euro area yearly from 1999 to 2011 together with growth forecasts of EUROSTAT for 2012 and 2013. Inflation in the euro zone remained subdued around 2 percent in the first five years of the euro zone from 1999 to 2004, as shown in Table VD-EUR. Inflation climbed above 2.0 percent after 2005, peaking at 3.3 percent in 2008 with the surge in commodity prices but falling to 0.3 percent in 2009 with the collapse of commodity prices. Inflation climbed back to 1.6 percent in 2010 and 2.7 percent in 2011. Under the regime of zero interest rates inflation returns worldwide during relaxation of risk aversion. The rate of unemployment increased in 2011 while the rate of GDP growth fell. EUROSTAT forecasts slightly negative growth of 0.3 percent in 2012 and growth of 1.0 percent in 2013.

Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, Unemployment Rate and GDP, ∆%

Year	HICP ∆%	Unemployment %	GDP ∆%
1999	1.2	9.6	2.9
2000	2.2	8.7	3.8
2001	2.4	8.1	2.0
2002	2.3	8.5	0.9
2003	2.1	9.0	0.7
2004	2.2	9.3	2.2
2005	2.2	9.2	1.7
2006	2.2	8.5	3.3
2007	2.1	7.6	3.0
2008	3.3	7.6	0.4
2009	0.3	9.6	-4.4
2010	1.6	10.1	2.0
2011	2.7	10.2	1.5
2012*			-0.3
2013*			1.0

*EUROSTAT forecast

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

The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, was unchanged in Jul from 46.0 in Jun, for six consecutive declines and ten drops in eleven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9824). Chris Williamson, Chief Economist at Markit, finds that GDP could have declined 0.6 percent in the euro area in IIQ2012, with the data for Jul suggesting GDP falling at the quarterly rate of 0.6 percent in the initial month of IIIQ2012; there are weaker conditions in the indebted countries spreading to Germany that contracted at the fastest rate in three years with some improvement in services in France with amelioration of the election effects (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9824).The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.0 in May to 46.4 in Jun, which is still in sharp contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769) in the deepest contraction in three years. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.6 percent IIQ2012, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769). The Markit Eurozone Manufacturing PMI^® was unchanged at 45.1 in Jun, which indicates the sharpest deteriorating in activity in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of about 1 percent, exerting pressure on GDP in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708).

Table EUR, Euro Area Economic Indicators

GDP	IQ2012 ∆% 0.0; IQ2012/IQ2011 ∆% -0.1 Blog 6/10/12
Unemployment	May 2012: 11.1% unemployment rate May 2012: 17.561 million unemployed Blog 7/8/12
HICP	Jun month ∆%: -0.1 12 months Jun ∆%: 2.4 Blog 7/22/12
Producer Prices	Euro Zone industrial producer prices May ∆%: -0.5 May 12-month ∆%: 2.3 Blog 7/8/12
Industrial Production	May month ∆%: 0.6; May 12 months ∆%: -2.8 Blog 7/15/12
Retail Sales	May month ∆%: 0.6 Apr 12 months ∆%: -1.7 Blog 7/8/12
Confidence and Economic Sentiment Indicator	Sentiment 89.9 Jun 2012 Confidence minus 19.8 Jun 2012 Blog 7/2/12
Trade	Jan-May 2012/Jan-May 2011 Exports ∆%: 7.4 Imports ∆%: 2.3 May 2012 12-month Exports ∆% 5.6 Imports ∆% 0.2 Blog 7/22/12

Links to blog comments in Table EUR:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):

“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”

Table VE-DE, Germany, GDP Year ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, fell from 48.1 in Jun to 47.3 in Jul, which is the lowest in 37 months and the sixth consecutive month of decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9827). Tim Moore, Senior Economist at Markit, finds deterioration in business conditions in Germany relative to the first semester of 2012 with new export orders in manufacturing falling at the sharpest rate in more than three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9827). The Markit Germany Composite Output Index of the Markit Germany Services PMI^®, combining manufacturing and services with close association with Germany’s GDP, fell from 49.3 in May to 48.1 in Jun, indicating marginal deterioration in private sector output for the first time in six months and the deepest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). Tim Moore, Senior Economist at Markit and author of the report, finds that the index suggests flat GDP in Germany in IIQ2012 with possible deterioration in the future (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, fell from 45.2 in May to 45.0 in Jun, remaining below 50.0 during four consecutive months for the longest period since the global recession of 2008 and 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765). Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output is showing the sharpest drop in about three years with contracting orders from export markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765).Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IQ2012 0.5 ∆%; I/Q2012/IQ2011 ∆% 1.7 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 5/27/12
Consumer Price Index	Jun month SA ∆%: -0.1 Jun 12-month NSA ∆%: 1.6 Blog 7/22/12
Producer Price Index	May month ∆%: -0.3 12-month NSA ∆%: 2.1 Blog 6/24/12
Industrial Production	Mfg May month SA ∆%: 1.9 12-month NSA: -7.0 Blog 7/8/12
Machine Orders	May month ∆%: 0.6 May 12-month ∆%: -10.6 Blog 7/8/12
Retail Sales	Apr Month ∆% 0.6 12-Month ∆% minus 3.8 Blog 6/3/12
Employment Report	Unemployment Rate May 5.5% Blog 7/2/12
Trade Balance	Exports May 12-month NSA ∆%: 0.5 Imports May 12 months NSA ∆%: -0.2 Exports May month SA ∆%: 3.9; Imports May month SA 6.3 Blog 7/15/12

Links to blog comments in Table DE:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html

5/27 http://cmpassocregulationblog.blogspot.com/2012_05_01_archive.html

VF France. The Markit Flash France Composite Output Index increased from 47.3 in Jun to 48.0 in Jun, for the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9822). Jack Kennedy, Senior Economist at Markit and author of the report, finds that activity in services balanced the fastest drop in manufacturing in Jul but that overall private sector activity fell at the fastest rate in more than two and a half years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9822). The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 44.6 in May to 47.3 in Jun, indicating contraction of private sector activity at a more moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds that weak services and manufacturing survey data suggest contraction of GDP in IIQ2012 after no growth in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783).The Markit France Manufacturing Purchasing Managers’ Index^® increased to 45.2 in Jun from 44.7 in May, which was the sharpest decline of the manufacturing economy in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing deterioration in manufacturing with IIQ2012 being the weakest quarter for French manufacturing in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Jun month ∆% 0.0 12 months ∆%: 1.9 7/15/12
PPI	May month ∆%: -1.1 May 12 months ∆%: 2.2 Blog 7/2/12
GDP Growth	IQ2012/IVQ2011 ∆%: 0.0 IQ2012/IQ2011 ∆%: 0.3 Blog 7/2/12
Industrial Production	May SA ∆%: Manufacturing -1.0 YOY NSA ∆%: Manufacturing -4.3 Blog 7/15/12
Consumer Spending	May Manufactured Goods ∆%: 1.4 May 12-Month Manufactured Goods ∆%: 0.2 Blog 7/2/12
Employment	IQ2012 Unemployed 2.746 million Unemployment Rate: 9.6% Employment Rate: 63.8% Blog 6/10/12
Trade Balance	May Exports ∆%: month 1.3, 12 months 7.8 Apr Imports ∆%: month 0.1, 12 months 3.2 Blog 7/8/12
Confidence Indicators	Historical averages 100 Jul Mfg Business Climate 90 Blog 7/29/12

Links to blog comments in Table FR:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules versus-discretionary-authorities_10.html

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds consecutive worsening conditions in Apr, May and Jun and Jul. Table VF-1 shows the INSEE business climate manufacturing indicator. The headline synthetic index decreased from 95 in Apr to 90 in Jul. The final row shows general production expectations deteriorating from minus 21 in Apr to minus 45 in Jul, well below the average since 1976 of minus 8. The indicator of demand and export order levels fell continuously from minus 25 in Apr to minus 37 in Jul, well below the average of minus 12 since 1976.

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

Mfg 2012	Average since 1976	Apr	May	Jun	Jul
Synthetic Index	100	95	93	91	90
Recent Changes in Output	5	-3	-3	-7	-9
Finished- Goods Inventory Level	13	10	12	11	11
Demand and Total Order Levels	-17	-22	-29	-33	-30
Demand and Export Order Levels	-12	-25	-28	-30	-37
Personal Production Expectations	5	-3	-2	-5	-8
General Production Expectations	-8	-21	-30	-35	-45

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120724

Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jul 2012.

Chart VF-1, France, INSEE Industrial Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120724

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jul 2012.

Chart VF-2, INSEE Business Climate Manufacturing Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120724

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar that weakens in Apr through Jul 2012.

Chart VF-3, Climate Manufacturing General Production, Personal Production and Recent Changes in Output of INSEE, SA %

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120724

VG Italy. The Markit/ADACI Business Activity Index increased from 42.8 in May to 43.1 in Jun, indicating sharp contraction of output of Italy’s services sector in 13 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the combined manufacturing and services indexes suggest continuing recession in IIQ2012 at the sharpest rate since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), fell slightly from 44.8 in May to 44.6 in Jun for nine consecutive months of contraction of Italy’s manufacturing quite sharp relative to the history of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds continuing sharp contraction of new orders of manufacturing in Italy and manufacturing output lower than in the first quarter when it fell at a quarterly rate of 2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jun month ∆%: 0.2 Jun 12-month ∆%: 3.3 Blog 7/15/12
Producer Price Index	May month ∆%: -0.3 May 12-month ∆%: 2.3 Blog 7/2/12
GDP Growth	IQ2012/IVQ2011 SA ∆%: minus 0.8 IQ2012/IQ2011 NSA ∆%: minus 1.4 Blog 6/17/12
Labor Report	Apr 2012 Participation rate 63.4% Employment ratio 57.0% Unemployment rate 10.2% Blog 6/3/12
Industrial Production	May month ∆%: 0.8 12 months ∆%: minus 6.9 Blog 7/15/12
Retail Sales	May month ∆%: -0.2 May 12-month ∆%: -2.0 Blog 7/29/12
Business Confidence	Mfg Jul 87.1, Mar 90.9 Construction Jul 84.0, Mar 82.6 Blog 7/29/12
Trade Balance	Balance May SA €90 million versus Apr -€59 Exports May month SA ∆%: 1.4; Imports May month ∆%: 0.9 Exports 12 months NSA ∆%: +4.8 Imports 12 months NSA ∆%: minus 4.5 Blog 7/22/12

Links to blog comments in Table IT:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html

6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html

An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales fell 0.2 percent in May 2012 relative to Apr 2012, decreased 1.0 percent in Mar-May 2012 relative to Dec 2011 to Feb 2012, decreased 2.0 percent in Apr 2012 relative to Apr 2011 and decreased 1.7 percent in Jan-May 2012 relative to Jan-May 2011.

Table VG-1, Italy, Retail Sales ∆%

	May 2012/ Apr 2012 SA	Mar-May 12/    Dec 11- Feb 12 SA	Apr 2012/ Apr 2011 NSA	Jan-May 2012/ Jan-May 2011
Total	-0.2	-1.0	-2.0	-1.7
Food	0.4	-0.3	0.2	-0.1
Non-food	-0.4	-1.3	-3.1	-2.4

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/67789

Chart VG-1 provides 12-month percentage changes of retail sales in Italy. There are only positive changes in Dec 2010 and Apr 2011. Retail sales fell relative to a year earlier in most months of 2011 with improvement in Feb and Mar 2012 but sharp decline in Apr 2012 followed by improvement in May 2012.

Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

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

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentages in 2011 and Jan-May 2012 and annual rates from 2008 to 2011 in Table VG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but few monthly increases of 0.6 percent in Oct, 1.2 percent in Apr and 0.2 percent in Mar. There are negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr 2011 and 0.5 percent in Feb 2012 and 1.5 percent in Mar 2012. Retail sales grew 1.2 percent in Jan 2012 and 0.7 percent in Feb 2012, reducing sharply the 12-month percentage change from minus 3.7 percent in Dec 2011 to only minus 1.1 percent in Jan 2012 and positive 0.5 percent in the 12 months ending in Feb 2012 and 1.5 percent in the 12 months ending in Mar 2012. The decline of the monthly rates in Mar 2012 of 0.7 percent and 1.7 percent in Apr 2012 pulled down the 12-month percentage change in Apr to minus 6.8 percent. Decrease of only 0.2 percent in May resulted in decrease of 2.0 percent in 12 months.

Table VG-2, Italy, Retail Sales Month and 12-Month ∆%

	12-Month ∆% NSA	Month ∆% SA
May 2012	-2.0	-0.2
Apr	-6.8	-1.7
Mar	1.5	-0.7
Feb	0.5	0.7
Jan	-1.1	1.2
Dec 2011	-3.7	-1.1
Nov	-1.8	-0.8
Oct	-1.4	0.6
Sep	-1.6	-0.5
Aug	-0.3	-0.3
July	-2.3	-0.2
Jun	-1.1	-0.4
May	-0.4	-0.4
Apr	2.2	1.2
Mar	-2.1	0.2
Feb	0.0	-0.8
Jan	-1.1	-1.0
Dec 2010	0.6	0.6
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/67789

Italy’s index of business confidence in manufacturing and construction is provided in Table VG-3. There has been deterioration of manufacturing confidence below the historical average of 100 from 90.9 in Mar with reading falling to 87.1 in Jul. Order books have fallen from minus 39 in Mar to minus 42 in Jul. There is mild improvement in construction with an increase of the index from 82.6 in Mar to 85.6 in Jun but declining to 84.0 in Jul.

VG-3, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Jul	Jun	May	Apr	Mar
Mfg Confidence	87.1	88.7	86.5	89.3	90.9
Order Books	-42	-40	-43	-39	-39
Stocks Finished Products	2	1	2	1	1
Production Expectation	-7	-5	-8	-5	0
Construction Confidence	84.0	85.6	82.2	83.9	82.6
Order Books	-44	-44	-44	-46	-49
Employment	-15	-12	-19	-13	-13

Mfg: manufacturing

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/67882

VH United Kingdom. Revised annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of revised 4.0 percent in 2009 after dropping revised 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.

Table VH-UK, UK, Gross Domestic Product, ∆%

	∆% on Prior Year
1998	3.5
1999	3.2
2000	4.2
2001	2.9
2002	2.4
2003	3.8
2004	2.9
2005	2.8
2006	2.6
2007	3.6
2008	-1.0
2009	-4.0
2010	1.8
2011	0.8
Average ∆% per Year
1948-2011	2.7
1948-1959	2.9
1960-1969	3.3
1970-1979	2.5
1980-1989	3.2
1990-1999	2.6
2000-2011	1.7
2000-2007	3.0
2009-2011	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® fell from 53.3 in May to 51.3 in Jun with growth during 18 months but at the weakest level since Oct 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). Chris Williamson, Chief Economist at Markit, finds that services grew only around 0.2 percent in IIQ2012, stagnating at the margin in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased from the three-year low of 45.9 in May to 48.6 in Jun with the average quarterly reading of 48.2 being the lowest since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds significant volatility from factors such as the jubilee holidays with production increase in Jun raising more favorable views but manufacturing output probably falling by around 0.5 percent in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748).

Table UK provides the country data table for the United Kingdom.

Table UK, UK Economic Indicators

CPI	May month ∆%: -0.1 Jun 12-month ∆%: 2.4 Blog 7/22/12
Output/Input Prices	Output Prices: Jun 12-month NSA ∆%: 2.3; excluding food, petroleum ∆%: 2.0 Input Prices: Jun 12-month NSA ∆%: -2.3 Excluding ∆%: -0.1 Blog 7/8/12
GDP Growth	IIQ2012 prior quarter ∆% minus 0.7; year earlier same quarter ∆%: minus 0.8 Blog 7/29/12
Industrial Production	May 2012/May 2011 NSA ∆%: Production Industries minus 1.6; Manufacturing minus 1.7 Blog 7/15/12
Retail Sales	Jun month ∆%: 0.1 May 12-month ∆%: +1.6 Blog 7/22/12
Labor Market	Mar-May Unemployment Rate: 8.1%; Claimant Count 4.9%; Earnings Growth 1.5% Blog 7/22/12
Trade Balance	Balance May minus ₤2717 million Exports May ∆%: 4.8 Apr-Jun ∆%: 0.2 Imports May ∆%: 1.2 Apr-Jun ∆%: 3.4 Blog 7/15/12

Links to blog comments in Table UK:

7/22/12 http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

Revised annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of revised 4.0 percent in 2009 after dropping revised 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.

Table VH-1, UK, Gross Domestic Product, ∆%

	∆% on Prior Year
1998	3.5
1999	3.2
2000	4.2
2001	2.9
2002	2.4
2003	3.8
2004	2.9
2005	2.8
2006	2.6
2007	3.6
2008	-1.0
2009	-4.0
2010	1.8
2011	0.8
Average ∆% per Year
1948-2011	2.7
1948-1959	2.9
1960-1969	3.3
1970-1979	2.5
1980-1989	3.2
1990-1999	2.6
2000-2011	1.7
2000-2007	3.0
2009-2011	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 1998. Growth in IIQ2011 was reduced to minus 0.1 percent. The estimate for IIIQ2011 is at 0.6 percent. The estimate for IVQ2011 is contraction of 0.4 percent, which is higher than contraction of 0.2 percent in the second estimate. The GDP of the UK contracted in a second consecutive quarter by 0.3 percent in the latest estimate for IQ2012. The first estimate for IIQ2012 is contraction of 0.7 percent for the third consecutive contraction. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

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

	IQ	IIQ	IIIQ	IV
2012	-0.3	-0.7
2011	0.5	-0.1	0.6	-0.4
2010	0.6	0.7	0.6	-0.4
2009	-1.5	-0.2	0.4	0.4
2008	0.1	-0.9	-1.8	-2.1
2007	1.1	1.2	1.2	0.2
2006	0.5	0.3	0.2	0.9
2005	0.6	1.2	0.8	1.1
2004	0.7	0.2	0.0	0.6
2003	0.6	1.2	1.2	1.2
2002	0.4	0.8	0.8	0.9
2001	1.3	0.7	0.5	0.4
2000	1.0	1.4	0.3	0.2
1999	0.5	0.3	1.7	1.3
1998	0.8	0.7	0.6	0.9

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 4.6 percent in IVQ2008, 6.1 percent in IQ2009, 5.4 percent in IIQ2009 and 3.3 percent in IIIQ2009. (3) The economy bounced strongly with 2.1 percent in IIQ2010, 2.4 percent in IIIQ2010 and 1.5 percent in IVQ2010. (4) Recovery in 2011 did not continue at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.5 percent in IVQ2010 to 1.4 percent in IQ2011, 0.6 percent in IIQ2011, 0.5 percent in IIIQ2011 and 0.6 percent in IVQ2011 but contraction of 0.2 percent in IQ2012 relative to IQ2011. In IQ2012, GDP fell 0.3 percent for a second consecutive quarter and fell 0.2 percent relative to a year earlier. In IIQ2012, GDP fell 0.7 percent relative to IQ2012 and fell 0.8 percent relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

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

	IQ	IIQ	IIIQ	IV
2012	-0.2	-0.8
2011	1.4	0.6	0.5	0.6
2010	1.2	2.1	2.4	1.5
2009	-6.1	-5.4	-3.3	-0.9
2008	2.7	0.5	-2.4	-4.6
2007	2.6	3.6	4.6	3.8
2006	3.7	2.7	2.1	2.0
2005	1.5	2.5	3.3	3.8
2004	4.4	3.4	2.2	1.6
2003	3.1	3.3	3.6	4.0
2002	2.0	2.2	2.5	3.1
2001	3.3	2.5	2.8	2.9
2000	4.4	5.6	4.1	2.9
1999	2.8	2.4	3.5	4.0
1998	4.0	3.7	3.3	3.1

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

Growth rates of GDP and components of gross value added in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Contraction of GDP in IIQ2012 resulted from sharp contraction of construction by 5.2 percent with total production declining 1.3 percent and manufacturing 1.4 percent while services fell 0.1 percent. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 4.9 percent and contraction of total production by -0.5 percent with manufacturing contracting 0.3 percent while services crawled 0.2 percent. Contraction of GDP of 0.4 percent in IVQ2011 resulted from sharp contraction of 1.4 percent in total production, with manufacturing declining 1.1 percent. Even services fell by 0.2 percent in IVQ2011. Growth of 0.6 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components with exception of 0.1 percent of construction. Growth in 2011 originated mostly in services. GDP contracted 0.4 percent in IVQ2010, 0.1 percent in IIQ2011, 0.3 percent in IIIQ2011, 0.3 percent in IQ2012 and 0.7 percent in IIQ2012. All components are negative in IV2011 and services fell 0.2 percent while all components are negative in IQ2012 with meager growth of services of 0.2 percent and decline of manufacturing by 0.3 percent. All components are negative in IIQ2012 with output falling 1.3 percent, construction 5.2 percent and services 0.1 percent.

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

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	156	105	68	770
IIQ12	-0.7	-1.3	-1.4	-5.2	-0.1
IQ12	-0.3	-0.5	-0.3	-4.9	0.2
IVQ11	-0.4	-1.4	-1.1	0.0	-0.2
IIIQ11	0.6	0.0	-0.3	0.1	0.8
IIQ11	-0.1	-1.2	0.3	0.9	0.2
IQ11	0.5	-0.1	0.7	0.5	0.7
IVQ10	-0.4	0.1	0.5	-1.8	-0.4
IIIQ10	0.6	0.4	1.6	2.9	0.4
IIQ10	0.7	1.4	1.9	6.3	0.2
IQ10	0.6	1.1	0.8	2.3	0.2
IV09	0.4	0.3	1.1	0.5	0.6
III09	0.4	-1.1	-0.4	-0.1	0.5
II09	-0.2	0.0	0.2	-2.6	0.0
I09	-1.5	-4.3	-5.2	-5.8	-0.5
IV08	-2.1	-4.9	-5.2	-5.8	-1.4
III08	-2.0	-1.1	-1.3	-3.0	-1.6
II08	-1.3	-1.2	-1.6	-2.0	-0.6
I08	0.0	-0.4	0.4	1.6	0.0

Note: CONS: construction’ MFG: manufacturing

*Weights (2009) may not add because of rounding and exclusion of Agriculture, Forestry and Fishing with weight of 6. Output components are valued at basic prices while GDP is valued at market prices. The preliminary estimate places GDP next to gross value added by components because it is the only contribution to change in GDP.

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 1.3 percent in IIQ2012 with manufacturing falling 1.4 percent and construction dropping 5.2 percent. Total production fell 0.5 percent in IQ2012 with manufacturing falling 0.3 percent, construction fell 4.9 percent and services increased 0.2 percent. Total production fell 1.4 percent in IVQ2011 with manufacturing declining 1.1 percent. Services fell 0.2 percent in IVQ2011 and grew 0.2 percent in IQ2012, reducing the support of economic activity in prior quarters. Business services & finance fell 0.3 percent in IQ2012 and 0.2 percent IVQ2011 but increased marginally 0.1 percent in IIQ2012.

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

Component	2011 Q2	2011Q3	2011Q4	2012Q1	2012Q2
Agriculture, forestry & fishing	-0.9	-0.7	-1.8	-2.2	-2.6
Total Production	-1.2	0.0	-1.4	-0.5	-1.3
Mining & quarrying (Extraction)	-7.2	-0.3	-2.6	-3.6	-5.9
Manufacturing	0.3	-0.3	-1.1	-0.3	-1.4
Electricity, gas, steam & air (Utilities)	-2.7	1.6	-3.8	1.2	5.9
Water supply, sewerage etc.	-2.0	0.4	0.9	0.8	-2.1
Construction	0.9	0.1	0.0	-4.9	-5.2
Total Services	0.2	0.8	-0.2	0.2	-0.1
Distribution, hotels & restaurants	0.2	0.4	-0.6	0.3	-0.4
Transport, storage & communication	0.4	0.9	-0.5	1.0	-1.4
Business services & finance	0.2	1.2	-0.2	-0.3	0.1
Government & other services	0.2	0.4	0.3	0.3	0.3

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IIQ2012, total production deducted 0.2 percentage points with manufacturing deducting 0.2 percentage points, construction deducting 0.4 percent and total services deducted 0.1 percentage points. In IQ2012, total production deducted 0.1 percentage points, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.4 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.3 percentage points by business services and finance and 0.1 percentage points by government. Business services and finance deducted 0.1 percentage points in IVQ2011 and IQ2012 and was flat in IIQ2012 while government and other services contributed 0.1 percentage points in all quarters from IIIQ2011 to IIQ2012.

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

Component	2011 Q2	2011Q3	2011Q4	2012Q1	2012Q2
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	-0.2	0.0	-0.2	-0.1	-0.2
Mining & quarrying (Extraction)	-0.1	0.0	0.0	-0.1	-0.1
Manufacturing	0.0	0.0	-0.1	0.0	-0.2
Electricity, gas, steam & air (Utilities)	0.0	0.0	-0.1	0.0	0.1
Water supply, sewerage etc.	0.0	0.0	0.0	0.0	0.0
Construction	0.1	0.0	0.0	-0.4	-0.4
Total Services	0.2	0.6	-0.1	0.1	-0.1
Distribution, hotels & restaurants	0.0	0.1	-0.1	0.0	-0.1
Transport, storage & communication	0.0	0.1	-0.1	0.1	-0.2
Business services & finance	0.1	0.4	-0.1	-0.1	0.0
Government & other services	0.0	0.1	0.1	0.1	0.1

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

Table VH-7 provides UK growth of value added by components relative to a year earlier. There was significant deceleration in growth of total production from 2.1 percent in 2010 to minus 0.7 percent in 2011. Manufacturing growth fell from 3.7 percent in 2010 to 2.0 percent in 2011. Construction growth fell from 3.8 percent in 2010 to 2.1 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.7 percent in 2007 to decline 0.2 percent in 2008 and 2.1 percent in 2009. Growth of services in 2010 and 2011 has been more moderate at 1.1 percent and 1.2 percent, respectively.

Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	-2.6	6.1	-6.3	-1.5	-2.0
Total Production	0.5	-2.8	-9.1	2.1	-0.7
Mining & quarrying (Extraction)	-2.7	-6.2	-9.0	-4.3	-14.1
Manufacturing	0.9	-2.5	-9.7	3.8	2.1
Electricity, gas, steam & air (Utilities)	0.5	0.3	-4.7	3.2	-4.5
Water supply, sewerage etc.	3.4	-1.6	-8.5	-0.9	4.1
Construction	2.1	-2.7	-13.5	7.9	2.8
Total Services	4.7	-0.2	-2.1	1.1	1.2
Distribution, hotels & restaurants	5.2	-2.6	-4.1	1.4	0.5
Transport, storage & communication	5.4	-0.5	-5.7	2.8	0.7
Business services & finance	6.8	0.8	-3.5	0.8	1.6
Government & other services	1.4	0.0	2.8	0.6	1.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/index.html

Total production subtracted 0.1 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-8. Total services added 0.8 percentage points in 2010 and 1.0 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.3 percent in the final quarter of 2011, 0.3 percent in the first quarter of 2012 and 0.7 percent in the second quarter of 2012.

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

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	0.1	-0.5	-1.5	0.3	-0.1
Mining & quarrying (Extraction)	-0.1	-0.2	-0.2	-0.1	-0.3
Manufacturing	0.1	-0.3	-1.1	0.4	0.2
Electricity, gas, steam & air (Utilities)	0.0	0.0	-0.1	0.0	-0.1
Water supply, sewerage etc.	0.0	0.0	-0.1	0.0	0.0
Construction	0.2	-0.2	-1.0	0.6	0.2
Total Services	3.5	-0.2	-1.6	0.9	0.9
Distribution, hotels & restaurants	0.7	-0.4	-0.6	0.2	0.1
Transport, storage & communication	0.6	-0.1	-0.6	0.3	0.1
Business services & finance	1.8	0.2	-1.0	0.2	0.5
Government & other services	0.3	0.0	0.6	0.1	0.3

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2012/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 3.4 percent by Fri Jul 27, 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	7/27/2012
Rate	1.1423	1.5914	1.192	1.2320
CNY/USD	01/03 2000	07/21 2005	7/15 2008	7/27/ 2012
Rate	8.2798	8.2765	6.8211	6.3818
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 1.2320/EUR on Jul 27, 2012 or by 3.4 percent {[(1.2320/1.192)-1]100 = 3.4%}. 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. Risk aversion erodes devaluation of the dollar. 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 6.3818/USD on Fri Jul 27, 2012, or by an additional 6.4 percent, for cumulative revaluation of 22.9 percent. The final row of Table VI-2 shows that depreciation of the CNY in three of the past four weeks.

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	7/27/ /2012
Rate	1.1423	1.5914	1.192	1.2320
CNY/USD	01/03 2000	07/21 2005	7/15 2008	7/27/ 2012
Rate	8.2798	8.2765	6.8211	6.3818
Weekly Rates	7/6/2012	7/13/2012	7/20/2012	7/27/ 2012
CNY/USD	6.3658	6.3868	6.3750	6.3818
∆% from Earlier Week*	-0.2	-0.3	0.2	-0.1

*Negative sign is depreciation, positive sign is 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

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). Bob Davis and Lingling Wei, writing on “China shifts course, lets Yuan drop,” on Jul 25, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444840104577548610131107868.html?mod=WSJPRO_hpp_LEFTTopStories), find that China is depreciating the CNY relative to the USD in an effort to diminish the impact of appreciation of the CNY relative to the EUR. Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Jul 27, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. The CNY devalued 0.4 percent relative to the USD by Jul 27, 2012 to CNY 6.3818/USD from the rate of CNY 6.3588/USD on Oct 28, 2011. 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-2A, Renminbi Yuan US Dollar Rate

	CNY/USD	∆% from 10/28/2011
7/27/12	6.3818	-0.4
7/20/12	6.3750	-0.3
7/13/12	6.3868	-0.4
7/6/12	6.3658	-0.1
6/29/12	6.3552	0.1
6/22/12	6.3650	-0.1
6/15/12	6.3678	-0.1
6/8/2012	6.3752	-0.3
6/1/2012	6.3708	-0.2
4/27/2012	6.3016	0.9
3/23/2012	6.3008	0.9
2/3/2012	6.3030	0.9
12/30/2011	6.2940	1.0
11/25/2011	6.3816	-0.4
10/28/2011	6.3588	-

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 the CNY/USD exchange rate from Jul 29, 2002 to Jul 20, 2012 together with US recession dates in shaded areas. China fixed the CNY/USD date for a long period as shown in the horizontal segment from 2000 to 2005. There was systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY 6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to avoid adverse effects on its economy from the global recession, which is shown as a horizontal segment from 2009 until mid 2010. China then continued the policy of appreciation of the CNY relative to the USD with oscillations until the beginning of 2012 when the rate began to move sideways followed by a final upward slope of devaluation that is measured in Table VI-2A. Revaluation of the CNY relative to the USD by 22.9 percent by Jul 27, 2012 has not reduced the trade surplus of China but reversal of the policy of revaluation could result in international confrontation. The upward slope in the final segment on the right of Chart VI-I is measured as depreciation of 0.4 percent in Table VI-2A, which can be reversed rapidly.

Chart VI-1, Chinese Yuan (CNY) per US Dollar (US), Jul 29, 2002-Jul 20, 2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

The database of the World Economic Outlook (WEO) of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2011 and 2015. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15094	-7.3	-3.1	80.3	-2.3	-3.2	88.3
Japan	5869	-9.1	2.0	126.6	-5.8	2.4	155.0
UK	2418	-5.8	-1.9	78.3	-0.8	-0.4	88.1
Euro	13115	-1.6	0.3	68.4	1.1	1.2	71.3
Ger	3577	0.7	5.7	56.1	1.4	4.3	52.4
France	2776	-2.9	-2.2	80.4	0.3	-0.8	83.8
Italy	2199	0.8	-3.2	99.6	4.4	-1.6	101.5
Can	1737	-4.1	-2.8	33.3	-1.1	-2.5	37.4
China	7298	-1.2	2.7	25.8	-0.1	3.4	14.8
Brazil	2493	3.1	-2.1	36.4	3.1	-3.4	31.9

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/2012/01/weodata/weoselgr.aspx

The current account of the US balance of payments is provided in Table VI-3A for IQ2011 and IQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $119.9 billion in IQ2011, or 3.2 percent of GDP to $137.3 billion in IQ2012, or 3.6 percent of GDP. 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).

Table VI-3A, US Balance of Payments, Millions of Dollars NSA

	IQ2011	IQ2012	Difference
Goods Balance	-181,358	-194,462	-13,104
X Goods	360,917	388,501	11.0 ∆%
M Goods	-542,276	-582.963	12.9 ∆%
Services Balance	44,133	43,465	-668
X Services	147,894	154,420	9.1 ∆%
M Services	-103,761	-110,955	8.0 ∆%
Balance Goods and Services	-137,225	-150,997	-13,772
Balance Income	52,451	47,571	-4,880
Unilateral Transfers	-35,223	-33,887	1,336
Current Account Balance	-119,997	-137,313	-17,316
% GDP	IQ2011	IVQ2011	IQ2012
	3.2	3.1	3.6

X: exports; M: imports

Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table VI-3B provides data on US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012MarBEO, 2) estimates the federal deficit in 2012 at $1171 billion or 7.6 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5178 billion or 33 percent of the estimate of GDP of $15,508 billion for 2012 by the CBO (2012MarBEO, 2). Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5178 billion, and corresponded to 36.3 percent of GDP. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 73.2 percent of GDP in 2012 (CBO2012MarBEO, 2). This situation may worsen in the future (CBO 2012LTBO):

“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.

The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.

Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”

Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2000	2007	2008	2009	2010	2011
Goods & Services	-377	-697	-698	-379	-495	-559
Income	19	101	147	119	184	227
UT	-58	-115	-126	-122	-131	-133
Current Account	-416	-710	-677	-382	-442	-466
NGDP	9951	14028	14291	13939	14526	15094
Current Account % GDP	-3.8	-5.0	-4.9	-2.7	-3.4	-3.7
NIIP	-1337	-1796	-3260	-2396	-2471	NA
NIIP % GDP	-13.4	-12.8	-22.8	-17.2	-17.0	NA
Exports Goods Services Income	1425	2488	2657	2181	2519	2848
NIIP % Exports Goods Services Income	-94	-72	-123	-110	-98	NA
DIA MV	2694	5274	3102	4331	4843	NA
DIUS MV	2783	3551	2486	3027	3451	NA
Fiscal Balance	+236	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	+2.4	-1.2	-3.2	-9.9	-8.9	-8.7
Federal   Debt	3410	5035	5803	7545	9019	10128
Federal Debt % GDP	34.7	36.3	40.5	54.1	62.8	67.7
Federal Outlays	1789	2729	2983	3518	3456	3598
∆%	5.1	2.8	9.3	17.9	-1.8	4.1
% GDP	18.2	19.7	20.8	25.2	24.1	24.1
Federal Revenue	2052	2568	2524	2105	2162	2303
∆%	10.8	6.7	-1.7	-16.6	2.7	6.5
% GDP	20.6	18.5	17.6	15.1	15.1	15.4

Sources: 

Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which they original number of the CBO source is maintained. These discrepancies do not alter conclusions.

Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop

Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/national/index.htm#gdp

Federal Outlays, Revenues and Debt, Congressional Budget Office (CBO) http://www.cbo.gov/publication/42911

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 (2012WEOApr) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSRApr) (http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMApr) (http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf). 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 IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.5 percent, which is the lowest since the global recession (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html and earlier http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). There is also ongoing political development in China during a decennial political reorganization. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm).

2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US is experiencing the first expansion from a recession after World War II without growth and without jobs. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2011 to cumulative growth of 0.87 percent in the first two quarters of 2012, which is equivalent to 1.75 percent. Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 26.8 million people (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). (ii) The labor market continues fractured with 28.6 million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). There are over 10 million fewer full-time jobs and hiring has collapsed (Section I http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5178 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (see Section VA http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 67.7 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012MarBEO, 2) at 73.2 percent in 2012. The CBO (2012MarBEO) 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 but grew 2.8 percent in IQ2012 relative to a year earlier and 1.2 percent in IQ2012 relative to IVQ2011. The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012, falling 0.1 percent relative to a year earlier in IQ2011; Germany’s GDP fell 0.2 percent in IVQ2011 but grew 0.5 percent in IQ2012; and the UK’s GDP fell 0.4 percent in IVQ2011, 0.3 percent in IQ2012 and 0.7 percent in IIQ2012 and declined 0.8 percent in IIQ2012 relative to IIQ2011. There is still high unemployment in advanced economies

4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.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) and consolidation can restrict growth as analyzed by Blanchard (2012WEOApr). 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 35.0 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Jul 27, 2012, and the S&P 500 has gained 35.5 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. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” Another version of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (1)

Equation (1) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The present value of the firm can also be expressed as the discounted future value of net cash flows. Equities can inflate beyond sound values if cash flows that depend on economic activity prove to be illusory in continuing mediocre growth

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 Jun 20, 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 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.” (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.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. 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.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ), 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 and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). 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:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e 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(π_t, U_t) (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 (π_t, U_t - 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: R_t 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; R_t+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; i_f is the domestic interest rate of the high-yielding country where investment will be made; i_usd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; i_f >i_usd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); S_t is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal S_t in the local currency debt of the foreign country provides a profit of:

π = (1 + i_f)(R_tS_t)(1/R_t+τ) – (1 + i_usd)S_t (3)

The profit from the carry trade, π, is nonnegative when:

(1 + i_f)/ (1 + i_usd) ≥ R_t+τ/R_t (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 i_f be 0.10 (10 percent), i_usd 0.005 (0.5 percent), S_t USD100 and R_t 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 R_t+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 A_ij = f(r, x) where A_ij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, r_i, 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 A_ij 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/2011/01/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 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 or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). 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 7/27/12,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: surge in the week of Dec 2, 2011, 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 have fluctuated with events such as the 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 13 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 [(1.018)⁴], which was repeated in IIQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt, continuing into the week of Apr 27. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China but fiscal and banking uncertainties in Spain spread to Italy in the selloff of July 20, 2012. Mario Draghi (2012Jul26), president of the European Central Bank, stated: “But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This statement caused return of risk appetite, driving upward valuations of risk financial assets worldwide. Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).The highest valuations in column “∆% Trough to 7/27/12” are by US equities indexes: DJIA 35.0 percent and S&P 500 35.5 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. The DJIA reached 13,331.77 in intraday trading 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, almost all assets in the column “∆% Trough to 7/27/12” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations of equity indexes show increase of less than 10 percent: China’s Shanghai Composite is 10.7 percent below the trough; Japan’s Nikkei Average is 2.9 percent below the trough; DJ Asia Pacific TSM is 3.2 percent above the trough; Dow Global is 7.4 percent above the trough; STOXX 50 of European equities is 7.0 percent above the trough; and NYSE Financial is 5.2 percent above the trough. DJ UBS Commodities is 15.7 percent above the trough. DAX is 18.0 percent above the trough. Japan’s Nikkei Average is 2.9 percent below the trough on Aug 31, 2010 and 24.8 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8566.64 on Fri Jul 27, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 16.5 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 3.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 7/27/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Jul 27, 2012 such as 0.9 percent for DAX, 0.5 percent for STOXX 50 of European equities, 2.8 percent for NYSE Financial and 1.7 percent for Dow Global. DJ UBS Commodities fell 1.9 percent. Other valuations decreased such as 1.2 percent Nikkei Average, 0.7 percent DJ Asia Pacific TSM and1.8 percent Shanghai Composite. The DJIA increased 2.0 percent and S&P 500 increased 1.7 percent. The USD depreciated 1.3 percent. There are still high uncertainties on European sovereign risks and banking soundness, 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 7/27/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jul 20, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 7/27/12” but also relative to the peak in column “∆% Peak to 7/27/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 16.7 percent, S&P 500 13.9 percent and DAX 5.6 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 16.2 percent, Nikkei Average by 24.8 percent, Shanghai Composite by 32.7 percent, DJ Asia Pacific by 9.7 percent, STOXX 50 by 9.3 percent and Dow Global by 12.4 percent. DJ UBS Commodities Index is now 1.1 percent below the peak. The US dollar strengthened 18.6 percent relative to 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 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.

Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 7/27 /12	∆% Week 7/27/12	∆% Trough to 7/27/ 12
DJIA	4/26/ 10	7/2/10	-13.6	16.7	2.0	35.0
S&P 500	4/23/ 10	7/20/ 10	-16.0	13.9	1.7	35.5
NYSE Finance	4/15/ 10	7/2/10	-20.3	-16.2	2.8	5.2
Dow Global	4/15/ 10	7/2/10	-18.4	-12.4	1.7	7.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	-9.7	-0.7	3.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-24.8	-1.2	-2.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-32.7	-1.8	-10.7
STOXX 50	4/15/10	7/2/10	-15.3	-9.3	0.5	7.0
DAX	4/26/ 10	5/25/ 10	-10.5	5.6	0.9	18.0
Dollar Euro	11/25 2009	6/7 2010	21.2	18.6	-1.3	-3.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-1.1	-1.9	15.7
10-Year T Note	4/5/ 10	4/6/10	3.986	1.544

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 Jul 27, 2012, shows that the S&P 500 is now 14.3 percent above the Apr 26, 2010 level and the DJIA is 16.7 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded 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 Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6
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
Apr 20	1.4	16.3	0.6	13.7
Apr 27	1.5	18.1	1.8	15.8
May 4	-1.4	16.4	-2.3	12.9
May 11	-1.7	14.4	-1.1	11.7
May 18	-3.5	10.4	-4.3	6.4
May 25	0.7	11.2	1.7	8.7
Jun 1	-2.7	8.2	-3.0	5.4
Jun 8	3.6	12.0	3.7	9.4
Jun 15	1.7	13.9	1.3	10.8
Jun 22	-1.0	12.8	-0.6	10.1
Jun 29	1.9	14.9	2.0	12.4
Jul 6	-0.8	14.0	-0.5	11.8
Jul 13	0.0	14.0	0.2	11.9
Jul 20	0.4	14.4	0.4	12.4
Jul 27	2.0	16.7	1.7	14.3

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, 2011 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 12.7 percent to ZAR 8.1576/USD on Jul 27, 2012, which is still 29.5 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.5 percent stronger at SGD 1.2473/USD on Jul 27, 2012 relative to the trough of depreciation but still stronger by 19.7 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 16.6 percent relative to the trough to BRL 2.0249/USD on Jul 27, 2012 but still stronger by 16.7 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 by 50 basis points for the seventh consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3613&IDPAI=NEWS):

“Copom reduces the Selic rate to 8.0 percent

11/07/2012 8:35:00 PM

Brasília - Continuing the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 8.00 percent.”

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	Jul 27, 2012	∆% T Jul 27, 2012	∆% P Jul 27, 2012
EUR USD	7/15 2008	6/7 2010		7/27 2012
Rate	1.59	1.192		1.2320
∆%			-33.4		3.2	-29.1
JPY USD	8/18 2008	9/15 2010		7/27 2012
Rate	110.19	83.07		78.45
∆%			24.6		5.6	28.8
CHF USD	11/21 2008	12/8 2009		7/27 2012
Rate	1.225	1.025		0.9750
∆%			16.3		4.9	20.4
USD GBP	7/15 2008	1/2/ 2009		7/27 2012
Rate	2.006	1.388		1.5745
∆%			-44.5		11.8	-27.4
USD AUD	7/15 2008	10/27 2008		7/27 2012
Rate	1.0215	1.6639		1.0483
∆%			-62.9		42.7	6.6
ZAR USD	10/22 2008	8/15 2010		7/27 2012
Rate	11.578	7.238		8.1576
∆%			37.5		-12.7	29.5
SGD USD	3/3 2009	8/9 2010		7/27 2012
Rate	1.553	1.348		1.2473
∆%			13.2		7.5	19.7
HKD USD	8/15 2008	12/14 2009		7/27 2012
Rate	7.813	7.752		7.7574
∆%			0.8		-0.1	0.7
BRL USD	12/5 2008	4/30 2010		7/27 2012
Rate	2.43	1.737		2.0249
∆%			28.5		-16.6	16.7
CZK USD	2/13 2009	8/6 2010		7/27 2012
Rate	22.19	18.693		20.536
∆%			15.7		-9.9	7.5
SEK USD	3/4 2009	8/9 2010		7/27 2012
Rate	9.313	7.108		6.8668
∆%			23.7		3.4	26.3
CNY USD	7/20 2005	7/15 2008		7/27 2012
Rate	8.2765	6.8211		6.3818
∆%			17.6		6.4	22.9

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

There are major ongoing and unresolved realignments of exchange rates in the international financial system as countries and regions seek parities that can optimize their productive structures. Seeking exchange rate parity or exchange rate optimizing internal economic activities is complex in a world of unconventional monetary policy of zero interest rates and even negative nominal interest rates of government obligations such as yield of minus 0.03 percent for the two-year government bond of Germany. Regulation, trade and devaluation conflicts should have been expected from a global recession (Pelaez and Pelaez (2007), The Global Recession Risk, Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a)): “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” (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve System provides the key exchange rate of US dollars (USD) per euro (EUR) from Jul 27, 1999 to Jul 20, 2012. US recession dates are in shaded areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form of quantitative easing by suspension of auctions of the 30-year Treasury, which was equivalent to withdrawing supply from markets. Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the shaded area of the global recession. The flight to the USD and obligations of the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after stress tests showed sound US bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4 percent to USD 1.4875/USD on May 3, 2011. The rate appreciated 18.1 percent to USD 1.2176/EUR on Jul 20, 2012, which is the last point in Chart VI-2. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-2, US Dollars (USD) per Euro (EUR), Jul 27,1999 to Jul 20, 2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

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-3, US Dollar Currency Indexes

Source: Board of Governors of the Federal Reserve System

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

Chart VI-4 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-4, US Dollars per Euro, 2009-2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/RXI$US_N.B.EU%7d

Chart VI-5 of the Board of Governors of the Federal Reserve System provides the rate of Japanese yen (JPY) per US dollar (USD) from Jan 1,1971 to Jul 20, 2012. The first data point on the extreme left is JPY 358.0200/USD on Jan 1, 1971. The JPY has appreciated over the long-term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.48/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 79.2686/USD on Jul 20, 2012 for appreciation of 36.1 percent relative to JPY 124.0900/USD on Jun 22, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, 1971-2012

Note: US Recessions in Shaded Areas 

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL 1.7845.USD on Jul 27, 2000 to BRL 1.9887 on Jul 2, 2012. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 1.9887/USD on Jul 2, 2012 for depreciation of 29.3 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) Jul 27, 2000 to Jul 2, 2012

Note: US Recessions in Shaded Areas 

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.8440/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880/USD on Sep 21, 2001 relative to Mar 3, 1999.

Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2, 1995 to Jul 2, 2012

Note: US Recessions in Shaded Areas 

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

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 1.544 percent at the close of market on Fri Jul 27, 2012 would be equivalent to price of 109.9812 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 8.6 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 Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. 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. These losses defy annualizing. 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 Jul 25, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2833 billion, or $2.8 trillion, with portfolio of long-term securities of $2580 billion, or $2.6 trillion, consisting of $1567 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $91 billion Federal agency debt securities and $853 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1571 billion or $1.6 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table 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
04/20/12	1.959	106.0216	4.7
04/27/12	1.931	106.2836	5.0
05/04/12	1.876	106.8004	5.5
05/11/12	1.845	107.0930	5.8
05/18/12	1.714	108.3393	7.0
05/25/12	1.738	108.1098	6.8
06/01/12	1.454	110.8618	9.5
06/08/12	1.635	109.0989	7.7
06/15/12	1.584	109.5924	8.2
06/22/12	1.676	108.7039	7.4
06/29/12	1.648	108.9734	7.6
07/06/12	1.548	109.9423	8.6
07/13/12	1.49	110.5086	9.1
07/20/12	1.459	110.8127	9.4
07/27/12	1.544	109.9812	8.6

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

Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury from Feb 15, 1997 to Jul 25, 2012. The yield stood at 7.67 percent on Feb 16, 1977. A peak was reached at 15.21 percent on Oct 26, 1981 during the inflation control effort by the Fed. There is a second local peak in Chart VI-8 on May 3, 1984 at 13.94 percent followed by another local peak at 8.14 percent on Nov 21, 1994 during another inflation control effort (see Appendix I The Great Inflation). There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. Yields rose again to 4.89 percent on Jun 14, 2004 and 5.23 percent on Jul 5, 2006. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and collapsed to 1.40 percent on Jul 26, 2012, which is the last data point in Chart VI-8. There has been a trend of decline of yields with oscillations. During periods of risk aversion investor seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-8, US, Ten-Year Treasury Constant Maturity Yield, Feb 16,1977 to Jul 25, 2012

Note: US Recessions in Shaded Areas 

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

VII Economic Indicators. Crude oil input in refineries increased 0.2 percent to 15,685 thousand barrels per day on average in the four weeks ending on Jul 20, 2012 from 15,647 thousand barrels per day in the four weeks ending on Jul 13, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 92.4 percent on Jul 20, 2012, which is higher than 88.7 percent on Jul 22, 2011 and almost equal to 92.3 percent on Jul 13, 2012. Imports of crude oil increased 1.5 percent from 8,825 thousand barrels per day on average in the four weeks ending on Jul 13 to 8,953 thousand barrels per day in the week of Jul 20. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 9.6 million barrels per day last week, up by 696 thousand barrels per day from the previous week [Jul 13]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Increasing utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 2.7 million barrels from 377.4 million barrels on Jul 13 to 380.1 million barrels on Jul 20. Motor gasoline production was flat at 9,216 thousand barrels per day in the week of Jul 20 from 9,220 thousand barrels per day on average in the week of Jul 13. Gasoline stocks increased 4.1 million barrels and stocks of fuel oil increased 1.7 million barrels. Supply of gasoline decreased from 9,088 thousand barrels per day on Jul 22, 2011, to 8,802 thousand barrels per day on Jul 20, 2012, or by 3.1 percent, while fuel oil supply increased 0.1 percent. Part of the fall in consumption of gasoline is due to high prices and part to the growth recession. WTI crude oil price traded at $91.56/barrel on Jul 20, 2012, decreasing 8.0 percent relative to $99.53/barrel on Jul 22, 2011. Gasoline prices fell 5.5 percent from Jul 25, 2011 to Jul 23, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices had been 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	7/20/12	7/13/12	7/22/11
Crude Oil Refineries Input	15,685 Week       ∆%: +0.2	15,647	15,379
Refinery Capacity Utilization %	92.4	92.3	88.7
Motor Gasoline Production	9,216 Week      ∆%: 0.0	9,220	9,215
Distillate Fuel Oil Production	4,710 Week     ∆%: +0.7	4,678	4,519
Crude Oil Imports	8,953 Week        ∆%: +1.5	8,825	9,474
Motor Gasoline Supplied	8,802 ∆% 2012/2011= -3.1%	8,848	9,088
Distillate Fuel Oil Supplied	3,485 ∆% 2012/2011 = 0.1%	3,572	3,482
	7/20//12	7/13/12	7/22/11
Crude Oil Stocks Million B	380.1     ∆=   +2.7 MB	377.4	354.0
Motor Gasoline Million B	210.0  ∆= 4.1 MB	205.9	213.5
Distillate Fuel Oil Million B	125.2 ∆= +1.7 MB	123.5	151.8
WTI Crude Oil Price $/B	91.56 ∆% 2012/2011 -8.0	87.15	99.53
	7/23/12	7/16/12	7/25/11
Regular Motor Gasoline $/G	3.494 ∆% 2012/2011 -5.5	3.427	3.699

B: barrels; G: gallon

Source: US Energy Information Administration

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

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 alternating with declines.

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 provides the evolution of motor gasoline stocks in the US since 2007. There have been oscillations around and downward trend in 2012 followed by recent increases.

Chart VII-2, US, Motor Gasoline Stocks

Source: US Energy Information Administration

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

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 at $145.29/barrel on Jul 3, 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. Risk aversion resulted in another drop in recent weeks.

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 35,000 from 388,000 on Jul 14, 2012, to 353,000 on Jul 21. Claims not adjusted for seasonality decreased 118,201 from 455,260 on Jul 14, 2012 to 337,059 on Jul 21. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Jul 21, 2012	353,000	337,059	367,250
Jul 14, 2012	388,000	455,260	376,000
Change	-35,000	-118,201	-8,750
Jul 7, 2012	352,000	442,192	377,000
Prior Year	402,000	396,207	413,000

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 590,730 on Jul 18, 2009 to 470,986 on Jul 16, 2011, and 337,059 on Jul 21, 2012. There is strong indication of significant decline in the level of layoffs in the US but some doubts at the margin after the high increase in unadjusted claims in the weeks of Jun 9, 2012 and Jul 7, 2012. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_6867.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Jul 21, 2001	406,038	398,000
Jul 20, 2002	394,586	379,00
Jul 19, 2003	429,381	403,000
Jul 17, 2004	394,372	355,000
Jul 16, 2005	374,665	323,000
Jul 15, 2006	377,115	318,000
Jul 21, 2007	298,366	310,000
Jul 19, 2008	403,607	402,000
Jul 18, 2009	590,730	562,000
Jul 17, 2010	502,065	462,000
Jul 16, 2011	470,086	418,000
Jul 21, 2012	337,059	353,000

Source: http://workforcesecurity.doleta.gov/unemploy/claims.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 four months Jan to Jun 2012, CPI inflation for all items seasonally adjusted was 1.2 percent in annual equivalent, that is, compounding inflation in Jan-Jun 2012 and assuming it would be repeated for a full year. In the 12 months ending in Jun, CPI inflation of all items not seasonally adjusted was 1.7 percent. Inflation in Jun 2012 not seasonally adjusted was minus 0.1 percent relative to May 2012 and unchanged seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 2.2 percent in annual equivalent Jan-Jun 2012. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.10 percent for three months, 0.14 percent for six months, 0.17 percent for 12 months, 0.24 percent for two years, 0.33 percent for three years, 0.65 percent for five years, 1.04 percent for seven years, 1.55 percent for ten years and 2.63 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. May inflation is low because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. 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 Jun 2012/Jun 2011 NSA	∆% Annual Equivalent Jan-Jun 2012 SA
CPI All Items	1.7	1.2
CPI ex Food and Energy	2.2	2.2

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/

Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twelve quarters of the current cyclical expansion from IIIQ2009 to IIQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for 2011 show the economy in standstill with annual growth of 2.4 percent decelerating to cumulative 0.87 percent in the first half of 2012 {(1.02)^1/4(1.015)^1/4 = 0.87%}, which is equivalent to 1.75 percent per year {([(1.02)^1/4(1.015)^1/4 ]² – 1)100 = 1.75%}. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table IX-1, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IQ2012	12	6.75	2.2

Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html

Data: http://www.bea.gov/iTable/index_nipa.cfm

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Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Carlos M. Pelaez, 2010, 2011, 2012