Mediocre and Decelerating United States Economic Growth at around 1.7 Percent per Year, Contracting Private Domestic Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income per Capita, Unresolved US Balance of Payments and Fiscal Imbalance Threatening Risk Premium on Treasury Securities, World Financial Turbulence and 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
IA Mediocre and Decelerating United States Economic Growth
IA1 Contracting Real Private Fixed Investment
IA2 Swelling Undistributed Corporate Profits
IB Collapse of United States Dynamism of Income Growth and Employment Creation
IIA Stagnating Real Disposable Income and Consumption Expenditures
IIA1 Stagnating Real Disposable Income and Consumption Expenditures
IIA2 Financial Repression
IIB Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
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
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/t20121009_402841094.htm). Table CIPMNM provides this index and components from Jan to No 2012. The index fell from 58.0 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. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug and 53.7 in Sep but rebounded to 55.5 in Oct and 55.6 in Nov 2012.
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| 2012 | Total Index | New Orders | Interm. | Subs Prices | Exp |
| Nov | 55.6 | 53.2 | 52.5 | 48.4 | 64.6 |
| Oct | 55.5 | 51.6 | 58.1 | 50.5 | 63.4 |
| Sep | 53.7 | 51.8 | 57.5 | 51.3 | 60.9 |
| Aug | 56.3 | 52.7 | 57.6 | 51.2 | 63.2 |
| Jul | 55.6 | 53.2 | 49.7 | 48.7 | 63.9 |
| 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/
Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Nov 2011 to Nov 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 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 2012 and sharper drop to 53.7 in Sep 2012, rebounding to 55.5 in Oct 2012 and 55.6 in Nov 2012.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Table CIPMMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul and to the contraction zone at 49.2 in Aug and 49.8 in Sep, climbing above 50.0 to 50.2 in Oct and 50.6 in Nov. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug, climbing above 50.0 to 51.2 in Nov 2012. The index of employment also fell from 51.0 in Apr to 49.1 in Aug and further down to 48.7 in Nov 2012.
Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| 2012 | IPM | PI | NOI | INV | EMP | SDEL |
| Nov | 50.6 | 52.5 | 51.2 | 47.9 | 48.7 | 49.9 |
| Oct | 50.2 | 52.1 | 50.4 | 47.3 | 49.2 | 50.1 |
| Sep | 49.8 | 51.3 | 49.8 | 47.0 | 48.9 | 49.5 |
| Aug | 49.2 | 50.9 | 48.7 | 45.1 | 49.1 | 50.0 |
| Jul | 50.1 | 51.8 | 49.0 | 48.5 | 49.5 | 49.0 |
| Jun | 50.2 | 52.0 | 49.2 | 48.2 | 49.7 | 49.1 |
| May | 50.4 | 52.9 | 49.8 | 45.1 | 50.5 | 49.0 |
| Apr | 53.3 | 57.2 | 54.5 | 48.5 | 51.0 | 49.6 |
| Mar | 53.1 | 55.2 | 55.1 | 49.5 | 51.0 | 48.9 |
| Feb | 51.0 | 53.8 | 51.0 | 48.8 | 49.5 | 50.3 |
| Jan | 50.5 | 53.6 | 50.4 | 49.7 | 47.1 | 49.7 |
IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Chart CIPMMFG provides the manufacturing index of purchasing managers from Nov 2011 to Nov 2012. There is deceleration from 51.2 in Sep 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 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011. The index then fell to contraction at 49.2 in Aug 2012 and improved to 49.8 in Sep with movement to 50.2 in Oct 2012 and 50.6 in Nov 2012 above the neutral zone of 50.0.
Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Cumulative growth in the first three quarters of 2012 relative to the same period in 2011 was 7.7 percent. Secondary industry accounts for 46.8 percent of GDP of which industry alone for 40.1 percent and construction with the remaining 6.7 percent. Tertiary industry accounts for 43.8 percent of GDP and primary industry for 9.4 percent. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-GDP provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012 and 9.1 percent in IIIQ2012.
Table VC-GDP, China, Cumulative and Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%
| Cumulative GDP | Value Current CNY 100 Million | Cumulative Three First Quarters of 2012 Relative to Cumulative Three First Quarters of 2012 ∆% Inflation Adjusted |
| GDP | 353,480.0 | 7.7 |
| Primary Industry | 33,088.0 | 4.2 |
| Farming | 33,088.0 | 4.2 |
| Secondary Industry | 165,428.5 | 8.1 |
| Industry | 141,641.5 | 7.9 |
| Construction | 23,787.0 | 9.2 |
| Tertiary Industry | 154,963.5 | 7.9 |
| Transport, Storage, Post | 18,941.0 | 6.7 |
| Wholesale, Retail Trades | 31,651.2 | 11.8 |
| Hotel & Catering Services | 7,015.6 | 7.6 |
| Financial Intermediation | 22,465.2 | 9.5 |
| Real Estate | 20,789.6 | 2.7 |
| Other | 54,101.0 | 7.7 |
| Growth in Quarter Relative to Prior Quarter | ∆% on Prior Quarter | ∆% Annual Equivalent |
| 2012 | ||
| IIIQ2012 | 2.2 | 9.1 |
| IIQ2012 | 2.0 | 8.2 |
| IQ2012 | 1.5 | 6.1 |
| 2011 | ||
| IVQ2011 | 1.7 | 7.0 |
| IIIQ2011 | 2.4 | 9.9 |
| IIQ2011 | 2.5 | 10.4 |
| IQ2011 | 2.2 | 9.1 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Table VD-GDPb provides growth of GDP in China relative to a year earlier and relative to prior quarter. Growth of GDP relative to a year earlier decelerated from 12.1 percent in IQ2010 to 7.4 percent in IIIQ2012. Growth of secondary industry decelerated from 14.5 percent in IQ2010 to 7.9 percent in IIIQ2012.
Table VC-GDPb, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2011 | IIQ 2011 | IIIQ 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | |
| GDP | 9.7 | 9.5 | 9.1 | 8.9 | 8.1 | 7.6 | 7.4 |
| Primary Industry | 3.5 | 3.2 | 3.8 | 4.5 | 3.8 | 4.3 | 4.2 |
| Secondary Industry | 11.1 | 11.0 | 10.8 | 10.6 | 9.1 | 8.3 | 8.1 |
| Tertiary Industry | 9.1 | 9.2 | 9.0 | 8.9 | 7.5 | 7.7 | 7.9 |
| GDP ∆% Relative to a Prior Quarter | 2.2 | 2.3 | 2.4 | 1.9 | 1.8 | 1.8 | 2.2 |
| IQ 2010 | IIQ 2010 | IIIQ 2010 | IVQ 2010 | ||||
| GDP | 12.1 | 11.2 | 10.7 | 12.1 | |||
| Primary Industry | 3.8 | 3.6 | 4.0 | 3.8 | |||
| Secondary Industry | 14.5 | 13.3 | 12.6 | 14.5 | |||
| Tertiary Industry | 10.5 | 9.9 | 9.7 | 10.5 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/enGliSH
The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10452) is improving. The overall Flash China Manufacturing PMI™ increased marginally from 50.5 in Nov to 50.9 in Dec for a fourteen-month high while the Flash China Manufacturing Output Index decreased from 51.3 in Nov to 50.5 in Dec, both in expansion territory above 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China is improving because of internal demand while still requiring further easing policy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10452).The HSBC China Services PMI™, compiled by Markit, shows marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 50.5 in Oct to 51.6 in Nov for the third consecutive month of increasing output at the fastest rate since Jul 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10434). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds marginal improvement in business conditions in China but that services entities increased employment and feel more optimistic about the economy in the next year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10434). The HSBC Business Activity index decreased from 53.5 in Oct to 52.1 in Nov with continuing growth in services at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10434). Hongbin Ku, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that services activity will benefit from growth in manufacturing promoted by higher internal demand resulting from easier policies (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10434). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, increased to 50.5 in Nov from 49.5 in Oct, indicating moderate activity and the first monthly improvement of the index in 13 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10391). New exports orders registered the first increase since Apr 2012 at marked rate, with strength in foreign demand from Europe and the US. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds gradual improvement of the economy of China consistent with probable growth of GDP at 8 percent in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10391).
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 | Nov 12-month ∆%: minus 2.2 Nov month ∆%: minus 0.1 |
| Consumer Price Index | Nov month ∆%: 0.1 Nov 12 months ∆%: 2.0 |
| Value Added of Industry | Nov month ∆%: 0.86 Jan-Nov 2012/Jan-Nov 2011 ∆%: 10.0 |
| GDP Growth Rate | Year IIIQ2012 ∆%: 7.4 |
| Investment in Fixed Assets | Nov month ∆%: 1.26 Total Jan-Nov 2012 ∆%: 20.7 Real estate development: 16.7 |
| Retail Sales | Nov month ∆%: 1.47 Jan-Nov ∆%: 14.2 |
| Trade Balance | Nov balance $19.6 billion Cumulative Nov: $199.54 billion |
Links to blog comments in Table CNY:
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html
VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.4 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.4 percent in 2012 and 0.1 percent in 2013 but 1.4 percent in 2014.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, ∆%
| 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 | 3.2 |
| 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 | 10.1 | 1.4 |
| 2012* | -0.4 | ||
| 2013* | 0.1 | ||
| 2014* | 1.4 |
*EUROSTAT forecast Source: EUROSTAT 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, increased from 46.5 in Nov to 47.3 in Dec, for eleven consecutive declines and fifteen drops in sixteen months, with Oct registering the lowest reading since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10458). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index is consistent with GDP declining even by more than contraction of 0.1 percent in IIIQ2012 but improving outlook for return to growth next year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10458). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 45.7 in Oct to 46.5 in Nov, which is the tenth consecutive contraction; contraction spread in manufacturing and services throughout the four largest economies of Germany, France, Italy and Spain with weak demand from internal and export markets affecting both manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10404). Chris Williamson, Chief Economist at Markit, finds that the data are consistent with likely decline of GDP at a rate higher than 0.1 percent in IIIQ2012 but at a lower rate of contraction at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10404). The Markit Eurozone Services Business Activity Index increased from 46.0 in Oct, which was a low in 39 months since Jul 2009, to 46.7 in Nov but with contraction in 14 of the past 15 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10404). The Markit Eurozone Manufacturing PMI® increased to 46.2 in Nov from 45.4 in Oct, which is the highest reading in eight months in sixteen consecutive months of deterioration of manufacturing business in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10365). New export orders declined in Nov for the seventeenth consecutive month with contracting demand within the euro area and deteriorating global markets. Chris Williamson, Chief Economist at Markit, finds that manufacturing output declined at the lowest rate in eight months, suggesting that recession in the euro area may have continued into a third consecutive quarter (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10365). Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IIIQ2012 ∆% -0.1; IIIQ2012/IIIQ2011 ∆% -0.6 Blog 12/9/12 |
| Unemployment | Oct 2012: 11.7% unemployment rate Oct 2012: 18.703 million unemployed Blog 12/2/12 |
| HICP | Nov month ∆%: -0.2 12 months Nov ∆%: 2.2 |
| Producer Prices | Euro Zone industrial producer prices Oct ∆%: 0.1 |
| Industrial Production | Oct month ∆%: -1.4; Oct 12 months ∆%: -3.6 |
| Retail Sales | Oct month ∆%: minus 1.2 |
| Confidence and Economic Sentiment Indicator | Sentiment 85.7 Nov 2012 Consumer minus 26.9 Nov 2012 Blog 12/2/12 |
| Trade | Jan-Oct 2012/Jan-Oct 2011 Exports ∆%: 8.6 Oct 2012 12-month Exports ∆% 14.3 Imports ∆% 7.0 |
Links to blog comments in Table EUR:
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html
12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
Euro zone trade growth continues to be relatively strong as shown in Table VD-1. Exports grew at 8.6 percent and imports at 2.1 percent in Jan-Oct 2012 relative to Jan-Oct 2011. The 12-month rate of growth of exports was 14.3 percent in Oct 2012 while imports increased 7.0 percent. In Sep 2012, exports increased 1.3 percent in 12 months and imports decreased 4.5 percent. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.
Table VD-1, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA
| Exports | Imports | |
| Jan-Oct 2012 | 1,560.3 | 1,496.2 |
| Jan-Oct 2011 | 1,436.7 | 1,465.2 |
| ∆% | 8.6 | 2.1 |
| Oct 2012 | 169.4 | 159.2 |
| Oct 2011 | 148.2 | 148.8 |
| ∆% | 14.3 | 7.0 |
| Sep 2012 | 153.8 | 144.2 |
| Sep 2011 | 151.8 | 151.0 |
| ∆% | 1.3 | -4.5 |
| Trade Balance | Jan-Oct 2012 | Jan-Oct 2011 |
| € Billions | -28.5 | 64.1 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-17122012-AP/EN/6-17122012-AP-EN.PDF
The structure of trade of the euro zone in Jan-Sep 2012 is provided in Table VD-2. Data are still not available for trade structure for Oct 2012. Manufactured exports increased 7.2 percent in Jan-Sep 2012 relative to Jan-Sep 2011 while imports fell 2.0 percent. The trade surplus in manufactured products was marginally higher than the trade deficit in primary products in Jan-Sep 2012 but lower in Jan-Sep 2011 largely because of the commodity shock caused by carry trades.
Table VD-2, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, NSA, ∆%
| Primary | Manufactured | Other | Total | |
| Exports | ||||
| Jan-Sep 2012 € B | 217.2 | 1,134.6 | 39.1 | 1,390.9 |
| Jan-Sep 2011 € B | 194.7 | 1,058.7 | 35.1 | 1,288.5 |
| ∆% | 11.6 | 7.2 | 11.4 | 7.9 |
| Imports | ||||
| Jan-Sep 2012 € B | 493.9 | 819.1 | 24.0 | 1,337.0 |
| Jan-Sep 2011 € B | 461.7 | 833.3 | 21.4 | 1,316.4 |
| ∆% | 7.0 | -2.0 | 12.1 | 1.6 |
| Trade Balance € B | ||||
| Jan-Sep 2012 | -276.8 | 315.5 | 15.2 | 53.9 |
| Jan-Sep 2011 | -267.0 | 225.4 | 13.8 | -27.8 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-17122012-AP/EN/6-17122012-AP-EN.PDF
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 Annual ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2011 | 3.0 | 3.1 |
| 2010 | 4.2 | 4.0 |
| 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: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1
The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, increased from 49.2 in Nov to 50.5 in Dec, which is the highest reading in eight months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10456). The pace of decline of new export orders for manufacturing was at the lowest in nine months, with some respondents finding enhanced demand in Asia and the US but continuing weakness in Europe. Paul Smith, Senior Economist at Markit, finds the data consistent with stagnating GDP in IVQ2012 primarily because of weakness in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10456). The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, increased from 47.7 in Oct to 49.2 in Nov, indicating a level below the neutral zone of 50.0 for seven consecutive months but improving at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10383). Tim Moore, Senior Economist at Markit and author of the report, finds that the composite index of manufacturing and services indicates four months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10383). The Germany Services Business Activity Index increased from 48.4 in Oct to 49.7 in Sep, which is below the long-term average of 52.9 and also lower than readings in the first half of 2012 but indicating only marginal decline in general services business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10383). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing conditions, increased from 46.0 in Oct to 46.8 in Nov for the ninth consecutive month in contraction territory below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10384). New export orders fell for seventeen consecutive months but the rate of decline was the second slowest since Mar 2012. Tim Moore, Senior Economist at Markit and author of the report, finds continuing weakness in Germany’s manufacturing but some encouragement in the slower drop of new orders and output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10384 ).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IIIQ2012 0.2 ∆%; III/Q2012/IIIQ2011 ∆% 0.4 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12 11/25/12 |
| Consumer Price Index | Nov month NSA ∆%: -0.1 |
| Producer Price Index | Nov month ∆%: 0.1 CSA, -0.1 NSA |
| Industrial Production | Mfg Oct month CSA ∆%: -2.4 |
| Machine Orders | MFG Oct month ∆%: 3.9 |
| Retail Sales | Oct Month ∆% -0.8 12-Month ∆% -2.8 Blog 12/2/12 |
| Employment Report | Unemployment Rate Sep 5.4% |
| Trade Balance | Exports Oct 12-month NSA ∆%: 10.6 Blog 12/16/12 |
Links to blog comments in Table DE:
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html
12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html
11/25/12 http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIQ1949 to IIQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.8 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using second quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.
Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012
| Period | Average ∆% |
| 1949-2012* | 3.3 |
| 2000-2012* | 1.1 |
| 2000-2011 | 1.1 |
| 2000-2007 | 1.7 |
| 1990-1999 | 1.9 |
| 1980-1989 | 2.6 |
| 1970-1979 | 3.8 |
| 1960-1969 | 5.7 |
| 1950-1959 | 4.2 |
*Second Quarter on Second Quarter
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28
The Markit Flash France Composite Output Index increased marginally from 44.3 in Nov to 45.0 in Dec for the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10453). Jack Kennedy, Senior Economist at Markit and author of the report, finds that the data suggest the weakest quarter in output in four years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10453).
The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased marginally from 43.5 in Oct to 44.3 in Nov, indicating significant contraction of private sector activity for a ninth consecutive month at slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10367). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that new business declining at the fastest rate since the beginning of 2009 indicates weak conditions of France’s services sector at the end of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10367). The Markit France Services Activity index increased from 44.6 in Oct to 45.8 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10301). The Markit France Manufacturing Purchasing Managers’ Index® increased to 44.5 in Nov from 43.7 in Sep, remaining deeply below the neutral level of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10347). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing weakness in manufacturing with new orders falling at fast pace mostly because of restrained internal demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10347). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Nov month ∆% -0.2 |
| PPI | Sep month ∆%: 0.3 Blog 11/4/12 |
| GDP Growth | IIIQ2012/IIQ2012 ∆%: 0.2 |
| Industrial Production | Oct ∆%: |
| Consumer Spending | Sep Manufactured Goods |
| Employment | IIIQ2012 Unemployed 2.826 million |
| Trade Balance | Oct Exports ∆%: month 0.7, 12 months 4.9 Oct Imports ∆%: month -0.2, 12 months 0.6 Blog 12/23-24/12 |
| Confidence Indicators | Historical averages 100 Nov Mfg Business Climate 88 Blog 11/25/12 |
Links to blog comments in Table FR:
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
11/25/12 http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
France has been running a trade deficit fluctuating around €6,000 million, as shown in Table VF-2. Exports increased 0.7 percent in Oct 2012 while imports decreased 0.2 percent, resulting in marginal decrease of the trade deficit from revised €4997 million in Sep 2012 to €4685 million in Oct 2012.
Table VF-1, France, Exports, Imports and Trade Balance, € Millions
| Exports | Imports | Trade Balance | |
| Oct 2012 | 37,782 | 42,467 | -4,685 |
| Sep | 37,538 | 42,535 | -4,997 |
| Aug | 38,131 | 43,395 | -5,264 |
| Jul | 36,812 | 41,287 | -4,475 |
| Jun | 36,313 | 42,766 | -6,453 |
| May | 37,417 | 43,109 | -5,692 |
| Apr | 36,531 | 42,823 | -6,292 |
| Mar | 36,148 | 41,930 | -5,782 |
| Feb | 36,815 | 43,240 | -6,425 |
| Jan | 36,549 | 42,287 | -5,738 |
| Dec 2011 | 36,147 | 41,627 | -5,480 |
| Nov | 37,052 | 41,827 | -4,775 |
| Oct | 36,004 | 42,234 | -6,230 |
| Sep | 35,735 | 42,635 | -6,900 |
| Aug | 37,192 | 41,964 | -4,772 |
| Jul | 35,297 | 41,803 | -6,506 |
| Jun | 35,355 | 40,992 | -5,637 |
| May | 34,870 | 41,613 | -6,743 |
| Apr | 34,640 | 41,663 | -7,023 |
| Mar | 35,275 | 41,708 | -6,433 |
| Feb | 34,668 | 41,200 | -6,532 |
| Jan | 34,390 | 41,134 | -6,744 |
| Dec 2010 | 33,937 | 39,608 | -5,671 |
Source: http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
Monthly and 12-month rates of growth of exports and imports of France are provided in Table VF-2. Exports increased 0.7 percent in Oct and increased 4.9 percent in the 12 months ending in Oct. Imports decreased 0.2 percent in Oct and increased 0.6 percent in 12 months. Growth of exports and imports has fluctuated in 2011 and 2012 as a result of price surges of commodities and raw materials.
Table VF-2, France, Exports and Imports, Month and 12-Month ∆%
| Exports | Exports | Imports | Imports 12-Month ∆% | |
| Oct 2012 | 0.7 | 4.9 | -0.2 | 0.6 |
| Sep | -1.6 | 5.0 | -2.0 | -0.2 |
| Aug | 3.6 | 2.5 | 5.1 | 3.4 |
| Jul | 1.4 | 4.3 | -3.5 | -1.2 |
| Jun | -2.9 | 2.7 | -0.8 | 4.3 |
| May | 2.4 | 7.3 | 0.7 | 3.6 |
| Apr | 1.1 | 5.5 | 2.1 | 2.8 |
| Mar | -1.8 | 2.5 | -3.0 | 0.5 |
| Feb | 0.7 | 6.2 | 2.3 | 4.9 |
| Jan | 1.1 | 6.3 | 1.6 | 2.8 |
| Dec 2011 | -2.4 | 6.5 | -0.5 | 5.1 |
| Nov | 2.9 | 7.2 | -1.0 | 5.1 |
| Oct | 0.8 | 9.1 | -0.9 | 15.7 |
| Sep | -3.9 | 7.4 | 1.6 | 12.2 |
| Aug | 5.4 | 10.7 | 0.4 | 8.7 |
| Jul | -0.2 | 1.6 | 2.0 | 9.5 |
| Jun | 1.4 | 4.2 | -1.5 | 10.0 |
| May | 0.7 | 16.4 | -0.1 | 16.9 |
| Apr | -1.8 | 7.7 | -0.1 | 14.9 |
| Mar | 1.7 | 11.5 | 1.2 | 15.4 |
| Feb | 0.8 | 13.9 | 0.2 | 22.2 |
| Jan | 1.3 | 14.2 | 3.9 | 20.9 |
| Dec 2011 | 6.5 | 5.1 | ||
| Dec 2010 | 13.6 | 14.8 | ||
| Dec 2009 | -9.6 | -1.8 | ||
| Dec 2008 | -6.8 | -10.9 | ||
| Dec 2007 | 6.1 | 8.4 | ||
| Dec 2006 | 6.3 | 6.7 | ||
| Dec 2005 | 11.4 | 15.1 | ||
| Dec 2004 | -3.8 | 5.7 | ||
| Dec 2003 | 7.1 | 1.6 |
Source: http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
Annual data for France’s exports, imports and trade balance are provided in Table VF-4. France’s trade balance deteriorated sharply from 2007 to 2011 with the deficit increasing from €42,494 million in 2007 to €73,682 million in 2011. Annual growth rates of exports have not been sufficiently high to compensate for growth of imports driven in part by commodity price increases.
Table VF-3, France, Exports, Imports and Balance Year € Millions and ∆%
| Exports € Millions | ∆% | Imports € Millions | ∆% | Balance € Millions | |
| Oct 2012 12 Months | 443,102 | 509,828 | -66,726 | ||
| Year | |||||
| 2011 | 428,022 | 8.4 | 501,704 | 12.2 | -73,682 |
| 2010 | 394,758 | 13.9 | 447,054 | 14.1 | -52,296 |
| 2009 | 346,476 | -17.0 | 391,856 | -17.3 | -45,389 |
| 2008 | 417,636 | 2.7 | 473,853 | 5.5 | -56,217 |
| 2007 | 406,487 | 3.0 | 448,981 | 5.8 | -42,494 |
| 2006 | 394,621 | 9.5 | 424,549 | 10.4 | -29,928 |
| 2005 | 360,376 | 4.4 | 384,588 | 9.6 | -24,212 |
| 2004 | 345,256 | 5.4 | 350,996 | 7.0 | -5,740 |
| 2003 | 327,653 | 327,884 | -231 |
Source: http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
VG Italy. Table VG-IT provides percentage changes in a quarter relative to the same quarter of Italy’s expenditure components in chained volume measures. GDP has been declining at sharper rates from minus 0.5 percent in IQ2012 to minus 2.4 percent in IIIQ2012. The aggregate demand components of consumption and gross fixed capital formation (GFCF) have been declining at faster rates.
Table VG-IT, Italy, GDP and Expenditure Components, Chained Volume Measures, Quarter ∆% on Same Quarter Year Earlier
| GDP | Imports | Consumption | GFCF | Exports | |
| 2012 | |||||
| IIIQ | -2.4 | -7.8 | -3.7 | -9.8 | 1.6 |
| IIQ | -2.3 | -7.6 | -3.5 | -9.6 | 2.5 |
| IQ | -1.3 | -9.0 | -2.8 | -7.9 | 1.9 |
| 2011 | |||||
| IVQ | -0.5 | -6.8 | -1.6 | -3.7 | 3.3 |
| IIIQ | 0.4 | 0.3 | -0.5 | -2.2 | 5.9 |
| IIQ | 1.0 | 3.4 | 0.6 | -0.2 | 7.1 |
| IQ | 1.3 | 8.9 | 0.9 | 0.7 | 10.9 |
| 2010 | |||||
| IVQ | 2.2 | 15.4 | 0.8 | 2.3 | 13.3 |
| IIIQ | 1.9 | 13.0 | 1.0 | 4.3 | 12.2 |
| IIQ | 1.9 | 13.2 | 0.5 | 2.3 | 12.0 |
| IQ | 1.1 | 7.3 | 0.5 | -0.8 | 7.3 |
| 2009 | |||||
| IVQ | -3.5 | -6.4 | -0.1 | -7.5 | -9.3 |
| IIIQ | -5.0 | -12.1 | -0.9 | -12.6 | -16.3 |
| IIQ | -6.6 | -17.8 | -1.3 | -13.7 | -21.4 |
| IQ | -6.9 | -17.2 | -1.6 | -12.7 | -22.9 |
| 2008 | |||||
| IVQ | -3.0 | -8.2 | -0.9 | -8.3 | -10.3 |
| IIIQ | -1.9 | -5.0 | -0.8 | -4.5 | -3.9 |
| IIQ | -0.2 | -0.1 | -0.3 | -1.5 | 0.4 |
| IQ | 0.5 | 1.7 | 0.1 | -1.0 | 2.9 |
GFCF: Gross Fixed Capital Formation
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77009
The Markit/ADACI Business Activity Index decreased from 44.6 in Oct to 44.6 in Nov, indicating significant contraction of output of Italy’s services at a marginally higher rate for contraction during a year and a half (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10428). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the data suggest contraction of business services activity at an accelerating rate, breaking improvement in recent months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10428). The Markit/ADACI Purchasing Managers’ Index® (PMI®), decreased from 45.5 in Oct to 45.1 in Nov for 16 consecutive months of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10388 ). New foreign orders continued contracting especially from France and Germany. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds that decline of foreign orders was partly because of weakness in the economies of France and Germany but also to high selling prices that reversed prior gains in competitiveness (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10388). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Nov month ∆%: -0.2 |
| Producer Price Index | Oct month ∆%: -0.3 Blog 12/2/12 |
| GDP Growth | IIIQ2012/IIQ2012 SA ∆%: minus 0.2 |
| Labor Report | Oct 2012 Participation rate 64.0% Employment ratio 56.9% Unemployment rate 11.1% Blog 12/2/12 |
| Industrial Production | Oct month ∆%: minus 1.1 |
| Retail Sales | Oct month ∆%: -1.0 Sep 12-month ∆%: -3.8 Blog 12/23-24/12 |
| Business Confidence | Mfg Nov 88.5, Jul 87.3 Construction Oct 79.7, Jul 83.5 Blog 12/2/12 |
| Trade Balance | Balance Oct SA €1321 million versus Sep €1541 |
Links to blog comments in Table IT:
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.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 decreased 1.0 percent in Oct 2012 relative to Sep 2012, decreased 0.5 percent in Aug-Oct 2012 relative to May-Jul 2012, decreased 3.8 percent in Oct 2012 relative to Oct 2011 and decreased 1.9 percent in Jan-Oct 2012 relative to Jan-Oct 2011. Food retail sales outperform non-food retail sales.
Table VG-1, Italy, Retail Sales ∆%
| Oct 2012/ Sep 2012 SA | Aug-Oct 12/ | Oct 2012/ Oct 2011 NSA | Jan-Oct 2012/ | |
| Total | -1.0 | -0.5 | -3.8 | -1.9 |
| Food | -1.3 | -0.3 | -2.9 | -0.4 |
| Non-food | -1.0 | -0.5 | -4.0 | -2.5 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/78047
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 improvements in May and Jun 2012, another sharp drop in Jul 2012 and improvement in Aug- 2012 with marginal deterioration in Sep 2012 followed by sharper deterioration in Oct 2012.
Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months
Source: Istituto Nazionale di Statistica
A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage changes in 2011 and Jan-Oct 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 1.3 percent in Apr 2011, 1.2 percent in Oct 2012, 1.2 percent in Jan 2012, 0.9 percent in Feb 2012, 0.1 percent in May 2012 and 0.4 percent in Jun 2012. There are negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr 2011 and 0.0 percent in Feb 2011. There are only two months with positive 12-month percentage change in 2012, 1.5 percent in Mar 2012 and 0.5 percent in Feb 2012. Retail sales grew 1.2 percent in Jan 2012 and 0.9 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. Decline of the monthly rates in Mar 2012 of 0.8 percent and 1.7 percent in Apr 2012 pulled down the 12-month percentage change in Apr to minus 6.8 percent. Increase of 0.1 percent in May 2012 resulted in decrease of 1.7 percent in 12 months and growth of 0.4 percent in Jun 2012 further reduced the 12-month percentage change to minus 0.5 percent. Further decline of 0.2 percent in Jul 2012 resulted in decline of 3.2 percent in 12 months. Decline of 0.1 percent of sales in Aug 2012 resulted in decline in twelve months of 1.1 percent. Decrease of 1.0 percent in Oct 2012 resulted in decline of 3.8 percent in 12 months.
Table VG-2, Italy, Retail Sales Month and 12-Month ∆%
| Month ∆% SA | 12-Month ∆% NSA | |
| Oct 2012 | -1.0 | -3.8 |
| Sep | -0.1 | -1.6 |
| Aug | -0.1 | -1.1 |
| Jul | -0.2 | -3.2 |
| Jun | 0.4 | -0.5 |
| May | 0.1 | -1.7 |
| Apr | -1.7 | -6.8 |
| Mar | -0.8 | 1.5 |
| Feb | 0.9 | 0.5 |
| Jan | 1.2 | -1.1 |
| Dec 2011 | -1.1 | -3.7 |
| Nov | -1.0 | -1.8 |
| Oct | 1.2 | -1.4 |
| Sep | -0.6 | -1.6 |
| Aug | -0.3 | -0.3 |
| July | -0.2 | -2.3 |
| Jun | -0.6 | -1.1 |
| May | -0.5 | -0.4 |
| Apr | 1.3 | 2.2 |
| Mar | 0.1 | -2.1 |
| Feb | -0.7 | 0.0 |
| Jan | -1.1 | -1.1 |
| 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/78047
Exports and imports of Italy and monthly growth rates SA are provided in Table VG-3. There have been significant fluctuations. Seasonally-adjusted exports changed 0.0 percent in Oct 2012 while imports increased 0.8 percent. The SA trade balance deteriorated from surplus of €541 million in Sep 2012 to surplus of €1321 million in Oct 2012.
Table VG-3, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%
| Exports | ∆% | Imports | ∆% | Balance | |
| 2010 | |||||
| Dec | 29,656 | 1.5 | 33,552 | 3.2 | -3,896 |
| 2011 | |||||
| Jan | 31,076 | 4.8 | 33,790 | 0.7 | -2,714 |
| Feb | 30,507 | -1.8 | 33,146 | -1.9 | -2,639 |
| Mar | 31,109 | 2.0 | 35,098 | 5.9 | -3,989 |
| Apr | 31,483 | 1.2 | 34,291 | -2.3 | -2,808 |
| May | 32,195 | 2.3 | 34,780 | 1.4 | -2,585 |
| Jun | 31,421 | -2.4 | 33,321 | -4.2 | -1,900 |
| Jul | 31,631 | 0.7 | 33,949 | 1.9 | -2,318 |
| Aug | 31,697 | 0.2 | 34,288 | 1.0 | -2,591 |
| Sep | 31,937 | 0.8 | 33,343 | -2.8 | -1,406 |
| Oct | 31,121 | -2.6 | 32,701 | -1.9 | -1,580 |
| Nov | 31,556 | 1.4 | 32,836 | 0.4 | -1,280 |
| Dec | 32,661 | 3.5 | 32,051 | -2.4 | 610 |
| 2012 | |||||
| Jan | 31,934 | -2.2 | 32,389 | 1.1 | -455 |
| Feb | 31,877 | -0.2 | 32,387 | 0.0 | -510 |
| Mar | 32,355 | 1.5 | 31,728 | -2.0 | 627 |
| Apr | 32,359 | 0.0 | 32,332 | 1.9 | 27 |
| May | 32,807 | 1.4 | 32,547 | 0.7 | 260 |
| Jun | 32,359 | -1.4 | 30,639 | -5.9 | 1,720 |
| Jul | 32,665 | 0.9 | 31,735 | 3.6 | 930 |
| Aug | 33,532 | 2.7 | 32,671 | 2.9 | 861 |
| Sep | 32,805 | -2.2 | 31,264 | -4.3 | 1,541 |
| Oct | 32,821 | 0.0 | 31,500 | 0.8 | 1,321 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/77607
Italy’s trade account not seasonally adjusted is provided in Table VG-4. Values are different because the data are original and not adjusted. Exports increased 12.0 percent in the 12 months ending in Oct 2012 while imports increased 0.9 percent. Twelve-month rates of growth picked up again in Aug 2011 with 15.2 percent for exports and 12.6 percent for imports. In Sep 2011, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct 2011, exports grew 4.5 percent while imports fell 0.2 percent. In Nov 2011, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. Exports continued to growth of 7.2 percent in the 12 months ending in Aug 2012 while imports fell 2.7 percent. The actual or not seasonally adjusted trade balance deficit fell from €2948 million in Aug 2011 to surplus of €1407 million in Dec 2011 but turned into deficit of €4574 million in Jan 2012, improving to lower deficit of €1195 million in Feb 2012 and surplus of €1792 million in Mar 2012, returning to deficit of €250 million in Apr and surplus of €867 million in May. In Jun 2012, the actual surplus was €2780 million and then €4733 million in Jul 2012 which was the highest in 2012 but deteriorated to actual deficit of €483 million in Aug 2012. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009. Growth of exports of minus 12.0 percent in the 12 months ending in Oct 2012 while imports increased 0.9 percent increased the trade surplus to €2452 million.
Table VG-4, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%
| Exports | ∆% | Imports | ∆% | Balance | |
| Annual | |||||
| 2009 | 291,733 | -20.9 | 297,609 | -22.1 | -5,876 |
| 2010 | 337,346 | 15.6 | 367,390 | 23.4 | -30,044 |
| 2011 | 375,904 | 11.4 | 401,428 | 9.3 | -25,524 |
| Monthly | |||||
| 2010 | |||||
| Dec | 29,714 | 20.2 | 32,732 | 31.7 | -3,018 |
| 2011 | |||||
| Jan | 26,163 | 24.7 | 32,552 | 28.8 | -6,389 |
| Feb | 29,625 | 17.8 | 32,682 | 16.4 | -3,057 |
| Mar | 34,340 | 13.8 | 38,527 | 20.9 | -4,187 |
| Apr | 31,079 | 12.6 | 33,969 | 18.4 | -2,890 |
| May | 33,545 | 19.9 | 35,853 | 18.8 | -2,308 |
| Jun | 32,649 | 8.1 | 34,481 | 2.1 | -1,832 |
| Jul | 35,327 | 6.0 | 34,058 | 7.1 | 1,269 |
| Aug | 24,245 | 15.2 | 27,193 | 12.6 | -2,948 |
| Sep | 32,996 | 10.2 | 34,886 | 3.6 | -1,890 |
| Oct | 32,131 | 4.5 | 33,245 | -0.2 | -1,114 |
| Nov | 32,440 | 6.5 | 34,025 | 0.5 | -1,585 |
| Dec | 31,364 | 5.6 | 29,957 | -8.5 | 1,407 |
| 2012 | |||||
| Jan | 27,429 | 4.8 | 32,003 | -1.7 | -4,574 |
| Feb | 31,787 | 7.3 | 32,982 | 0.9 | -1,195 |
| Mar | 36,070 | 5.0 | 34,278 | -11.0 | 1,792 |
| Apr | 30,510 | -1.8 | 30,760 | -9.4 | -250 |
| May | 35,132 | 4.7 | 34,265 | -4.4 | 867 |
| Jun | 34,358 | 5.2 | 31,578 | -8.4 | 2,780 |
| Jul | 37,019 | 4.8 | 32,286 | -5.2 | 4,733 |
| Aug | 25,979 | 7.2 | 26,462 | -2.7 | -483 |
| Sep | 31,602 | -4.2 | 31,193 | -10.6 | 409 |
| Oct | 36,001 | 12.0 | 33,549 | 0.9 | 2,452 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/77607
Growth rates of Italy’s trade and major products are provided in Table VG-5 for the period Jan-Oct 2012 relative to Jan-Oct 2011. Growth rates in 12 months of imports are negative with the exception of 9.3 percent for energy. The higher rate of growth of exports of 5.3 percent in Jan-Oct 2012/Jan-Oct 2011 relative to imports of minus 2.6 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.
Table VG-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 28.9 | 5.3 | 25.0 | -2.6 |
| Durable | 5.9 | 2.4 | 3.0 | -5.9 |
| Non | 23.0 | 6.0 | 22.0 | -2.2 |
| Capital Goods | 32.3 | 2.5 | 21.1 | -12.3 |
| Inter- | 34.2 | 3.3 | 34.3 | -11.3 |
| Energy | 4.7 | 20.0 | 19.6 | 9.3 |
| Total ex Energy | 95.3 | 3.6 | 80.4 | -8.9 |
| Total | 100.0 | 4.4 | 100.0 | -5.4 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607
Table VG-6 provides Italy’s trade balance by product categories in Oct 2012 and cumulative Jan-Oct 2012. Italy’s trade balance excluding energy generated surplus of €7613 million in Oct 2012 and €60,206 million in Jan-Oct 2012 but the energy trade balance created deficit of €5161 million in Oct 2012 and €53,677 million in Jan-Oct 2012. The overall surplus in Oct 2012 was €2452 million with surplus of €6528 million in Jan-Oct 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table VG-6, Italy, Trade Balance by Product Categories, € Millions
| Oct 2012 | Cumulative Jan-Oct 2012 | |
| Consumer Goods | 1,834 | 13,406 |
| Durable | 1,089 | 9,371 |
| Nondurable | 745 | 4,035 |
| Capital Goods | 4,711 | 40,621 |
| Intermediate Goods | 1,067 | 6,179 |
| Energy | -5,161 | -53,677 |
| Total ex Energy | 7,613 | 60,206 |
| Total | 2,452 | 6,528 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607
Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table VG-7 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.5 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.9 percent in Jan-Oct 2012 relative to Jan-Oct 2011 while those to EMU are falling at 0.9 percent.
Table VG-7, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Oct 2012 | Exports | ∆% Jan-Oct 2012/ Jan-Oct 2011 | Imports | Imports |
| EU | 56.0 | 0.2 | 53.7 | -7.3 |
| EMU 17 | 42.5 | -0.9 | 43.3 | -7.3 |
| France | 11.6 | 0.0 | 8.4 | -5.9 |
| Germany | 13.1 | 0.1 | 15.5 | -10.9 |
| Spain | 5.3 | -8.1 | 4.5 | -8.1 |
| UK | 4.7 | 10.2 | 2.7 | -13.6 |
| Non EU | 44.0 | 9.9 | 46.3 | -3.1 |
| Europe non EU | 13.3 | 9.7 | 12.5 | -1.4 |
| USA | 6.1 | 18.8 | 3.2 | 2.2 |
| China | 2.7 | -12.0 | 7.4 | -16.3 |
| OPEC | 4.7 | 24.9 | 8.5 | 22.4 |
| Total | 100.0 | 4.4 | 100.0 | -5.4 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607
Table VG-8 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €330 million with the 17 countries of the euro zone (EMU 17) in Oct 2012 and deficit of €1601 million in Jan-Oct 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €9,267 million in Jan-Oct with Europe non European Union and of €11,391 million with the US and in reducing the deficit with non European Union of €3106 million in Jan-Oct 2012. There is significant rigidity in the trade deficits in Jan-Oct of €14,168 million with China and €16,853 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table VG-8, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Oct 2012 Millions of Euro | Trade Balance Cumulative Jan-Oct 2012 Millions of Euro |
| EU | 981 | 9,634 |
| EMU 17 | -330 | -1,601 |
| France | 1,048 | 10,183 |
| Germany | -375 | -4,837 |
| Spain | 143 | 1,359 |
| UK | 916 | 7,993 |
| Non EU | 1,471 | -3,106 |
| Europe non EU | 1,051 | 9,267 |
| USA | 1,268 | 11,391 |
| China | -1,245 | -14,168 |
| OPEC | -1,128 | -16,853 |
| Total | 2,452 | 6,528 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607
VH United Kingdom. Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 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 0.9 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 | 0.9 |
| 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/naa2/second-estimate-of-gdp/q3-2012/stb-second-estimate-of-gdp--q3-2012.html
The Business Activity Index of the Markit/CIPS UK Services PMI® decreased from 50.6 in Oct to 50.2 in Nov with growth during 23 consecutive months, decreasing at the margin (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10433). Chris Williamson, Chief Economist at Markit, finds that the lowest level of the index registered in 23 months suggests together with weak survey data for manufacturing and construction suggests that the UK economy could fall back to contraction after growth in IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10433). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) increased from 47.3 in Oct to 49.1 in Nov for seven months in contraction territory (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10398). The PMI registered average 47.8 in IIIQ2012, which is the lowest reading since IIQ2009 but the average to date for IVQ2012 at 48.2 is higher than 47.8 in IIIQ2012. New export orders continued to fall with declining new business from Europe and the US. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds that recession in the Europe and weak world growth continue to affect exports (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10398). Table UK provides the economic indicators for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | Nov month ∆%: 0.2 |
| Output/Input Prices | Output Prices: Nov 12-month NSA ∆%: 2.2; excluding food, petroleum ∆%: 1.4 |
| GDP Growth | IIIQ2012 prior quarter ∆% minus 1.0; year earlier same quarter ∆%: -0.1 |
| Industrial Production | Oct 2012/Oct 2011 ∆%: Production Industries minus 3.0; Manufacturing minus 2.1 |
| Retail Sales | Nov month ∆%: 0.0 |
| Labor Market | Aug-Oct Unemployment Rate: 7.8%; Claimant Count 4.8%; Earnings Growth 1.8% |
| Trade Balance | Balance Oct minus ₤3644 million |
Links to blog comments in Table UK:
12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html
12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html
Labor market statistics of the UK for the quarter Aug-Oct 2012 are provided in Table VH-1. The unemployment rate fell to 7.8 percent and the number unemployed decreased 128,000 in the year, reaching 2.510 million. The employment rate is 71.2 percent. Earnings growth including bonuses was 1.8 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 4.8 percent, unchanged on the month and on the year. There are 8.12 million people working part time.
Table VH-1, UK, Labor Market Statistics
| Quarter Aug-Oct 2012 | |
| Unemployment Rate | 7.8% down 0.2 % points on quarter and down 0.5 from year earlier |
| Number Unemployed | (1) down 82,000 on quarter and down 128,000 from year earlier to reach 2.510 million (2) Unemployment rate 16 to 24 years of age 20.7% of that age group (3) Unemployed 16 to 24 years excluding those in full-time education 626,000 (319,000 in full-time education) down 90,000 from year earlier; unemployment rate 20.3% |
| Number Unemployed > one and two years | (1) Number unemployed over one year: 894,000, down 49,000 on quarter (2) Number unemployed over two years: 443,000, up 21,000 on quarter |
| Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks) | (1) 22.6%, up 0.1 % points on quarter, down 0.6 on year (2) Economically inactive 16-64 years up 60,000 on quarter and down 249,000 on year to 9.072 million |
| Employment Rate | 71.2%, up 0.1 % points on quarter, up 0.9 % points on year |
| Number Employed | (1) Up 40,000 on quarter, +499,000 on year to 29.601 million (2) Number of employees up 162,000 on quarter to 25.12 million (3) Self-employed +35,000 on quarter to 4.20 million (5) Number in other job categories +26,000 to 210,000 |
| Earnings Growth Rates Year on Year | (1) Total +1.8% (including bonuses) over year earlier; regular 1.7%; private sector 1.8% on year earlier, public sector rose 2.5% on year earlier (2) Regular private +1.7 % (excluding bonuses); regular public 2.3% on year earlier |
| Full-time and Part-time | (1) Number full-time 21.48 million, up 44,000 on quarter (2) Number part-time 8.12 million, down 4,000 on quarter |
| Claimant Count (Jobseeker’s Allowance, JSA) | (1) Latest estimate: 1.575 million; down 3,000 in month, down 20,900 on year earlier (2) Claimant count 4.8%, unchanged on month and down 0.1 on year |
| Labor Productivity | (1) Output per worker fell 1.1% from IQ2012 to IIQ2012 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2012/index.html
Table VH-2 provides indicators of the labor force survey of the UK for Aug-Oct 2012 and earlier quarters. There has been improvement in UK labor markets with the rate of unemployment decreasing from 8.3 percent in Aug-Oct 2011 to 7.8 percent in Aug-Oct 2012.
Table VH-2, UK, Labor Force Survey Indicators
| LFHP | EMP | PART | UNE | RATE | |
| Aug-Oct 2012 | 40,204 | 29,601 | 71.2 | 2,510 | 7.8 |
| May-Jul 2012 | 40,187 | 29,560 | 71.2 | 2,592 | 8.1 |
| Feb-Apr 2012 | 40,183 | 29,324 | 70.7 | 2,599 | 8.1 |
| Nov-Jan 2012 | 40,177 | 29,141 | 70.4 | 2,652 | 8.3 |
| Aug-Oct 2011 | 40,171 | 29,102 | 70.3 | 2,637 | 8.3 |
| Aug-Oct 2010 | 40,026 | 29,109 | 70.6 | 2,484 | 7.9 |
Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 and over in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed Ages 16 and over in thousands; Rate: Number Unemployed Ages 16 and over as % of Employed plus Unemployed
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2012/index.html
The volume of retail sales in the UK increased 0.0 percent in Nov 2012 and increased 0.9 percent in the 12 months ending in Nov 2012, as shown in Table VH-3. Retail sales percentage changes in 12 months had been positive in several months since Sep 2011 with exception of decline of 2.3 percent in Apr 2012. The decline of 0.7 percent in Oct 2012 brought down the 12-month increase to 0.8 percent.
Table VH-3, UK, Volume of Retail Sales ∆%
| Month ∆% | 12-Month ∆% | |
| Nov 2012 | 0.0 | 0.9 |
| Oct | -0.7 | 0.8 |
| Sep | 0.4 | 2.3 |
| Aug | -0.1 | 2.5 |
| Jul | 0.2 | 2.2 |
| Jun | 0.4 | 2.2 |
| May | 1.4 | 1.8 |
| Apr | -2.3 | -1.7 |
| Mar | 1.9 | 2.8 |
| Feb | -0.5 | 0.6 |
| Jan | 0.1 | 0.5 |
| Dec 2011 | 0.1 | 2.5 |
| Nov | -0.2 | 0.2 |
| Oct | 0.8 | 0.6 |
| Sep | 0.6 | 0.3 |
| Aug | -0.4 | -1.2 |
| Jul | 0.2 | -0.9 |
| Jun | 0.1 | -0.7 |
| May | -2.1 | -0.8 |
| Apr | 2.2 | 2.1 |
| Mar | -0.3 | 0.0 |
| Feb | -0.6 | 0.1 |
| Jan | 2.1 | 3.5 |
| Dec 2010 | -2.0 | -2.2 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2012/index.html
Retail sales in the UK struggle with relatively high inflation. Table VH-4 provides 12-month percentage changes of the implied deflator of UK retail sales. The implied deflator of all retail sales increased 0.5 percent in the 12 months ending in Nov 2012 while that of sales excluding auto fuel increased 0.6 percent. The 12-month increase of the implied deflator of auto fuel sales rose to 16.9 percent in Sep 2011, which is the highest 12-month increase in 2011, but then declined to 2.7 percent in Oct 2012. The percentage change of the implied deflator of sales of food stores at 1.4 percent in Nov 2012 that is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 with exception of the decline of 9.5 percent in 2008 when commodity carry trades were reversed in the panic of the financial crisis, as shown in Table VH-4. UK inflation is particularly sensitive to changes in commodity prices.
Table VH-4, UK, Implied Deflator of Retail Sales, 12-Month Percentage Changes, ∆%
| All Retail | Ex Auto | Food | Non- | Auto | |
| Nov 2012 | 0.5 | 0.6 | 3.0 | -1.1 | 1.4 |
| Oct | 0.9 | 0.8 | 2.7 | -0.7 | 2.7 |
| Sep | 0.7 | 0.5 | 2.0 | -0.6 | 2.9 |
| Aug | 0.3 | 0.3 | 2.0 | -1.0 | 0.4 |
| Jul | 0.2 | 0.5 | 1.9 | -0.6 | -1.3 |
| Jun | 0.3 | 0.7 | 2.2 | -0.5 | -1.1 |
| May | 1.2 | 1.3 | 3.1 | -0.1 | 1.2 |
| Apr | 2.0 | 1.7 | 3.7 | 0.0 | 5.2 |
| Mar | 2.9 | 2.5 | 4.5 | 0.9 | 4.9 |
| Feb | 2.6 | 2.3 | 4.0 | 0.6 | 5.3 |
| Jan | 2.5 | 2.1 | 3.5 | 0.9 | 5.3 |
| Dec 2011 | 2.8 | 2.0 | 4.3 | 0.6 | 9.1 |
| Nov | 3.8 | 2.7 | 4.6 | 1.4 | 12.6 |
| Oct | 4.6 | 3.4 | 5.0 | 2.1 | 14.7 |
| Sep | 5.1 | 3.6 | 6.1 | 1.5 | 16.9 |
| Aug | 5.4 | 4.0 | 6.0 | 2.3 | 16.2 |
| Jul | 5.1 | 3.8 | 5.9 | 2.1 | 14.4 |
| Jun | 4.6 | 3.3 | 6.1 | 1.0 | 14.5 |
| May | 4.6 | 3.4 | 5.5 | 1.7 | 13.1 |
| Apr | 4.2 | 3.2 | 4.8 | 1.9 | 12.2 |
| Mar | 4.3 | 2.9 | 4.3 | 1.7 | 14.8 |
| Feb | 4.9 | 3.6 | 5.5 | 2.0 | 15.0 |
| Jan | 4.2 | 3.0 | 5.3 | 1.1 | 14.4 |
| Dec 2010 | 3.4 | 3.0 | 5.2 | 1.1 | 12.4 |
| Dec 2009 | 3.6 | 2.4 | 2.1 | 1.7 | 16.8 |
| Dec 2008 | -0.3 | 0.4 | 7.1 | -4.1 | -9.5 |
| Dec 2007 | 1.8 | 0.6 | 3.9 | -1.7 | 15.3 |
| Dec 2006 | 1.1 | 0.9 | 3.3 | -1.0 | 1.1 |
| Dec 2005 | -0.4 | -1.0 | 1.3 | -2.6 | 6.6 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2012/index.html
UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Total volume of sales increased 0.0 percent in Nov 2012. There was increase of 0.1 percent in retail sales excluding auto fuels but decline of 0.1 percent in nonfood stores and decline of 1.3 percent in auto fuel stores. Multiple positive and negative variations and changes in magnitudes confirm high volatility.
VH-5, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%
| All Retail | Ex Auto Fuel | Food Stores | Non-Food | Auto Fuel | ||
| Dec | -2.0 | -1.4 | -2.2 | -1.3 | -8.0 | |
| 2011 | Jan | 2.1 | 1.4 | 0.5 | 2.2 | 9.5 |
| Feb | -0.6 | -0.7 | -0.3 | -1.1 | 0.1 | |
| Mar | -0.3 | -0.2 | 0.9 | -0.9 | -0.9 | |
| Apr | 2.2 | 2.2 | 3.5 | 1.0 | 1.8 | |
| May | -2.1 | -2.3 | -4.2 | -1.0 | - | |
| Jun | 0.1 | - | -0.3 | -0.3 | 0.2 | |
| Jul | 0.2 | 0.3 | 1.0 | 0.1 | -0.4 | |
| Aug | -0.4 | -0.4 | - | -1.2 | -0.6 | |
| Sep | 0.6 | 0.6 | 0.1 | 1.3 | 0.1 | |
| Oct | 0.8 | 0.8 | 0.8 | 1.2 | 1.2 | |
| Nov | -0.2 | -0.5 | -0.6 | -1.4 | 3.0 | |
| Dec | 0.1 | 0.2 | -0.1 | 0.9 | -0.4 | |
| 2012 | Jan | 0.1 | 0.3 | - | 0.4 | -1.1 |
| Feb | -0.5 | -0.4 | - | -0.9 | -1.8 | |
| Mar | 1.9 | 1.5 | -0.1 | 2.9 | 5.6 | |
| Apr | -2.3 | -1.1 | -0.3 | -2.1 | -12.6 | |
| May | 1.4 | 1.0 | 0.5 | 1.2 | 5.7 | |
| Jun | 0.4 | 0.7 | 0.1 | 1.5 | -2.5 | |
| Jul | 0.2 | - | 0.3 | -0.9 | 2.4 | |
| Aug | -0.1 | -0.2 | 0.1 | 0.5 | 0.5 | |
| Sep | 0.4 | 0.4 | -0.1 | 0.5 | 0.5 | |
| Oct | -0.7 | -0.5 | -0.7 | -0.6 | -2.8 | |
| Nov | - | 0.1 | -0.1 | 0.3 | -1.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2012/index.html
Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales increased 0.9 percent in the 12 months ending in Nov 2012 with increase of 2.0 percent in sales excluding auto fuel. Sales of auto fuel stores fell 8.8 percent with the interruption of the carry trade from zero interest rates to commodity futures. Significant improvement since Aug 2011 was interrupted with sharp declines in Apr 2012 but recovery from May to Oct 2012.
Table VH-6, UK, Growth of Retail Sales Volume by Component Groups 12-Month ∆%
| All Retail | Ex Auto Fuel | Food Stores | Non-Food | Auto Fuel | ||
| Dec | -2.2 | -1.7 | -4.2 | -0.4 | -8.3 | |
| 2011 | Jan | 3.5 | 3.1 | -2.5 | 7.2 | 7.5 |
| Feb | 0.1 | -0.4 | -2.4 | -0.1 | 4.8 | |
| Mar | - | -0.4 | -1.2 | -0.7 | 3.6 | |
| Apr | 2.1 | 1.9 | 2.3 | 0.5 | 3.9 | |
| May | -0.8 | -1.1 | -3.3 | -0.8 | 2.3 | |
| Jun | -0.7 | -1.1 | -4.0 | -0.8 | 3.3 | |
| Jul | -0.9 | -1.2 | -1.1 | -2.7 | 2.2 | |
| Aug | -1.2 | -1.5 | -0.6 | -3.8 | 2.0 | |
| Sep | 0.3 | -0.1 | -0.2 | -1.3 | 3.4 | |
| Oct | 0.6 | 0.4 | 0.5 | -0.7 | 2.6 | |
| Nov | 0.2 | -0.3 | -1.1 | -1.6 | 5.2 | |
| Dec | 2.5 | 1.4 | 1.0 | 0.6 | 14.0 | |
| 2012 | Jan | 0.5 | 0.2 | 0.5 | -1.1 | 3.0 |
| Feb | 0.6 | 0.5 | 0.9 | -0.8 | 1.0 | |
| Mar | 2.8 | 2.3 | - | 3.1 | 7.6 | |
| Apr | -1.7 | -1.1 | -3.8 | -0.1 | -7.6 | |
| May | 1.8 | 2.3 | 1.0 | 2.1 | -2.3 | |
| Jun | 2.2 | 3.0 | 1.4 | 3.8 | -5.0 | |
| Jul | 2.2 | 2.7 | 0.8 | 2.8 | -2.4 | |
| Aug | 2.5 | 2.9 | 0.9 | 4.5 | -1.3 | |
| Sep | 2.3 | 2.7 | 0.6 | 3.7 | -0.9 | |
| Oct | 0.8 | 1.4 | -0.8 | 1.9 | -4.9 | |
| Nov | 0.9 | 2.0 | -0.3 | 3.7 | -8.8 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-2012/index.html
Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to 12-month percentage changes of value and volume of retail sales in the UK. The volume of retail sales seasonally adjusted increased 0.9 percent in the 12 months ending in Nov 2012. Sales of predominantly food stores with weight of 41.3 percent decreased 0.3 percent in the 12 months ending in Nov 2012, deducting 0.1 percentage points. Mostly nonfood stores with weight of 41.6 percent increased 3.7 percent with contribution of 1.7 percentage points. Positive contribution to 12-month percentage changes of volume was made by non-store retailing with weight of 5.3 percent, growth of 5.5 percent and positive contribution of 0.3 percentage points but automotive fuel with weight of 11.8 percent and growth of minus 8.8 percent deducted 1.0 percentage points. The value of retail sales increased 1.5 percent in the 12 months ending in Nov 2012. There were positive contributions: 1.1 percentage points for predominantly food stores, 1.1 percentage points for predominantly nonfood stores and 0.2 percentage points for non-store retailing. Automotive fuel stores deducted 0.9 percentage points.
Table VH-7, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors
| Nov 2012 | Weight | Volume SA | PP Cont. | Value SA | PP Cont. |
| All Retailing | 100.0 | 0.9 | 1.5 | ||
| Mostly | 41.3 | -0.3 | -0.1 | 2.7 | 1.1 |
| Mostly Nonfood Stores | |||||
| Total | 41.6 | 3.7 | 1.7 | 2.6 | 1.1 |
| Non- | 7.8 | 5.8 | 0.5 | 3.9 | 0.3 |
| Textile, Clothing & Footwear | 12.3 | 2.0 | 0.3 | 2.0 | 0.2 |
| Household Goods Stores | 8.8 | 3.6 | 0.4 | 2.0 | 0.2 |
| Other | 12.7 | 4.1 | 0.5 | 2.7 | 0.4 |
| Non-store Retailing | 5.3 | 5.5 | 0.3 | 4.0 | 0.2 |
| Automotive Fuel | 11.8 | -8.8 | -1.0 | -7.5 | -0.9 |
Cont.: Contribution
Sources: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/rsi/retail-sales/november-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 10.6 percent by Fri Dec 21, 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 | 12/21/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3189 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 12/21/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2352 |
| 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 1.3189/EUR on Dec 21, 2012 or by 10.6 percent {[(1.3189/1.192)-1]100 = 10.6%}. 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 6.2352/USD on Fri Dec 21, 2012, or by an additional 8.6 percent, for cumulative revaluation of 24.7 percent. The final row of Table VI-2 shows revaluation of the CNY in two of the past four weeks by 0.1 percent in the weeks of Dec 7 and 0.2 percent in the week of Dec 21; and depreciation by 0.3 percent in the week of Dec 14, 2012.
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 | 12/21/ |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.3189 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 12/21/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.2352 |
| Weekly Rates | 11/30/2012 | 12/7/2012 | 12/14/2012 | 12/21/ 2012 |
| CNY/USD | 6.2310 | 6.2254 | 6.2460 | 6.2352 |
| ∆% from Earlier Week* | 0.0 | 0.1 | -0.3 | 0.2 |
*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 Nov 9, 2012 in selected intervals on Fridays. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. The CNY was virtually unchanged relative to the USD by Aug 24, 2012 to CNY 6.3558/USD from the rate of CNY 6.3588/USD on Oct 28, 2011 and then revalued slightly by 1.1 percent to CNY 6.2858/USD on Sep 28, 2012. Devaluation of 0.6 percent from CNY 6.2858/USD on Sep 28, 2012 to CNY 6.3240/USD on Oct 5, 2012, reduced to 0.5 percent the cumulative revaluation from Oct 28, 2011 to Oct 5, 2012. Revaluation by 0.2 percent to CNY 6.2546/USD on Oct 12, 2012, revalued the CNY by 1.6 percent relative to the dollar from CNY 6.3588/USD on Oct 29, 2011. By Dec 21, 2012, the CNY revalued 1.9 percent to CNY 6.2352/USD relative to CNY 6.3588/USD on Oct 29, 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 | |
| 12/21/12 | 6.2352 | 1.9 |
| 12/14/12 | 6.2460 | 1.8 |
| 12/7/12 | 6.2254 | 2.1 |
| 11/30/12 | 6.2310 | 2.0 |
| 11/23/12 | 6.2328 | 2.0 |
| 11/16/12 | 6.2404 | 1.9 |
| 11/9/12 | 6.2452 | 1.8 |
| 11/2/12 | 6.2458 | 1.8 |
| 10/26/12 | 6.2628 | 1.5 |
| 10/19/12 | 6.2546 | 1.6 |
| 10/12/12 | 6.2670 | 1.4 |
| 10/5/12 | 6.3240 | 0.5 |
| 9/28/12 | 6.2858 | 1.1 |
| 9/21/12 | 6.3078 | 0.8 |
| 9/14/12 | 6.3168 | 0.7 |
| 9/7/12 | 6.3438 | 0.2 |
| 8/31/12 | 6.3498 | 0.1 |
| 8/24/12 | 6.3558 | 0.0 |
| 8/17/12 | 6.3589 | 0.0 |
| 8/10/12 | 6.3604 | 0.0 |
| 8/3/12 | 6.3726 | -0.2 |
| 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 Jan 3, 2000 to Dec 14, 2012 together with US recession dates in shaded areas. China fixed the CNY/USD rate for a long period as shown in the horizontal segment from 1995 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 but virtually disappeared in the rate of CNY 6.3589/USD on Aug 17, 2012 and was nearly unchanged at CNY 6.3558/USD on Aug 24, 2012. China then appreciated 0.2 percent in the week of Dec 21, 2012, to CNY 6.2352/USD for cumulative 1.9 percent revaluation from Oct 28, 2011. Revaluation of the CNY relative to the USD by 24.7 percent by Dec 21, 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 virtually stability in Table VI-2A with slight decrease or revaluation in the final segment.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (US), Jan 3, 1995-Dec 14, 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 G7 meeting in Washington on Apr 21 2006 of finance ministers and heads of central bank governors of the G7 established the “doctrine of shared responsibility” (G7 2006Apr):
“We, Ministers and Governors, reviewed a strategy for addressing global imbalances. We recognized that global imbalances are the product of a wide array of macroeconomic and microeconomic forces throughout the world economy that affect public and private sector saving and investment decisions. We reaffirmed our view that the adjustment of global imbalances:
- Is shared responsibility and requires participation by all regions in this global process;
- Will importantly entail the medium-term evolution of private saving and investment across countries as well as counterpart shifts in global capital flows; and
- Is best accomplished in a way that maximizes sustained growth, which requires strengthening policies and removing distortions to the adjustment process.
In this light, we reaffirmed our commitment to take vigorous action to address imbalances. We agreed that progress has been, and is being, made. The policies listed below not only would be helpful in addressing imbalances, but are more generally important to foster economic growth.
- In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.
- In Europe, further action is needed to implement structural reforms for labor market, product, and services market flexibility, and to encourage domestic demand led growth.
- In Japan, further action is needed to ensure the recovery with fiscal soundness and long-term growth through structural reforms.
Others will play a critical role as part of the multilateral adjustment process.
- In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, lessening reliance on export-led growth strategies, and actions to strengthen financial sectors.
- In oil-producing countries, accelerated investment in capacity, increased economic diversification, enhanced exchange rate flexibility in some cases.
- Other current account surplus countries should encourage domestic consumption and investment, increase micro-economic flexibility and improve investment climates.
We recognized the important contribution that the IMF can make to multilateral surveillance.”
The concern at that time was that fiscal and current account global imbalances could result in disorderly correction with sharp devaluation of the dollar after an increase in premiums on yields of US Treasury debt (see Pelaez and Pelaez, The Global Recession Risk (2007)). The IMF was entrusted with monitoring and coordinating action to resolve global imbalances. The G7 was eventually broadened to the formal G20 in the effort to coordinate policies of countries with external surpluses and deficits.
The database of the WEO (http://www.imf.org/external/datamapper/index.php?db=WEO) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2012 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 2012 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| US | 15653 | -7.8 | -3.1 | 80.3 | -2.2 | -3.2 | 89.5 |
| Japan | 5984 | -8.9 | 2.0 | 126.4 | -4.6 | 2.4 | 152.4 |
| UK | 2434 | -5.7 | -1.9 | 76.6 | -1.5 | -1.5 | 91.5 |
| Euro | 15653 | -1.5 | 0.4 | 68.0 | 1.2 | 1.5 | 74.4 |
| Ger | 3366 | 0.9 | 5.7 | 55.3 | 1.2 | 4.4 | 56.2 |
| France | 2580 | -2.7 | -1.9 | 78.8 | 0.4 | -1.2 | 86.1 |
| Italy | 1980 | 0.8 | -3.2 | 99.6 | 4.2 | -1.2 | 102.4 |
| Can | 1770 | -3.9 | -2.8 | 33.1 | -1.3 | -3.5 | 37.8 |
| China | 8250 | -1.2 | 2.8 | 25.8 | -0.1 | 3.2 | 14.9 |
| Brazil | 2425 | 3.1 | -2.1 | 34.4 | 3.1 | -3.3 | 28.7 |
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: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The current account of the US balance of payments is provided in Table IIB-1 for IIIQ2011 and IIIQ2012. 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 $128.2 billion in IIIQ2011, or 3.4 percent of GDP, to $128.3 billion in IIIQ2012, or 3.3 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 but is combined now with much higher imbalance in the Treasury budget (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
| IIIQ2011 | IIIQ2012 | Difference | |
| Goods Balance | -202,153 | -196,249 | 5,904 |
| X Goods | 378,454 | 382,877 | 1.2 ∆% |
| M Goods | -580,607 | -579,126 | -0.3 ∆% |
| Services Balance | 48,571 | 52,218 | 3,647 |
| X Services | 161,319 | 165,492 | 2.6 ∆% |
| M Services | -112,747 | -113,273 | 0.5 ∆% |
| Balance Goods and Services | -153,581 | -144,031 | 9,550 |
| Balance Income | 57,934 | 50,271 | -7,663 |
| Unilateral Transfers | -32,525 | -34,510 | -1,985 |
| Current Account Balance | -128,172 | -128,270 | -98 |
| % GDP | IIIQ2011 | IVQ2011 | IIIQ2012 |
| 3.4 | 3.1 | 3.3 |
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 alternative fiscal scenario of the CBO (2012NovCDR) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.
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 the 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 2012NovCDR) estimates the federal deficit in 2012 at $1089 billion or 7.7 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html). The combined record federal deficits of the US from 2009 to 2012 are $5092 billion or 33 percent of the estimate of GDP of $15,538 billion for fiscal year 2012 by the CBO (http://www.cbo.gov/publication/43542 2012AugBEO). The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5092 trillion in four years, using the fiscal year deficit of $1089.4 billion for fiscal year 2012 (http://www.fms.treas.gov/mts/mts0912.txt), which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5092 billion. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 72.6 percent of GDP in 2012 (CBO2012AugBEO, CBO2012NovCDR). 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 & | -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 | 13974 | 14499 | 15076 |
| Current Account % GDP | -3.8 | -5.1 | -4.7 | -2.7 | -3.1 | -3.1 |
| NIIP | -1337 | -1796 | -3260 | -2321 | -2474 | -4030 |
| US Owned Assets Abroad | 6239 | 18399 | 19464 | 18512 | 20298 | 21132 |
| Foreign Owned Assets in US | 7576 | 20195 | 22724 | 20833 | 22772 | 25162 |
| NIIP % GDP | -13.4 | -12.8 | -22.8 | -16.6 | -17.1 | 26.7 |
| Exports | 1425 | 2488 | 2657 | 2181 | 2519 | 2848 |
| NIIP % | -94 | -72 | -123 | -106 | -98 | -142 |
| DIA MV | 2694 | 5274 | 3102 | 4287 | 4767 | 4450 |
| DIUS MV | 2783 | 3551 | 2486 | 2995 | 3397 | 3509 |
| Fiscal Balance | +236 | -161 | -459 | -1413 | -1294 | -1297 |
| Fiscal Balance % GDP | +2.4 | -1.2 | -3.2 | -10.1 | -9.0 | -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 | 3603 |
| ∆% | 5.1 | 2.8 | 9.3 | 17.9 | -1.8 | 4.3 |
| % GDP | 18.2 | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 |
| Federal Revenue | 2052 | 2568 | 2524 | 2105 | 2162 | 2302 |
| ∆% | 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 the 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
Budget, Congressional Budget Office http://www.cbo.gov/
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 (2012WEOOct) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSROct) (http://www.imf.org/external/pubs/ft/gfsr/2012/02/index.htm) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMOct) (http://www.imf.org/external/pubs/ft/fm/2012/02/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks, which are analyzed in the comments of this blog.
Economic risks include the following:
1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.6 percent, which is the lowest since the global recession. GDP in China increased 2.2 percent in IIIQ2012 relative to IIQ2012, or annual equivalent of 9.1 percent, and 7.4 percent relative to IIQ2011 (See Subsection VC at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united_21.html). There is also ongoing political development in China during a decennial political reorganization with new leadership (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). 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 1.59 percent in the first three quarters of 2012, which is equivalent to 2.1 percent per year (Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 28.6 million people. (ii) The labor market continues fractured with 28.6 million unemployed or underemployed (Section I at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html
and earlier http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5092 billion in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012, which is the worst fiscal performance since World War II (Section I at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier Section IB at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.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 (Table IB-3 at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html and CBO 2012AugBEO http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf iv) at 72.6 percent in 2012. The CBO (2012AugBEO, CBO2012NovCDR) 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 89.7 percent by 2022 (Table IB-6 at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html). 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 grew 3.4 percent in IQ2012 relative to a year earlier, 1.4 percent in IQ2012 relative to IVQ2011, 0.0 percent in IIQ2012 relative to IQ2011 and contracted 0.9 percent in IIIQ2012, increasing 0.5 percent relative to a year earlier (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). The euro zone’s GDP was flat in IQ2012 and fell 0.1 percent relative to a year earlier in IQ2011 but fell 0.2 percent in IIQ2012 and declined 0.5 percent relative to IIQ2011, falling 0.1 percent in IIIQ2012 and declining 0.6 percent relative to a year earlier; Germany’s GDP grew 0.5 percent in IQ2012 and 1.7 percent relative to IQ2011, increasing 0.3 percent in IIQ2012 and 0.5 percent relative to IIQ2011 and growing 0.2 percent in IIIQ2012 with growth of 0.4 percent relative to a year earlier; and the UK’s GDP fell 0.4 percent in IVQ2011, 0.3 percent in IQ2012 and 0.4 percent in IIQ2012 for cumulative decline of 1.1 percent in three consecutive quarters at annual equivalent rate of minus 1.5 percent and declined 0.5 percent in IIQ2012 relative to IIQ2011. In IIIQ2012, the UK grew 1.0 percent relative to IIQ2012 and fell 0.1 percent relative to IIIQ2011. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section II http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.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 of their currencies. 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 36.2 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Dec 21, 2012, and the S&P 500 has gained 39.9 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:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (1)
Equation (1) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+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 Rt, 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) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
At its meeting on Jan 25, 2012, 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:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/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 12/21/12,” which has been recently stalling or reversing amidst bouts of 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). Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Risk appetite continued in the week of Aug 3, 2012, in expectation of purchases of sovereign bonds by the ECB. Growth of China’s exports by 1.0 percent in the 12 months ending in Jul 2012 released in the week of Aug 10, 2012, together with doubts on the purchases of bonds by the ECB injected a mild dose of risk aversion. There was optimism on the resolution of the European debt crisis on Aug 17, 2012. The week of Aug 24, 2012 had alternating shocks of risk aversion and risk appetite from the uncertainties of success of the Greek adjustment program, the coming decision of the Federal Constitutional Court of Germany on the European Stability Mechanism, disagreements between the Deutsche Bundesbank and the European Central Bank on purchase of sovereign bonds of highly indebted euro area member countries and the exchange of letters between Darrell E. Issa (2012Aug1), Chairman of the House Committee on Oversight and Government Reform, and Chairman Bernanke (2012Aug22) on monetary policy. Bernanke (2012JHAug31) and Draghi (2012Aug29) generated risk enthusiasm in the week of Aug 31, 2012. Risk appetite returned in the week of Sep 7, 2012, with the announcement of the bond-buying program of OMT (Outright Monetary Transactions) on Sep 6, 2012, by the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Valuations of risk financial assets increased sharply after the statement of the FOMC on Sep 13, 2012 with open-ended quantitative easing and self-imposed single-mandate of jobs that would maintain easing monetary policy well after the economy returns to full potential. Risk aversion returned in the week of Sep 21, 2012 on doubts about the success of quantitative easing and weakness in flash purchasing managers’ indices. Risk aversion returned in the week of Sep 28, 2012, because of uncertainty on the consequences of a bailout of Spain and weakness of central banks in controlling financial turbulence but was followed by risk appetite in the week of Oct 5, aversion in the week of Oct 12 and mixed views in the week of Oct 19. Revenue declines for reporting companies caused decline of stocks in the week of Oct 26. Continuing risk aversion originates in the week of Nov 9 from the unresolved European debt crisis, world economic slowdown and low growth with fiscal challenges in the United States. Risk aversion continued in the week of Nov 16 with the unresolved European debt crisis, world economic slowdown and the unsustainable deficit/debt of the US threatening prosperity. Risk appetite returned in the Thanksgiving week with expectations of a deal for avoiding expenditure reductions and tax increases in the US in 2013. Risks doubts returned in some markets in the week of Nov 30 with impasse in fiscal negotiations in the US and sovereign debt doubts in Europe. Increase in China’s purchasing managers’ indexes stimulated markets that did not react adversely to downgrades of growth by the Deutsche Bundesbank and the European Central Bank in the week of Dec 7, 2012. The flash HSBC manufacturing PMI index showing the highest reading in 14 months also supported Chinese stocks. Unsustainable deficit/debt in the United States is dominating financial/economic risk perceptions in the week of Dec 21, 2012. The highest valuations in column “∆% Trough to 12/21/12” are by US equities indexes: DJIA 36.2 percent and S&P 500 39.9 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 13,661.87 on Oct 5, 2012, 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 12/21/12” had double digit gains relative to the trough around Jul 2, 2010 but now some valuations of equity indexes show varying behavior: China’s Shanghai Composite is 9.6 percent below the trough; Japan’s Nikkei Average is 12.6 percent above the trough; DJ Asia Pacific TSM is 13.8 percent above the trough; Dow Global is 17.4 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 12.8 percent above the trough; and NYSE Financial is 20.0 percent above the trough. DJ UBS Commodities is 12.3 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 34.7 percent above the trough. Japan’s Nikkei Average is 12.6 percent above the trough on Aug 31, 2010 and 12.8 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9940.06 on Fri Dec 21, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 3.1 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 10.6 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 12/21/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Dec 21, 2012 such as 1.3 percent for Dow Global, 2.8 percent for NYSE Financial, 0.1 percent for STOXX 50, 0.5 percent for DAX and 0.7 percent for DJ Asia Pacific TSM. Nikkei Average increased 2.1 percent in the week. DJ UBS Commodities decreased 0.9 percent. China’s Shanghai Composite increased 0.1 percent in the week of Dec 14, 2012. The DJIA increased 0.4 percent and S&P 500 increased 1.2 percent. The USD depreciated 0.2 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 12/21/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Dec 21, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 12/21/12” but also relative to the peak in column “∆% Peak to 12/21/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 17.7 percent, S&P 500 17.5 percent and DAX 20.6 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 4.4 percent, Nikkei Average by 12.8 percent, Shanghai Composite by 31.9 percent, DJ Asia Pacific by 0.4 percent, STOXX 50 by 4.5 percent and Dow Global by 4.2 percent. DJ UBS Commodities Index is now 4.0 percent below the peak. The US dollar strengthened 12.8 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. Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. It may be quite painful to exit QE∞ or use of the balance sheet of the central together with zero interest rates forever. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image009[1]](http://lh4.ggpht.com/-RJkhY0BhMTk/UNh8-yiM6lI/AAAAAAAAO3g/fBaAIH2UCQ4/s1600-h/clip_image009%25255B1%25255D%25255B2%25255D.gif "clip_image009[1]"){kind=small}
declines. Equally, decline in expected revenue from the stock or project, Rτ, causes decline in valuation. 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 12/21/ /12 | ∆% Week 12/21/12 | ∆% Trough to 12/21/ 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 17.7 | 0.4 | 36.2 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 17.5 | 1.2 | 39.9 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -4.4 | 2.8 | 20.0 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -4.2 | 1.3 | 17.4 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -0.4 | 0.7 | 13.8 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -12.8 | 2.1 | 12.6 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -31.9 | 0.1 | -9.6 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -4.5 | 0.1 | 12.8 |
| DAX | 4/26/ | 5/25/ | -10.5 | 20.6 | 0.5 | 34.7 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 12.8 | -0.2 | -10.6 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -4.0 | -0.9 | 12.3 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.770 |
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 Nov 30, 2012, shows that the S&P 500 is now 18.0 percent above the Apr 26, 2010 level and the DJIA is 17.7 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 | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 1 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 8 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16 | -2.6 | 5.9 | -2.8 | 0.6 |
| Dec 23 | 3.6 | 9.7 | 3.7 | 4.4 |
| Dec 30 | -0.6 | 9.0 | -0.6 | 3.8 |
| Jan 6 2012 | 1.2 | 10.3 | 1.6 | 5.4 |
| Jan 13 | 0.5 | 10.9 | 0.9 | 6.4 |
| Jan 20 | 2.4 | 13.5 | 2.0 | 8.5 |
| Jan 27 | -0.5 | 13.0 | 0.1 | 8.6 |
| Feb 3 | 1.6 | 14.8 | 2.2 | 11.0 |
| Feb 10 | -0.5 | 14.2 | -0.2 | 10.8 |
| Feb 17 | 1.2 | 15.6 | 1.4 | 12.3 |
| Feb 24 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
| Apr 6 | -1.1 | 16.6 | -0.7 | 15.3 |
| Apr 13 | -1.6 | 14.7 | -2.0 | 13.1 |
| 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 |
| Aug 3 | 0.2 | 16.9 | 0.4 | 14.8 |
| Aug 10 | 0.9 | 17.9 | 1.1 | 16.0 |
| Aug 17 | 0.5 | 18.5 | 0.9 | 17.0 |
| Aug 24 | -0.9 | 17.4 | -0.5 | 16.4 |
| Aug 31 | -0.5 | 16.8 | -0.3 | 16.0 |
| Sep 7 | 1.6 | 18.8 | 2.2 | 18.6 |
| Sep 14 | 2.2 | 21.3 | 1.90 | 20.9 |
| Sep 21 | -0.1 | 21.2 | -0.4 | 20.5 |
| Sep 28 | -1.0 | 19.9 | -1.3 | 18.9 |
| Oct 5 | 1.3 | 21.5 | 1.4 | 20.5 |
| Oct 12 | -2.1 | 18.9 | -2.2 | 17.9 |
| Oct 19 | 0.1 | 19.1 | 0.3 | 18.3 |
| Oct 26 | -1.8 | 17.0 | -1.5 | 16.5 |
| Nov 2 | -0.1 | 16.9 | 0.2 | 16.7 |
| Nov 9 | -2.1 | 14.4 | -2.4 | 13.8 |
| Nov 16 | -1.8 | 12.3 | -1.4 | 12.2 |
| Nov 23 | 3.3 | 16.1 | 3.6 | 16.3 |
| Nov 30 | 0.1 | 16.2 | 0.5 | 16.8 |
| Dec 7 | 1.0 | 17.4 | 0.1 | 17.0 |
| Dec 14 | -0.2 | 17.2 | -0.3 | 16.6 |
| Dec 21 | 0.4 | 17.7 | 1.2 | 18.0 |
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 18.7 percent to ZAR 8.5901/USD on Dec 21, 2012, which is still 25.8 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 9.4 percent stronger at SGD 1.2208/USD on Dec 21, 2012 relative to the trough of depreciation but still stronger by 21.4 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 19.7 percent relative to the trough to BRL 2.0793/USD on Dec 21, 2012 but still stronger by 14.4 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for nine consecutive meeting (http://www.bcb.gov.br/?INTEREST) of its monetary policy committee, COPOM, but made no changes in its most recent meeting (http://www.bcb.gov.br/textonoticia.asp?codigo=3694&IDPAI=NEWS):
“Copom maintains the Selic rate at 7.25 percent
28/11/2012 8:07:00 PM
Brasília - The Copom unanimously decided to maintain the Selic rate to 7.25 percent.”
The Selic rate has been lowered from 12.50 percent on Jul 20, 2011 to 7.25 percent on Oct 11, 2012 (http://www.bcb.gov.br/?INTEREST). 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 | Dec 21, 2012 | ∆% T Dec 21, 2012 | ∆% P Dec 21, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 12/21/ 2012 | |||
| Rate | 1.59 | 1.192 | 1.3189 | |||
| ∆% | -33.4 | 9.6 | -20.6 | |||
| JPY USD | 8/18 | 9/15 | 12/21/ 2012 | |||
| Rate | 110.19 | 83.07 | 84.24 | |||
| ∆% | 24.6 | -1.4 | 23.6 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 12/21/ 2012 | |||
| Rate | 1.225 | 1.025 | 0.9156 | |||
| ∆% | 16.3 | 10.7 | 25.3 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 12/21/ 2012 | |||
| Rate | 2.006 | 1.388 | 1.6172 | |||
| ∆% | -44.5 | 14.2 | -24.1 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 12/21/ | |||
| Rate | 1.0215 | 1.6639 | 1.0402 | |||
| ∆% | -62.9 | 42.2 | 5.9 | |||
| ZAR USD | 10/22 2008 | 8/15 | 12/21/ 2012 | |||
| Rate | 11.578 | 7.238 | 8.5901 | |||
| ∆% | 37.5 | -18.7 | 25.8 | |||
| SGD USD | 3/3 | 8/9 | 12/21/ | |||
| Rate | 1.553 | 1.348 | 1.2208 | |||
| ∆% | 13.2 | 9.4 | 21.4 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 12/21/ | |||
| Rate | 7.813 | 7.752 | 7.7502 | |||
| ∆% | 0.8 | 0.0 | 0.8 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 12/21/ 2012 | |||
| Rate | 2.43 | 1.737 | 2.0793 | |||
| ∆% | 28.5 | -19.7 | 14.4 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 12/21/ | |||
| Rate | 22.19 | 18.693 | 19.065 | |||
| ∆% | 15.7 | -2.0 | 14.1 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 12/21/ 2012 | |||
| Rate | 9.313 | 7.108 | 6.5522 | |||
| ∆% | 23.7 | 7.8 | 29.6 | |||
| CNY USD | 7/20 2005 | 7/15 | 12/21/ | |||
| Rate | 8.2765 | 6.8211 | 6.2352 | |||
| ∆% | 17.6 | 8.6 | 24.7 |
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 0.01 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 Jan 4, 1999 to Dec 14, 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/EUR on May 3, 2011. The rate appreciated 11.7 percent to USD 1.3134/EUR on Dec 14, 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), Jan 4, 1999 to Dec 14, 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-3 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
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
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 1971 to Dec 2012. The first data point on the extreme left is JPY 358.0200/USD for Jan 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 82.6110/USD in Dec 2012 for appreciation of 33.4 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, Jan 1971-Dec 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 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
Zero interest rates in the United States forever tend to depreciate the dollar against every other currency if there is no risk aversion preventing portfolio rebalancing toward risk financial assets, which include the capital markets and exchange rates of emerging-market economies. The objective of unconventional monetary policy as argued by Yellen 2011AS) is to devalue the dollar to increase net exports that increase US economic growth. Increasing net exports and internal economic activity in the US is equivalent to decreasing net exports and internal economic activity in other countries.
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 1.2074/USD on Jan 4, 1999 to BRL 2.0800/USD on Dec 14, 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 2.0827/USD on Dec 14, 2012 for depreciation of 35.5 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) Jan 4, 1999 to Dec 14, 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 Dec 14, 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 1.770 percent at the close of market on Fri Dec 21, 2012 would be equivalent to price of 107.8045 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 6.5 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. The price loss between Sep 7, 2012 and Sep 14, 2012 would have been 1.7 percent in just five trading days. 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 72.6 percent of GDP in 2012 (Section I 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 (see Table IB-2 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html). On Dec 19, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2902 billion, or $2.9 trillion, with portfolio of long-term securities of $2660 billion, or $2.7 trillion, consisting of $1573 billion Treasury nominal notes and bonds, $75 billion of notes and bonds inflation-indexed, $79 billion Federal agency debt securities and $933 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1483 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply
Table VI-7, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note
| Date | Yield | Price | ∆% 11/04/10 |
| 05/01/01 | 5.510 | 78.0582 | -22.9 |
| 06/10/03 | 3.112 | 95.8452 | -5.3 |
| 06/12/07 | 5.297 | 79.4747 | -21.5 |
| 12/19/08 | 2.213 | 104.4981 | 3.2 |
| 12/31/08 | 2.240 | 103.4295 | 2.1 |
| 03/19/09 | 2.605 | 100.1748 | -1.1 |
| 06/09/09 | 3.862 | 89.8257 | -11.3 |
| 10/07/09 | 3.182 | 95.2643 | -5.9 |
| 11/27/09 | 3.197 | 95.1403 | -6.0 |
| 12/31/09 | 3.835 | 90.0347 | -11.1 |
| 02/09/10 | 3.646 | 91.5239 | -9.6 |
| 03/04/10 | 3.605 | 91.8384 | -9.3 |
| 04/05/10 | 3.986 | 88.8726 | -12.2 |
| 08/31/10 | 2.473 | 101.3338 | 0.08 |
| 10/07/10 | 2.385 | 102.1224 | 0.8 |
| 10/28/10 | 2.658 | 99.7119 | -1.5 |
| 11/04/10 | 2.481 | 101.2573 | - |
| 11/15/10 | 2.964 | 97.0867 | -4.1 |
| 11/26/10 | 2.869 | 97.8932 | -3.3 |
| 12/03/10 | 3.007 | 96.7241 | -4.5 |
| 12/10/10 | 3.324 | 94.0982 | -7.1 |
| 12/15/10 | 3.517 | 92.5427 | -8.6 |
| 12/17/10 | 3.338 | 93.9842 | -7.2 |
| 12/23/10 | 3.397 | 93.5051 | -7.7 |
| 12/31/10 | 3.228 | 94.3923 | -6.7 |
| 01/07/11 | 3.322 | 94.1146 | -7.1 |
| 01/14/11 | 3.323 | 94.1064 | -7.1 |
| 01/21/11 | 3.414 | 93.4687 | -7.7 |
| 01/28/11 | 3.323 | 94.1064 | -7.1 |
| 02/04/11 | 3.640 | 91.750 | -9.4 |
| 02/11/11 | 3.643 | 91.5319 | -9.6 |
| 02/18/11 | 3.582 | 92.0157 | -9.1 |
| 02/25/11 | 3.414 | 93.3676 | -7.8 |
| 03/04/11 | 3.494 | 92.7235 | -8.4 |
| 03/11/11 | 3.401 | 93.4727 | -7.7 |
| 03/18/11 | 3.273 | 94.5115 | -6.7 |
| 03/25/11 | 3.435 | 93.1935 | -7.9 |
| 04/01/11 | 3.445 | 93.1129 | -8.0 |
| 04/08/11 | 3.576 | 92.0635 | -9.1 |
| 04/15/11 | 3.411 | 93.3874 | -7.8 |
| 04/22/11 | 3.402 | 93.4646 | -7.7 |
| 04/29/11 | 3.290 | 94.3759 | -6.8 |
| 05/06/11 | 3.147 | 95.5542 | -5.6 |
| 05/13/11 | 3.173 | 95.3387 | -5.8 |
| 05/20/11 | 3.146 | 95.5625 | -5.6 |
| 05/27/11 | 3.068 | 96.2089 | -4.9 |
| 06/03/11 | 2.990 | 96.8672 | -4.3 |
| 06/10/11 | 2.973 | 97.0106 | -4.2 |
| 06/17/11 | 2.937 | 97.3134 | -3.9 |
| 06/24/11 | 2.872 | 97.8662 | -3.3 |
| 07/01/11 | 3.186 | 95.2281 | -5.9 |
| 07/08/11 | 3.022 | 96.5957 | -4.6 |
| 07/15/11 | 2.905 | 97.5851 | -3.6 |
| 07/22/11 | 2.964 | 97.0847 | -4.1 |
| 07/29/11 | 2.795 | 98.5258 | -2.7 |
| 08/05/11 | 2.566 | 100.5175 | -0.7 |
| 08/12/11 | 2.249 | 103.3504 | 2.1 |
| 08/19/11 | 2.066 | 105.270 | 3.7 |
| 08/26/11 | 2.202 | 103.7781 | 2.5 |
| 09/02/11 | 1.992 | 105.7137 | 4.4 |
| 09/09/11 | 1.918 | 106.4055 | 5.1 |
| 09/16/11 | 2.053 | 101.5434 | 0.3 |
| 09/23/11 | 1.826 | 107.2727 | 5.9 |
| 09/30/11 | 1.912 | 106.4602 | 5.1 |
| 10/07/11 | 2.078 | 104.9161 | 3.6 |
| 10/14/11 | 2.251 | 103.3323 | 2.0 |
| 10/21/11 | 2.220 | 103.6141 | 2.3 |
| 10/28/11 | 2.326 | 102.6540 | 1.4 |
| 11/04/11 | 2.066 | 105.0270 | 3.7 |
| 11/11/11 | 2.057 | 105.1103 | 3.8 |
| 11/18/11 | 2.003 | 105.6113 | 4.3 |
| 11/25/11 | 1.964 | 105.9749 | 4.7 |
| 12/02/11 | 2.042 | 105.2492 | 3.9 |
| 12/09/11 | 2.065 | 105.0363 | 3.7 |
| 12/16/11 | 1.847 | 107.0741 | 5.7 |
| 12/23/11 | 2.027 | 105.3883 | 4.1 |
| 12/30/11 | 1.871 | 106.8476 | 5.5 |
| 01/06/12 | 1.957 | 106.0403 | 4.7 |
| 01/13/12 | 1.869 | 106.8664 | 5.5 |
| 01/20/12 | 2.026 | 105.3976 | 4.1 |
| 01/27/12 | 1.893 | 106.6404 | 5.3 |
| 02/03/12 | 1.923 | 106.3586 | 5.0 |
| 02/10/12 | 1.974 | 105.8815 | 4.6 |
| 02/17/12 | 2.000 | 105.6392 | 4.3 |
| 02/24/12 | 1.977 | 105.8535 | 4.5 |
| 03/02/12 | 1.977 | 105.8535 | 4.5 |
| 03/09/12 | 2.031 | 105.3512 | 4.0 |
| 03/16/12 | 2.294 | 102.9428 | 1.7 |
| 03/23/12 | 2.234 | 103.4867 | 2.2 |
| 03/30/12 | 2.214 | 103.6687 | 2.4 |
| 04/06/12 | 2.058 | 105.1010 | 3.8 |
| 04/13/12 | 1.987 | 105.7603 | 4.4 |
| 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 |
| 08/03/12 | 1.569 | 109.7380 | 8.4 |
| 08/10/12 | 1.658 | 108.8771 | 7.5 |
| 08/17/12 | 1.814 | 107.3864 | 6.1 |
| 08/24/12 | 1.684 | 108.6270 | 7.3 |
| 08/31/12 | 1.543 | 109.9910 | 8.6 |
| 9/7/12 | 1.668 | 108.7808 | 7.4 |
| 9/14/12 | 1.863 | 106.9230 | 5.6 |
| 9/21/12 | 1.753 | 107.9666 | 6.6 |
| 9/28/12 | 1.631 | 109.1375 | 7.8 |
| 10/05/12 | 1.737 | 108.1193 | 6.8 |
| 10/12/12 | 1.663 | 108.8290 | 7.5 |
| 10/19/12 | 1.766 | 107.8426 | 6.5 |
| 10/26/12 | 1.748 | 108.0143 | 6.7 |
| 11/02/12 | 1.715 | 108.3297 | 7.0 |
| 11/09/12 | 1.614 | 109.3018 | 7.9 |
| 11/16/12 | 1.584 | 109.5924 | 8.2 |
| 11/23/12 | 1.691 | 108.5598 | 7.2 |
| 11/30/12 | 1.612 | 109.3211 | 7.9 |
| 12/7/12 | 1.625 | 109.1954 | 7.8 |
| 12/14/12 | 1.704 | 108.4351 | 7.1 |
| 12/21/12 | 1.770 | 107.8045 | 6.5 |
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
Table VI-7A provides the maturity distribution and average length in months of marketable interest-bearing debt held by private investors from 2007 to Jun 2012. Total debt increased from $3635 billion in 2007 to $8793 billion in Jun 2012 or increase by 141.9 percent. There are two concerns with the maturity distribution of US debt. (1) Growth of debt is moving total debt to the point of saturation in investors’ portfolio. In a new environment of risk appetite and nonzero fed funds rates with economic growth at historical trend of around 3 percent, yields on risk financial assets are likely to increase. Placement of new debt may require increasing interest rates in an environment of continuing placement of debt by the US Treasury without strong fiscal constraints. (2) Refinancing of maturing debt is likely to occur in an environment of higher interest rates, exerting pressure on future fiscal budgets. In Jun 2012, $2808 billion or 31.9 percent of outstanding debt held by investors matures in less than a year and $3668 billion or 41.7 percent of total debt matures in one to five years. Debt maturing in five years or less adds to $6476 billion or 73.7 percent of total outstanding debt held by investors of $8793 billion. This historical episode may be remembered as one in which the US managed its government debt with short-dated instruments during record low long-dated yields and on the verge of fiscal pressures on all interest rates, which kind of maximizes over time interest payments on government debt by taxpayers that is precisely the opposite of the objective of sound debt management and taxpayer welfare.
Table VI-7A, Maturity Distribution and Average Length in Months of Marketable Interest-Bearing Public Debt Held by Private Investors, Billions of Dollars
| End of Fiscal Year or Month | 2007 | 2008 | 2009 | 2010 | 2011 | Jun 2012 |
| Total* | 3635 | 4745 | 6229 | 7676 | 7951 | 8793 |
| <1 Year | 1176 | 2042 | 2605 | 2480 | 2504 | 2808 |
| 1-5 Years | 1310 | 1468 | 2075 | 2956 | 3085 | 3668 |
| 5-10 Years | 678 | 719 | 995 | 1529 | 1544 | 1502 |
| 10-20 Years | 292 | 352 | 351 | 341 | 309 | 285 |
| >20 Years | 178 | 163 | 204 | 371 | 510 | 529 |
| Average | 58 | 49 | 49 | 57 | 60 | 56 |
*Amount Outstanding Privately Held
Source: United States Treasury. 2012Sep. Treasury Bulletin. Washington, DC, Sep 2012.
https://www.fms.treas.gov/bulletin/index.html
Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury from Jan 3, 1977 to Dec 18, 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 1.84 percent on Dec 18, 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 investors 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, Jan 3, 1977 to Dec 18, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Chart VI-9 of the Board of Governors of the Federal Reserve System provides securities held outright by Federal Reserve banks from 2002 to 2012. The first data point in Chart VI-9 is the level for Dec 18, 2002 of $629,407 million and the final data point in Chart VI-9 is level of $2,671,525 million on Dec 19, 2012.
Chart VI-9, US, Securities Held Outright by Federal Reserve Banks, Wednesday Level, Dec 18, 2002 to Dec 19, 2012, USD Millions
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
Chart VI-10 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jan 3, 1979, at 8.34 percent per year, to Dec 20, 2012, at 0.17 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1930s (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 fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart VI-10 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart VI-10 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart VI-10. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart VI-10 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 0.17 percent on Dec 20, 2012. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. Current policy consists of forecast mandate of maintaining policy accommodation until the forecast of the rate of unemployment reaches 6.5 percent and the rate of personal consumption expenditures excluding food and energy reaches 2.5 percent (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm). It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 8.34 percent on Jan 3, 1979, at the beginning point in Chart VI-10, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). There is not a fiscal cliff ahead but rather free fall into a fiscal abyss. The combination of the fiscal abyss with zero interest rates could trigger the risk premium on Treasury debt or Himalayan hike in interest rates.
Chart VI-10, US, Fed Funds Rate, Business Days, Jan 3, 1979 to Dec 20, 2012, Percent per Year
Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h15/
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 VI-7B 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 VI-7B 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 VI-7B, 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
VII Economic Indicators. Crude oil input in refineries increased 1.2 percent to 15,391 thousand barrels per day on average in the four weeks ending on Dec 14, 2012 from 15,215 thousand barrels per day in the four weeks ending on Dec 7, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 90.3 percent on Dec 14, 2012, which is higher than 89.2 percent on Dec 16, 2011 and marginally higher than 89.2 percent on Dec 7, 2012. Imports of crude oil increased 1.9 percent from 8,112 thousand barrels per day on average in the four weeks ending on Dec 7 to 8,269 thousand barrels per day in the week of Dec 14. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.4 million barrels per day last week, down by 100 thousand barrels per day from the previous week [Dec 7]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Marginally higher utilization in refineries with increasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 1.0 million barrels from 372.6 million barrels on Dec 7 to 371.6 million barrels on Dec 14. Motor gasoline production decreased 0.8 percent to 8,931 thousand barrels per day in the week of Dec 14 from 9,006 thousand barrels per day on average in the week of Dec 7. Gasoline stocks increased 2.2 million barrels and stocks of fuel oil decreased 1.1 million barrels. Supply of gasoline decreased from 8,772 thousand barrels per day on Dec 16, 2011, to 8,472 thousand barrels per day on Dec, 14, 2012, or by 2.9 percent, while fuel oil supply decreased 2.7 percent. Part of the fall in consumption of gasoline has been due to high prices and part to the growth recession. WTI crude oil price traded at $86.32/barrel on Dec 14, 2012, decreasing 7.7 percent relative to $93.55/barrel on Dec 16, 2011. Gasoline prices increased 0.8 percent from Dec 19, 2011 to Dec 17, 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 | 12/14/12 | 12/7/12 | 12/16/11 |
| Crude Oil Refineries Input | 15,391 Week ∆%: +1.2 | 15,215 | 14,768 |
| Refinery Capacity Utilization % | 90.3 | 89.2 | 85.6 |
| Motor Gasoline Production | 8,931 Week ∆%: -0.8 | 9,006 | 9,312 |
| Distillate Fuel Oil Production | 4,762 Week ∆%: +1.1% | 4,710 | 4,961 |
| Crude Oil Imports | 8,269 Week ∆%: +1.9 | 8,112 | 8,564 |
| Motor Gasoline Supplied | 8,472 ∆% 2012/2011= -2.9% | 8,542 | 8,722 |
| Distillate Fuel Oil Supplied | 3,774 ∆% 2012/2011 = -2.7% | 3,771 | 3,878 |
| 12/14/12 | 12/7/12 | 12/16/11 | |
| Crude Oil Stocks | 371.6 ∆= -1.0 MB | 372.6 | 323.6 |
| Motor Gasoline Million B | 219.3 ∆= +2.2 MB | 217.1 | 218.4 |
| Distillate Fuel Oil Million B | 117.0 | 118.1 | 139.1 |
| WTI Crude Oil Price $/B | 86.32 ∆% 2012/2011 -7.7 | 85.45 | 93.55 |
| 12/17/12 | 12/10/12 | 12/19/11 | |
| Regular Motor Gasoline $/G | 3.254 ∆% 2012/2011 | 3.349 | 3.229 |
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 of the US Energy Information Administration (EIA) provides distillate fuel oil stocks from 2011 to 2012. There was sharp downward trend from 2011 into 2012 followed by fluctuating upward trend.
Chart VII-2, US, Distillate Fuel Oil Stocks
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 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 followed by some recovery.
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 increased 17,000 from 344,000 on Dec 8, 2012, to 361,000 on Dec 15. Claims not adjusted for seasonality decreased 28,766 from 429,188 on Dec 8, 2012 to 400.422 on Dec 15, 2012. Strong seasonality is preventing clear analysis of labor markets and data incorporate effects of hurricane Sandy.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Dec 15, 2012 | 361,000 | 400,422 | 367,750 |
| Dec 8, 2012 | 344,000 | 429,188 | 381,500 |
| Change | 17,000 | -28,766 | -13,750 |
| Dec 1, 2012 | 371,000 | 500,163 | 408,250 |
| Prior Year | 370,000 | 421,103 | 380,750 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm#.UNYW-ORZWwa
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 561,655 on Dec 12, 2009 to 435,863 on Dec 10, 2011, and 421,103 on Dec 15, 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/2012/12/recovery-without-hiring-forecast-growth.html) and there is continuing unemployment and underemployment of 28.6 million or 17.7 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Dec 15, 2001 | 440,906 | 389,000 |
| Dec 14, 2002 | 486,258 | 429,000 |
| Dec 13, 2003 | 412,627 | 363,000 |
| Dec 11, 2004 | 370,604 | 316,000 |
| Dec 10, 2005 | 391,961 | 327,000 |
| Dec 16, 2006 | 361,672 | 318,000 |
| Dec 15, 2007 | 393,042 | 350,000 |
| Dec 13, 2008 | 629,867 | 565,000 |
| Dec 12, 2009 | 561,655 | 500,000 |
| Dec 11, 2010 | 491,776 | 430,000 |
| Dec 10, 2011 | 435,863 | 371,000 |
| Dec 15, 2012 | 421,103 | 370,000 |
Source: http://www.ows.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 three months Sep-Nov 2012, CPI inflation for all items seasonally adjusted was 1.6 percent in annual equivalent, obtained by compounding inflation in Sep-Nov 2012 and assuming it would be repeated for a full year. In the 12 months ending in Nov, CPI inflation of all items not seasonally adjusted was 1.8 percent. Inflation in Nov 2012 seasonally adjusted was minus 0.3 percent relative to Oct 2012, or minus 3.5 percent annual equivalent (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 1.9 percent in 12 months and 1.6 percent in annual equivalent Sep-Nov 2012. The Wall Street Journal provides the yield curve of US Treasury securities (http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000). The lowest yield is 0.061 percent for three months, 0.119 percent for six months, 0.152 percent for 12 months, 0.277 percent for two years, 0.390 percent for three years, 0.772 percent for five years, 1.219 percent for seven years, 1.771 percent for ten years and 2.935 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 the Wall Street Journal, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Oct inflation is low in 12 months 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 Nov 2012/Nov | ∆% Annual Equivalent Sep-Nov 2012 SA | |
| CPI All Items | 1.8 | 1.6 |
| CPI ex Food and Energy | 1.9 | 1.6 |
Source: http://www.bls.gov/cpi/
IX Conclusion. Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy then returns to trend. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. The analysis is sharpened by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Long-term economic growth and prosperity are measured by the key indicators of growth of real income per capita, or what is earned per person after inflation. A refined concept would include real disposable income per capita, or what is earned per person after inflation and taxes.
Table IX-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 13 quarters of the current cyclical expansion from IIIQ2009 to IIIQ2012, GDP increased 7.4 percent at the annual equivalent rate of 2.2 percent. In the 12 quarters of cyclical expansion real disposable personal income (RDPI) increased 5.4 percent at the annual equivalent rate of 1.6 percent; RDPI per capita increased 3.0 percent at the annual equivalent rate of 0.9 percent; and population increased 2.3 percent at the annual equivalent rate of 0.7 percent. Third, since the beginning of the recession in IVQ2007 to IIIQ2012, GDP increased 2.5 percent, or barely above the level before the recession. Since the beginning of the recession in IVQ2007 to IIIQ2012, real disposable personal income increased 3.4 percent at the annual equivalent rate of 0.7 percent; population increased 3.9 percent at the annual equivalent rate of 0.8 percent; and real disposable personal income per capita is 0.4 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction from IVQ2007 to IIQ2009 of 4.7 percent and the financial crisis.
Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %
| # Quarters | ∆% | ∆% Annual Equivalent | |
| IQ1983 to IVQ1985 | 13 | ||
| GDP | 19.6 | 5.7 | |
| RDPI | 14.5 | 4.3 | |
| RDPI Per Capita | 11.5 | 3.4 | |
| Population | 2.7 | 0.8 | |
| IIIQ2009 to IIIQ2012 | 13 | ||
| GDP | 7.5 | 2.2 | |
| RDPI | 5.4 | 1.6 | |
| RDPI per Capita | 3.0 | 0.9 | |
| Population | 2.3 | 0.7 | |
| IVQ2007 to IIIQ2012 | 20 | ||
| GDP | 2.5 | 0.5 | |
| RDPI | 3.4 | 0.7 | |
| RDPI per Capita | -0.4 | ||
| Population | 3.9 | 0.8 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
There are seven basic facts illustrating the current economic disaster of the United States: (1) GDP maintained trend growth in the entire business cycle from IQ1980 to IV1985, including contractions and expansions, but is well below trend in the entire business cycle from IVQ2007 to IIQ2012, including contractions and expansions; (2) per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIQ2012; (3) the number of employed persons increased in the 1980s but declined into IIQ2012; (4) the number of full-time employed persons increased in the 1980s but declined into IIIQ2012; (5) the number unemployed, unemployment rate and number employed part-time for economic reasons fell in the recovery from the recessions of the 1980s but not substantially in the recovery after IIQ2009; (6) wealth of households and nonprofit organizations soared in the 1980s but declined into IIIQ2012; and (7) gross private domestic investment increased sharply from IQ1980 to IVQ1985 but gross private domestic investment and private fixed investment have fallen sharply from IVQ2007 to IIIQ2007. There is a critical issue of whether the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IX-2 provides data for analysis of these five basic facts. The six blocks of Table IX-2 are separated initially after individual discussion of each one followed by the full Table IX-2.
1. Trend Growth.
i. As shown in Table IX-2, actual GDP grew cumulatively 17.7 percent from IQ1980 to IVQ1985, which is relatively close to what trend growth would have been at 18.5 percent. Rapid growth at 5.7 percent annual rate on average per quarter during the expansion from IQ1983 to IVQ1985 erased the loss of GDP of 4.8 percent during the contraction and maintained trend growth at 3 percent over the entire cycle.
ii. In contrast, cumulative growth from IVQ2007 to IIIQ2012 was 2.5 percent while trend growth would have been 15.1 percent. GDP in IIIQ2012 at seasonally adjusted annual rate is estimated at $13,652.5 by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $15,338.2 billion, or $1,685.7 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $1.7 trillion of foregone GDP that would have been created as it occurred during past cyclical expansions, which explains why employment has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2012 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 28.6 million people or 17.7 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.3 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 239.618 million in 2011 or by 3.3 percent while the labor force increased from 153.124 million in 2007 to 153.617 million in 2011 or by 0.3 percent (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html ).
| Period IQ1980 to IVQ1985 | |
| GDP SAAR USD Billions | |
| IQ1980 | 5,903.4 |
| IVQ1985 | 6,950.0 |
| ∆% IQ1980 to IVQ1985 | 17.7 |
| ∆% Trend Growth IQ1980 to IVQ1985 | 18.5 |
| Period IVQ2007 to IIIQ2012 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 13,326.0 |
| IIIQ2012 | 13,652.5 |
| ∆% IVQ2007 to IIIQ2012 Actual | 2.5 |
| ∆% IVQ2007 to IIIQ2012 Trend | 15.1 |
2. Decline of Per Capita Real Disposable Income
i. In the entire business cycle from IQ1980 to IVQ1985, as shown in Table IX-2 trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 14.5 percent, which is close to what would have been trend growth of 12.1 percent.
ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2012, per capita real disposable income fell 0.5 percent while trend growth would have been 10.4 percent. Income available after inflation and taxes is lower than before the contraction after 13 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions.
| Period IQ1980 to IVQ1985 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD | 18,938 |
| Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD | 21,687 |
| ∆% IQ1980 to IVQ1985 | 14.5 |
| ∆% Trend Growth | 12.1 |
| Period IVQ2007 to IIIQ2012 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD | 32,837 |
| Real Disposable Personal Income per Capita IIIQ2012 Chained 2005 USD | 32,691 |
| ∆% IVQ2007 to IIIQ2012 | -0.4 |
| ∆% Trend Growth | 10.4 |
3. Number of Employed Persons
i. As shown in Table IX-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 107.819 million NSA in IVQ1985 or by 9.4 percent.
ii. In contrast, during the entire business cycle the number employed fell from 146.334 million in IVQ2007 to 143.333 million in IIIQ2012 or by 2.1 percent. There are 28.6 million persons unemployed or underemployed, which is 17.7 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html).
| Period IQ1980 to IVQ1985 |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IV1985 NSA End of Quarter | 107.819 |
| ∆% Employed IQ1980 to IV1985 | 9.4 |
| Period IVQ2007 to IIIQ2012 |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2012 NSA End of Quarter | 143.333 |
| ∆% Employed IVQ2007 to IIIQ2012 | -2.1 |
4. Number of Full-Time Employed Persons
i. As shown in Table IX-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 88.757 million NSA in IVQ1985 or 9.2 percent.
ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 115.678 million in IIIQ2012 or by minus 4.4 percent.
| Period IQ1980 to IVQ1985 |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IV1985 NSA End of Quarter | 88.757 |
| ∆% Full-time Employed IQ1980 to IV1985 | 9.2 |
| Period IVQ2007 to IIIQ2012 |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2012 NSA End of Quarter | 115.678 |
| ∆% Full-time Employed IVQ2007 to IIIQ2012 | -4.4 |
5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.
i. As shown in Table IX-2 and in the following block, in the cycle from IQ1980 to IVQ1985: (a) the rate of unemployment was virtually the same at 6.7 percent in IQ1985 relative to 6.6 percent in IQ1980; (b) the number unemployed increased from 6.983 million in IQ1980 to 7.717 million in IVQ1985 or 10.5 percent; and (c) the number employed part-time for economic reasons increased 49.1 percent from 3.624 million in IQ1980 to 5.402 million in IVQ1985.
ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2012: (a) the rate of unemployment increased from 4.8 percent in IVQ2007 to 7.6 percent in IIIQ2012; (b) the number unemployed increased 59.3 percent from 7.371 million in IVQ2007 to 11.742 million in IIIQ2012; (c) the number employed part-time for economic reasons increased 70.7 percent from 4.750 million in IVQ2007 to 8.110 million in IIIQ2012; and (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 14.2 percent in IIIQ2012.
| Period IQ1980 to IVQ1985 |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IV1985 NSA End of Quarter | 6.7 |
| Unemployed IQ1980 Millions End of Quarter | 6.983 |
| Unemployed IV 1985 Millions End of Quarter | 7.717 |
| Employed Part-time Economic Reasons Millions IQ1980 End of Quarter | 3.624 |
| Employed Part-time Economic Reasons Millions IVQ1985 End of Quarter | 5.402 |
| ∆% | 49.1 |
| Period IVQ2007 to IIIQ2012 |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2012 NSA End of Quarter | 7.6 |
| Unemployed IVQ2007 Millions End of Quarter | 7.371 |
| Unemployed IIIQ2009 Millions End of Quarter | 11.742 |
| ∆% | 59.3 |
| Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2009 End of Quarter | 8.110 |
| ∆% | 70.7 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2012 | 14.2 |
6. Wealth of Households and Nonprofit Organizations.
i. The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and also from IVQ1979) to IVQ1985 and from IVQ2007 to IIQ2012 is provided in the following block and in Table IX-2. Net worth of households and nonprofit organizations increased from $8,326.4 billion in IVQ1979 to $14,395.2 billion in IVQ1985 or 72.9 percent or 69.3 percent from $8,502.9 billion in IQ1980. The starting quarter does not bias the results. The US consumer price index not seasonally adjusted increased from 76.7 in Dec 1979 to 109.3 in Dec 1985 or 42.5 percent or 36.5 percent from 80.1 in Mar 1980 (using consumer price index data from the US Bureau of Labor Statistics at http://www.bls.gov/cpi/data.htm). In terms of purchasing power measured by the consumer price index, real wealth of households and nonprofit organizations increased 21.3 percent in constant purchasing power from IVQ1979 to IVQ1985 or 24.0 percent from IQ1980.
ii. In contrast, as shown in Table IX-2, net worth of households and nonprofit organizations fell from $66,000.6 billion in IVQ2007 to $64,768.8 billion in IIIQ2012 by $1,231.8 billion or 1.9 percent. The US consumer price index was 210.036 in Dec 2007 and 231.407 in Sep 2012 for increase of 10.2 percent. In purchasing power of Dec 2007, wealth of households and nonprofit organizations is lower by 10.9 percent in Sep 2012 after 13 consecutive quarters of expansion from IIIQ2009 to IIIQ2012 relative to IVQ2007 when the recession began. The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. The average growth rate from IIIQ2009 to IIQ2012 has been 2.2 percent, which is substantially lower than the average of 6.2 percent in cyclical expansions after World War II and 5.7 percent in the expansion from IQ1983 to IVQ1985. The US missed the opportunity of high growth rates that has been available in past cyclical expansions. US wealth of households and nonprofit organizations grew from IVQ1945 at $710,125.9 million to IIIQ2009 at $64,768,835.3 million or increase of 9,020.8 percent. The consumer price index not seasonally adjusted was 18.2 in Dec 1945 jumping to 231.407 in Sep 2012 or 1,171.5 percent. There was a gigantic increase of US net worth of households and nonprofit organizations over 67 years with inflation adjusted increase of 617.3 percent. The combination of collapse of values of real estate and financial assets during the global recession of IVQ2007 to IIQ2009 caused sharp contraction of US household and nonprofit net worth. Recovery has been in stop-and-go fashion during the worst cyclical expansion in the 67 years when US GDP grew at 2.2 percent on average in 13 quarters between IIIQ2009 and IIIQ2012 in contrast with average 5.7 percent from IQ1983 to IVQ1985 and average 6.2 percent during cyclical expansions in those 67 years (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
| Period IQ1980 to IVQ1985 | |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ1979 | 8,326.4 |
| IVQ1985 | 14,395.2 |
| ∆ USD Billions | +6,068.8 |
| Period IVQ2007 to IIQ2012 | |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ2007 | 66,000.6 |
| IIIQ2012 | 64,768.8 |
| ∆ USD Billions | -1,231.8 |
7. Gross Private Domestic Investment.
i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IV1985 and from IVQ2007 to IIQ2012 is provides in the following block and in Table IX-2. Gross private domestic investment increased from $778.3 billion in IQ1980 to $965.9 billion in IVQ1985 or by 24.1 percent.
ii In the current cycle, gross private domestic investment decreased from $2,123.6 billion in IVQ2007 to $1,928.8 billion in IIIQ2012, or decline by 9.2 percent. Private fixed investment fell from $2,111.5 billion in IVQ2007 to $1844.8 billion in IIIQ2012, or decline by 12.6 percent.
| Period IQ1980 to IVQ1985 | |
| Gross Private Domestic Investment USD 2005 Billions | |
| IQ1980 | 778.3 |
| IVQ1985 | 965.9 |
| ∆% | 24.1 |
| Period IVQ2007 to IIIQ2012 | |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,123.6 |
| IIIQ2012 | 1,928.8 |
| ∆% | -9.2 |
| Private Fixed Investment USD 2005 Billions | |
| IVQ2007 | 2,111.5 |
| IIIQ2012 | 1,844.8 |
| ∆% | -12.6 |
Table IX-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%
| Period IQ1980 to IVQ1985 | |
| GDP SAAR USD Billions | |
| IQ1980 | 5,903.4 |
| IVQ1985 | 6,950.0 |
| ∆% IQ1980 to IVQ1985 | 17.7 |
| ∆% Trend Growth IQ1980 to IVQ1985 | 18.5 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD | 18,938 |
| Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD | 21,687 |
| ∆% IQ1980 to IVQ1985 | 14.5 |
| ∆% Trend Growth | 12.1 |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IV1985 NSA End of Quarter | 107.819 |
| ∆% Employed IQ1980 to IV1985 | 9.4 |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IV1985 NSA End of Quarter | 88.757 |
| ∆% Full-time Employed IQ1980 to IV1985 | 9.2 |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IV1985 NSA End of Quarter | 6.7 |
| Unemployed IQ1980 Millions NSA End of Quarter | 6.983 |
| Unemployed IV 1985 Millions NSA End of Quarter | 7.717 |
| ∆% | 11.9 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIQ2009 NSA End of Quarter | 8.394 |
| ∆% | 76.7 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ1979 | 8,326.4 |
| IVQ1985 | 14,395.2 |
| ∆ USD Billions | +6,068.8 |
| Gross Private Domestic Investment USD 2005 Billions | |
| IQ1980 | 778.3 |
| IVQ1985 | 965.9 |
| ∆% | 24.1 |
| Period IVQ2007 to IIIQ2012 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 13,326.0 |
| IIIQ2012 | 13,652.5 |
| ∆% IVQ2007 to IIIQ2012 | 2.5 |
| ∆% IVQ2007 to IIIQ2012 Trend Growth | 15.1 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD | 32,837 |
| Real Disposable Personal Income per Capita IIIQ2012 Chained 2005 USD | 32,691 |
| ∆% IVQ2007 to IIIQ2012 | -0.4 |
| ∆% Trend Growth | 10.4 |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2012 NSA End of Quarter | 143.333 |
| ∆% Employed IVQ2007 to IIIQ2012 | -2.1 |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2012 NSA End of Quarter | 115.678 |
| ∆% Full-time Employed IVQ2007 to IIIQ2012 | -4.4 |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2012 NSA End of Quarter | 7.6 |
| Unemployed IVQ2007 Millions NSA End of Quarter | 7.371 |
| Unemployed IIIQ2009 Millions NSA End of Quarter | 11.742 |
| ∆% | 59.3 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2012 NSA End of Quarter | 8.110 |
| ∆% | 70.7 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2012 | 14.2 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ2007 | 66,000.6 |
| IIIQ2012 | 64,768.8 |
| ∆ USD Billions | -1,231.8 |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,123.6 |
| IIIQ2012 | 1,928.8 |
| ∆% | -9.2 |
| Private Fixed Investment USD 2005 Billions | |
| IVQ2007 | 2,111.5 |
| IIIQ2012 | 1,844.8 |
| ∆% | -12.6 |
Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2012Sep20. Flow of funds accounts of the United States. Washington, DC, Federal Reserve System.
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