Recovery without Hiring, Forecast Growth Mandate of Monetary Policy or QE∞, World Inflation Waves, United States International Trade, World Financial Turbulence and Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Recovery without Hiring
IA1 Hiring Collapse
IA2 Labor Underutilization
IA3 Ten Million Fewer Full-time Job
IA4 Youth and Middle-Aged Unemployment
II World Inflation Waves
IIA Appendix: Transmission of Unconventional Monetary Policy
IIA1 Theory
IIA2 Policy
IIA3 Evidence
IIA4 Unwinding Strategy
IIB United States Inflation
IIC Long-term US Inflation
IID Current US Inflation
IIE United States International Trade
IIE1 United States International Trade Deficit and Fiscal Imbalance
IIE2 Import Export Prices
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
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
Executive Summary
ESI Recovery without Hiring. Professor Edward P. Lazear (2012Jan19) at Stanford University finds that recovery of hiring in the US to peaks attained in 2007 requires an increase of hiring by 30 percent while hiring levels have increased by only 4 percent since Jan 2009. The high level of unemployment with low level of hiring reduces the statistical probability that the unemployed will find a job. According to Lazear (2012Jan19), the probability of finding a new job currently is about one third of the probability of finding a job in 2007. Improvements in labor markets have not increased the probability of finding a new job. Lazear (2012Jan19) quotes an essay coauthored with James R. Spletzer forthcoming in the American Economic Review on the concept of churn. A dynamic labor market occurs when a similar amount of workers is hired as those who are separated. This replacement of separated workers is called churn, which explains about two-thirds of total hiring. Typically, wage increases received in a new job are higher by 8 percent. Lazear (2012Jan19) argues that churn has declined 35 percent from the level before the recession in IVQ2007. Because of the collapse of churn there are no opportunities in escaping falling real wages by moving to another job. As this blog argues, there are meager chances of escaping unemployment because of the collapse of hiring and those employed cannot escape falling real wages by moving to another job (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html). Lazear and Spletzer (2012Mar, 1) argue that reductions of churn reduce the operational effectiveness of labor markets. Churn is part of the allocation of resources or in this case labor to occupations of higher marginal returns. The decline in churn can harm static and dynamic economic efficiency. Losses from decline of churn during recessions can affect an economy over the long-term by preventing optimal growth trajectories because resources are not used in the occupations where they provide highest marginal returns. Lazear and Spletzer (2012Mar 7-8) conclude that: “under a number of assumptions, we estimate that the loss in output during the recession [of 2007 to 2009] and its aftermath resulting from reduced churn equaled $208 billion. On an annual basis, this amounts to about .4% of GDP for a period of 3½ years.”
There are two additional facts discussed below: (1) there are about ten million fewer full-time jobs currently than before the recession of 2008 and 2009; and (2) the extremely high and rigid rate of youth unemployment is denying an early start to young people ages 16 to 24 years while unemployment of ages 45 years or over has swelled. There are four subsections. IA1 Hiring Collapse provides the data and analysis on the weakness of hiring in the United States economy. IA2 Labor Underutilization provides the measures of labor underutilization of the Bureau of Labor Statistics (BLS). Statistics on the decline of full-time employment are in IA3 Ten Million Fewer Full-time Jobs. IA4 Youth and Middle-Age Unemployment provides the data on high unemployment of ages 16 to 24 years and of ages 45 years or over.
IA1 Hiring Collapse. An important characteristic of the current fractured labor market of the US is the closing of the avenue for exiting unemployment and underemployment normally available through dynamic hiring. Another avenue that is closed is the opportunity for advancement in moving to new jobs that pay better salaries and benefits again because of the collapse of hiring in the United States. Those who are unemployed or underemployed cannot find a new job even accepting lower wages and no benefits. The employed cannot escape declining inflation-adjusted earnings because there is no hiring. The objective of this section is to analyze hiring and labor underutilization in the United States.
An appropriate measure of job stress is considered by Blanchard and Katz (1997, 53):
“The right measure of the state of the labor market is the exit rate from unemployment, defined as the number of hires divided by the number unemployed, rather than the unemployment rate itself. What matters to the unemployed is not how many of them there are, but how many of them there are in relation to the number of hires by firms.”
The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).
The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):
“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”
The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS (see also Lazear and Spletzer 2012Mar, 6-7).
Hiring in the nonfarm sector (HNF) has declined from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million while hiring in the private sector (HP) has declined from 59.5 million in 2006 to 46.9 million in 2011 or by 12.6 million, as shown in Table ESI-1. The ratio of nonfarm hiring to employment (RNF) has fallen from 47.2 in 2005 to 38.1 in 2011 and in the private sector (RHP) from 52.1 in 2006 to 42.9 in 2011. The collapse of hiring in the US has not been followed by dynamic labor markets because of the low rate of economic growth of 2.2 percent in the first thirteen quarters of expansion from IIIQ2009 to IIIQ2012 compared with 6.2 percent in prior cyclical expansions (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Table ESI-1, US, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment
| HNF | Rate RNF | HP | Rate HP | |
| 2001 | 62,948 | 47.8 | 58,825 | 53.1 |
| 2002 | 58,583 | 44.9 | 54,759 | 50.3 |
| 2003 | 56,451 | 43.4 | 53,056 | 48.9 |
| 2004 | 60,367 | 45.9 | 56,617 | 51.6 |
| 2005 | 63,150 | 47.2 | 59,372 | 53.1 |
| 2006 | 63,773 | 46.9 | 59,494 | 52.1 |
| 2007 | 62,421 | 45.4 | 58,035 | 50.3 |
| 2008 | 55,166 | 40.3 | 51,606 | 45.2 |
| 2009 | 46,398 | 35.5 | 43,052 | 39.8 |
| 2010 | 48,647 | 37.5 | 44,826 | 41.7 |
| 2011 | 50,083 | 38.1 | 46,869 | 42.9 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Total nonfarm hiring (HNF), total private hiring (HP) and their respective rates are provided for the month of Oct in the years from 2001 to 2012 in Table ESI-2. Hiring numbers are in thousands. There is some recovery in HNF from 4012 thousand (or 4.0 million) in Oct 2009 to 4507 thousand in Oct 2011 and 4608 thousand in Oct 2012 for cumulative gain of 14.8 percent. HP rose from 3725 thousand in Oct 2009 to 4275 thousand in Oct 2011 and 4352 thousand in Oct 2012 for cumulative gain of 16.8 percent. HNF has fallen from 5572 in Oct 2006 to 4608 in Oct 2012 or by 17.3 percent. HP has fallen from 5264 in Oct 2007 to 4352 in Oct 2012 or by 17.3 percent. The labor market continues to be fractured, failing to provide an opportunity to exit from unemployment/underemployment or to find an opportunity for advancement away from declining inflation-adjusted earnings.
Table ESI-2, US, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted
| HNF | Rate RNF | HP | Rate HP | |
| 2001 Oct | 5401 | 4.1 | 5090 | 4.6 |
| 2002 Oct | 5156 | 3.9 | 4840 | 4.4 |
| 2003 Oct | 5234 | 4.0 | 4922 | 4.5 |
| 2004 Oct | 5490 | 4.1 | 5176 | 4.7 |
| 2005 Oct | 5357 | 4.0 | 5067 | 4.5 |
| 2006 Oct | 5544 | 4.0 | 5246 | 4.6 |
| 2007 Oct | 5572 | 4.0 | 5264 | 4.5 |
| 2008 Oct | 4785 | 3.5 | 4515 | 4.0 |
| 2009 Oct | 4012 | 3.1 | 3725 | 3.5 |
| 2010 Oct | 4307 | 3.3 | 4038 | 3.7 |
| 2011 Oct | 4507 | 3.4 | 4275 | 3.9 |
| 2012 Sep | 4509 | 3.4 | 4352 | 3.3 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Chart ESI-1 provides total nonfarm hiring on a monthly basis from 2001 to 2012. Nonfarm hiring rebounded in early 2010 but then fell and stabilized at a lower level than the early peak not-seasonally adjusted (NSA) of 4786 in May 2010 until it surpassed it with 4869 in Jun 2011 but declined to 4608 in Oct 2012. Nonfarm hiring fell again in Dec 2011 to 3038 from 3844 in Nov and to revised 3633 in Feb 2012, increasing to 4127 in Mar 2012, 4490 in Apr 2012, 4926 in May 2012, 4988 in Jun 2012, 4732 in Jul 2012, 4962 in Aug 2012, 4380 in Sep 2012 and 4608 in Oct 2012. Chart ESI-1 provides seasonally-adjusted (SA) monthly data. The number of seasonally-adjusted hires in Aug 2011 was 4221 thousand, increasing to revised 4444 thousand in Feb 2012, or 5.3 percent, but falling to revised 4335 thousand in Mar 2012 and 4213 in Apr 2012, or cumulative decline of 0.2 percent relative to Aug 2011, moving to 4339 in Oct 2012 for cumulative increase of 2.8 percent from 4220 in Oct 2011 and increase of 3.2 percent relative to 4204 in Sep 2012. The number of hires not seasonally adjusted was 4655 in Aug 2011, falling to 3038 in Dec 2011 but increasing to 4072 in Jan 2012 and 4608 in Oct 2012. The number of nonfarm hiring not seasonally adjusted fell by 34.7 percent from 4655 in Aug 2011 to 3038 in Dec 2011 in a yearly-repeated seasonal pattern.
Chart ESI-1, US, Total Nonfarm Hiring (HNF), 2001-2012 Month SA
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Similar behavior occurs in the rate of nonfarm hiring plot in Chart ESI-2. Recovery in early 2010 was followed by decline and stabilization at a lower level but with stability in monthly SA estimates of 3.2 in Sep 2011 to 3.2 in Jan 2012, increasing to 3.4 in May 2012 and falling to 3.2 in both Jun and Jul 2012, increasing to 3.3 in Aug 2012 but falling to 3.2 in Oct 2012. The rate not seasonally adjusted fell from 3.7 in Jun 2011 to 2.3 in Dec, climbing to 3.1 in Jan 2012, 3.7 in both May and Jun 2012 and falling to 3,6 in Jul, increasing to 3.7 in Aug and falling to 3.3 in Sep 2012 and 3.4 in Oct 2012. Rates of nonfarm hiring NSA were in the range of 2.8 (Dec) to 4.5 (Jun) in 2006.
Chart ESI-2, US, Rate Total Nonfarm Hiring, Month SA 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
There is only milder improvement in total private hiring shown in Chart ESI-3. Hiring private (HP) rose in 2010 with stability and renewed increase in 2011 followed by stationary series in 2012. The number of private hiring seasonally adjusted fell from 4002 thousand in Sep 2011 to 3889 in Dec 2011 or by 2.8 percent, increasing to 3945 in Jan 2012 or decline by 1.4 relative to the level in Sep 2011 but decreasing to 3922 in Sep 2012 or lower by 2.0 percent relative to Sep 2011 and increasing to 4056 in Oct 2012 for increase of 2.8 percent relative to 3945 in Jan 2012. The number of private hiring not seasonally adjusted fell from 4130 in Sep 2011 to 2856 in Dec or by 30.8 percent, reaching 3782 in Jan 2012 or decline of 8.4 percent relative to Sep 2011 and increasing to 4352 in Oct 2012 or 5.4 percent higher relative to Sep 2011. Companies do not hire in the latter part of the year that explains the high seasonality in year-end employment data. For example, NSA private hiring fell from 4934 in Sep 2006 to 3635 in Dec 2006 or by 26.3 percent. Private hiring NSA data are useful in showing the huge declines from the period before the global recession. In Jul 2006 private hiring NSA was 5555, declining to 4293 in Jul 2011 or by 22.7 percent and to 4403 in Jul 2012 or lower by 20.7 percent relative to Jul 2006. Private hiring NSA fell from 5215in Sep 2005 to 3999 in Sep 2012 or 23.3 percent and fell from 5264 in Oct 2007 to 4352 in Oct 2007 or 17.3 percent. The conclusion is that private hiring in the US is around 20 percent below the hiring before the global recession. The main problem in recovery of the US labor market has been the low rate of growth of 2.2 percent in the twelve quarters of expansion of the economy from IIIQ2009 to IIIQ2012 compared with average 6.2 percent in prior expansions from contractions (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart ESI-3, US, Total Private Hiring Month SA 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Chart ESI-4 shows similar behavior in the rate of private hiring. The rate in 2011 in monthly SA data did not rise significantly above the peak in 2010. The rate seasonally adjusted fell from 3.6 in Sep 2011 to 3.5 in Dec 2011 and reached 3.6 in Oct 2012. The rate not seasonally adjusted (NSA) fell from 3.8 in Sep 2011 to 2.6 in Dec 2011, increasing to 3.9 in Oct 2012. The NSA rate of private hiring fell from 4.8 in Jul 2006 to 3.4 in Jul 2009 but recovery was insufficient to only 3.9 in Oct 2012.
Chart ESI-4, US, Rate Total Private Hiring Month SA 2011-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
ESII Ten Million Fewer Full-time Jobs. There is strong seasonality in US labor markets around the end of the year. The number employed part-time for economic reasons because they could not find full-time employment fell from 9.270 million in Sep 2011 to 8.031 million in Aug 2012, seasonally adjusted, or decline of 1.239 million in nine months, as shown in Table ESII-1, but then rebounded to 8.613 million in Sep 2012 for increase of 582,000 in one month from Aug to Sep 2012, declining to 8.344 in Oct 2012 or by 269,000 again in one month and further declining to 8.176 million in Nov 2012 for another major one-month decline of 168,000. There is an increase of 313,000 in part-time for economic reasons from Aug 2012 to Oct 2012 and of 145,000 from Aug 2012 to Nov 2012. The number employed full-time increased from 112.841 million in Oct 2011 to 115.290 million in Mar 2012 or 2.449 million but then fell to 114.212 million in May 2012 or 1.078 million fewer full-time employed than in Mar 2012. The number employed full-time increased from 114,388 million in Aug 2012 to 115.459 million in Oct 2012 or increase of 1.071 million full-time jobs in two months and further to 115.657 in Nov 2012 or increase of 1.269 million more full-time jobs in three months from Aug 2012 to Nov 2012. The number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.271 million in Nov 2011 to 8.428 million in Dec 2011 or by 157,000 and then to 8.918 million in Jan 2012 or by an additional 490,000 for cumulative increase from Nov 2011 to Jan 2012 of 647,000. The level of employed part-time for economic reasons then fell from 8.918 million in Jan 2012 to 7.867 million in Mar 2012 or by 1.0151 million and to 7.694 million in Apr 2012 or 1.224 million fewer relative to Jan 2012. In Aug 2012, the number employed part-time for economic reasons reached 7.842 million NSA or 148,000 more than in Apr 2012. The number employed part-time for economic reasons increased from 7.842 million in Aug 2012 to 8.110 million in Sep 2012 or by 3.4 percent. The number part-time for economic reasons fell from 8.110 million in Sep 2012 to 7.870 million in Oct 2012 or by 240.000 in one month and fell to 7.794 million in Nov 2012 for an additional decline of 76.000 and cumulative from Sep 2012 of 316,000. The number employed full time without seasonal adjustment fell from 113.138 million in Nov 2011 to 113.050 million in Dec 2011 or by 88,000 and fell further to 111.879 in Jan 2012 for cumulative decrease of 1.259 million. The number employed full-time not seasonally adjusted fell from 113.138 million in Nov 2011 to 112.587 million in Feb 2012 or by 551.000 but increased to 116.214 million in Aug 2012 or 3.076 million more full-time jobs than in Nov 2011. The number employed full-time not seasonally adjusted decreased from 116.214 million in Aug 2012 to 115.678 million in Sep 2012 for loss of 536,000 full-time jobs and rose to 116.045 million in Oct 2012 or by 367,000 full-time jobs in one month relative to Sep 2012. The number employed full-time NSA fell from 116.045 million in Oct 2012 to 115.515 million in Nov 2012 or decline of 530.000 in one month. Comparisons over long periods require use of NSA data. The number with full-time jobs fell from a high of 123.219 million in Jul 2007 to 108.777 million in Jan 2010 or by 14.442 million. The number with full-time jobs in Nov 2012 is 115.515 million, which is lower by 7.704 million relative to the peak of 123.219 million in Jul 2007. There appear to be around 10 million fewer full-time jobs in the US than before the global recession. Growth at 2.2 percent on average in the thirteen quarters of expansion from IIIQ2009 to IIIQ2012 compared with 6.2 percent on average in expansions from postwar cyclical contractions is the main culprit of the fractured US labor market (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Table ESII-1, US, Employed Part-time for Economic Reasons, Thousands, and Full-time, Millions
| Part-time Thousands | Full-time Millions | |
| Seasonally Adjusted | ||
| Nov 2012 | 8,176 | 115.657 |
| Oct 2012 | 8,344 | 115.459 |
| Sep 2012 | 8,613 | 115.226 |
| Aug 2012 | 8,031 | 114.388 |
| Jul 2012 | 8,246 | 114.345 |
| Jun 2012 | 8,210 | 114.573 |
| May 2012 | 8,098 | 114.212 |
| Apr 2012 | 7,853 | 114.478 |
| Mar 2012 | 7,672 | 115.290 |
| Feb 2012 | 8,119 | 114.408 |
| Jan 2012 | 8,230 | 113.845 |
| Dec 2011 | 8,098 | 113.765 |
| Nov 2011 | 8,469 | 113.212 |
| Oct 2011 | 8,790 | 112.841 |
| Sep 2011 | 9,270 | 112.479 |
| Aug 2011 | 8,787 | 112.406 |
| Jul 2011 | 8,437 | 112.006 |
| Not Seasonally Adjusted | ||
| Nov 2012 | 7,794 | 115.515 |
| Oct 2012 | 7,870 | 116.045 |
| Sep 2012 | 8,110 | 115.678 |
| Aug 2012 | 7,842 | 116.214 |
| Jul 2012 | 8,316 | 116.131 |
| Jun 2012 | 8,394 | 116.024 |
| May 2012 | 7,837 | 114.634 |
| Apr 2012 | 7,694 | 113.999 |
| Mar 2012 | 7,867 | 113.916 |
| Feb 2012 | 8,455 | 112.587 |
| Jan 2012 | 8,918 | 111.879 |
| Dec 2011 | 8,428 | 113.050 |
| Nov 2011 | 8,271 | 113.138 |
| Oct 2011 | 8,258 | 113.456 |
| Sep 2011 | 8,541 | 112.980 |
| Aug 2011 | 8,604 | 114.286 |
| Jul 2011 | 8,514 | 113.759 |
| Jun 2011 | 8,738 | 113.255 |
| May 2011 | 8,270 | 112.618 |
| Apr 2011 | 8,425 | 111.844 |
| Mar 2011 | 8,737 | 111.186 |
| Feb 2011 | 8,749 | 110.731 |
| Jan 2011 | 9,187 | 110.373 |
| Dec 2010 | 9,205 | 111.207 |
| Nov 2010 | 8,670 | 111.348 |
| Oct 2010 | 8,408 | 112.342 |
| Sep 2010 | 8,628 | 112.385 |
| Aug 2010 | 8,628 | 113.508 |
| Jul 2010 | 8,737 | 113.974 |
| Jun 2010 | 8,867 | 113.856 |
| May 2010 | 8,513 | 112.809 |
| Apr 2010 | 8,921 | 111.391 |
| Mar 2010 | 9,343 | 109.877 |
| Feb 2010 | 9,282 | 109.100 |
| Jan 2010 | 9,290 | 108.777 (low) |
| Dec 2009 | 9,354 (high) | 109.875 |
| Nov 2009 | 8,670 | 111.274 |
| Oct 2009 | 8,474 | 111.599 |
| Sep 2009 | 8,255 | 111.991 |
| Aug 2009 | 8,835 | 113.863 |
| Jul 2009 | 9,103 | 114.184 |
| Jun 2009 | 9,301 | 114.014 |
| May 2009 | 8,785 | 113.083 |
| Apr 2009 | 8,648 | 112.746 |
| Mar 2009 | 9,305 | 112.215 |
| Feb 2009 | 9,170 | 112.947 |
| Jan 2009 | 8,829 | 113.815 |
| Nov 2008 | 7,135 | 118.432 |
| Oct 2008 | 6,267 | 120.020 |
| Sep 2008 | 5,701 | 120.213 |
| Aug 2008 | 5,736 | 121.556 |
| Jul 2008 | 6,054 | 122.378 |
| Jun 2008 | 5,697 | 121.845 |
| May 2008 | 5,096 | 120.809 |
| Apr 2008 | 5,071 | 120.027 |
| Mar 2008 | 5,038 | 119.875 |
| Feb 2008 | 5,114 | 119.452 |
| Jan 2008 | 5,340 | 119.332 |
| Nov 2007 | 4,374 | 121.846 |
| Oct 2007 | 4,028 | 122.006 |
| Sep 2007 | 4,137 | 121.728 |
| Aug 2007 | 4,494 | 122.870 |
| Jul 2007 | 4,516 | 123.219 (high) |
| Jun 2007 | 4,469 | 122.150 |
| May 2007 | 4,315 | 120.846 |
| Apr 2007 | 4,205 | 119.609 |
| Mar 2007 | 4,384 | 119.640 |
| Feb 2007 | 4,417 | 119.041 |
| Jan 2007 | 4,726 | 119.094 |
| Nov 2006 | 4,054 | 120.507 |
| Oct 2006 | 4,010 | 121.199 |
| Sep 2006 | 3,735 (low) | 120.780 |
| Aug 2006 | 4,104 | 121.979 |
| Jul 2006 | 4,450 | 121.951 |
| Jun 2006 | 4,456 | 121.070 |
| May 2006 | 3,968 | 118.925 |
| Apr 2006 | 3,787 | 118.559 |
| Mar 2006 | 4,097 | 117.693 |
| Feb 2006 | 4,403 | 116.823 |
| Jan 2006 | 4,597 | 116.395 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart ESII-1 shows the sharp rise in unemployed over 27 weeks and stabilization at an extremely high level.
Chart ESII-1, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2011
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Another segment of U6 consists of people marginally attached to the labor force who continue to seek employment but less frequently on the frustration there may not be a job for them. Chart ESII-2 shows the sharp rise in people marginally attached to the labor force after 2007 and subsequent stabilization.
Chart ESII-2, US, Marginally Attached to the Labor Force, NSA Month 2001-2012
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Chart ESII-3 reveals the fracture in the US labor market. The number of workers with full-time jobs not-seasonally-adjusted rose with fluctuations from 2002 to a peak in 2007, collapsing during the global recession. The terrible state of the job market is shown in the segment from 2009 to 2012 with fluctuations around the typical behavior of a stationary series: there is no improvement in the United States in creating full-time jobs.
Chart ESII-3, US, Full-time Employed, Thousands, NSA, 2001-2012
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
ESIII Youth Unemployment and Middle-Aged Unemployment. The United States is experiencing high youth unemployment as in European economies. Table ESII-1 provides the employment level for ages 16 to 24 years of age estimated by the Bureau of Labor Statistics. On an annual basis, youth employment fell from 20.041 million in 2006 to 17.362 million in 2011 or 2.679 million fewer youth jobs. During the seasonal peak months of youth employment in the summer from Jun to Aug, youth employment has fallen by more than two million jobs relative to 21.914 million in Jul 2006 with 19.461 for 2.453 fewer youth jobs. There are two hardships behind these data. First, young people cannot find employment after finishing high-school and college, reducing prospects for achievement in older age. Second, students with more modest means cannot find employment to keep them in college.
Table ESIII-1, US, Employment Level 16-24 Years, Thousands, NSA
| Year | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 20529 | 19706 | 19694 | 19675 | 19547 | 20088 |
| 2002 | 20653 | 19466 | 19542 | 19397 | 19394 | 19683 |
| 2003 | 20181 | 18909 | 19139 | 19163 | 19136 | 19351 |
| 2004 | 20660 | 19158 | 19609 | 19615 | 19619 | 19630 |
| 2005 | 20814 | 19503 | 19794 | 19750 | 19733 | 19770 |
| 2006 | 21167 | 19604 | 19853 | 19903 | 20129 | 20041 |
| 2007 | 20413 | 19498 | 19564 | 19660 | 19361 | 19875 |
| 2008 | 20096 | 18818 | 18757 | 18454 | 18378 | 19202 |
| 2009 | 18270 | 16972 | 16671 | 16689 | 16615 | 17601 |
| 2010 | 18061 | 16874 | 16867 | 16946 | 16727 | 17077 |
| 2011 | 18067 | 17238 | 17532 | 17402 | 17234 | 17362 |
| 2012 | 18171 | 17687 | 17842 | 17877 |
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Chart ESIII-1 provides US employment level ages 16 to 24 years from 2002 to 2012. Employment level is sharply lower in Jun 2012 relative to the peak in 2007.
Chart ESIII-1, US, Employment Level 16-24 Years, Thousands SA, 2001-2012
Sources: US Bureau of Labor Statistics
Table ESIII-2 provides US unemployment level ages 16 to 24 years. The number unemployed ages 16 to 24 years increased from 2342 thousand in 2007 to 3634 thousand in 2011 or by 1.292 million. This situation may persist for many years.
Table ESIII-2, US, Unemployment Level 16-24 Years, Thousands NSA
| Year | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 2585 | 2461 | 2301 | 2424 | 2470 | 2412 | 2371 |
| 2002 | 3034 | 2688 | 2506 | 2468 | 2570 | 2374 | 2683 |
| 2003 | 3200 | 2724 | 2698 | 2522 | 2522 | 2248 | 2746 |
| 2004 | 3018 | 2585 | 2493 | 2572 | 2448 | 2294 | 2638 |
| 2005 | 2688 | 2519 | 2339 | 2285 | 2369 | 2055 | 2521 |
| 2006 | 2750 | 2467 | 2297 | 2252 | 2242 | 2007 | 2353 |
| 2007 | 2622 | 2388 | 2419 | 2258 | 2250 | 2323 | 2342 |
| 2008 | 3408 | 2990 | 2904 | 2842 | 2833 | 2928 | 2830 |
| 2009 | 4387 | 4004 | 3774 | 3789 | 3699 | 3532 | 3760 |
| 2010 | 4374 | 3903 | 3604 | 3731 | 3561 | 3352 | 3857 |
| 2011 | 4110 | 3820 | 3541 | 3386 | 3287 | 3161 | 3634 |
| 2012 | 4011 | 3672 | 3174 | 3285 | 3102 |
Sources: US Bureau of Labor Statistics
Chart ESIII-2 provides the unemployment level ages 16 to 24 from 2002 to 2012. The level rose sharply from 2007 to 2010 with tepid improvement into 2012.
Chart ESIII-2, US, Unemployment Level 16-24 Years, Thousands SA, 2001-2012
Sources: US Bureau of Labor Statistics
Table ESIII-3 provides the rate of unemployment of young peoples in ages 16 to 24 years. The annual rate jumped from 10.5 percent in 2007 to 18.4 percent in 2010 and 17.3 percent in 2011. During the seasonal peak in Jul 2011 the rate of youth unemployed was 18.1 percent and 17.1 percent in Jul 2012 compared with 10.8 percent in Jul 2007.
Table ESIII-3, US, Unemployment Rate 16-24 Years, Thousands, NSA
| Year | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 11.6 | 10.5 | 10.7 | 10.5 | 11.0 | 11.2 | 11.0 | 10.6 |
| 2002 | 13.2 | 12.4 | 11.5 | 11.4 | 11.2 | 11.7 | 10.9 | 12.0 |
| 2003 | 14.8 | 13.3 | 11.9 | 12.5 | 11.6 | 11.6 | 10.5 | 12.4 |
| 2004 | 13.4 | 12.3 | 11.1 | 11.5 | 11.6 | 11.1 | 10.5 | 11.8 |
| 2005 | 12.6 | 11.0 | 10.8 | 10.7 | 10.3 | 10.7 | 9.4 | 11.3 |
| 2006 | 11.9 | 11.2 | 10.4 | 10.5 | 10.2 | 10.1 | 9.1 | 10.5 |
| 2007 | 12.0 | 10.8 | 10.5 | 11.0 | 10.3 | 10.3 | 10.7 | 10.5 |
| 2008 | 14.4 | 14.0 | 13.0 | 13.4 | 13.2 | 13.3 | 13.7 | 12.8 |
| 2009 | 19.9 | 18.5 | 18.0 | 18.2 | 18.5 | 18.1 | 17.5 | 17.6 |
| 2010 | 20.0 | 19.1 | 17.8 | 17.6 | 18.1 | 17.4 | 16.7 | 18.4 |
| 2011 | 18.9 | 18.1 | 17.5 | 17.0 | 16.2 | 15.9 | 15.5 | 17.3 |
| 2012 | 18.1 | 17.1 | 16.8 | 15.2 | 15.5 | 14.8 |
Sources: US Bureau of Labor Statistics
Chart ESIII-3 provides the BLS estimate of the not-seasonally-adjusted rate of youth unemployment for ages 16 to 24 years from 2002 to 2012. The rate of youth unemployment increased sharply during the global recession of 2008 and 2009 but has failed to drop to earlier lower levels during the twelve consecutive quarters of expansion of the economy since IIIQ2009 because of much lower growth at 2.2 percent annual equivalent on average compared with 6.2 percent on average in cyclical expansions since World War II Table I -5 (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Chart ESIII-3, US, Unemployment Rate 16-24 Years, Percent, NSA, 2001-2012
Sources: US Bureau of Labor Statistics
Chart ESIII-4 provides longer perspective with the rate of youth unemployment in ages 16 to 24 years from 1948 to 2012. The rate of youth unemployment rose to 20 percent during the contractions of the early 1980s and also during the contraction of the global recession in 2008 and 2009. The data illustrate again the claim in this blog that the contractions of the early 1980s are the valid framework for comparison with the global recession of 2008 and 2009 instead of misleading comparisons with the 1930s. During the initial phase of recovery, the rate of youth unemployment 16 to 24 years NSA fell from 18.9 percent in Jun 1983 to 14.5 percent in Jun 1984 while the rate of youth unemployment 16 to 24 years was nearly the same during the expansion after IIIQ2009: 18.1 percent in Nov 2009, 17.4 percent in Nov 2010, 15.9 percent in Nov 2011 and 14.8 percent in Nov 2012. In Jul 2007, the rate of youth unemployment was 10.8 percent, increasing to 17.1 percent in Jul 2012. The difference originates in the vigorous seasonally-adjusted annual equivalent average rate of GDP growth of 5.7 percent during the recovery from IQ1983 to IVQ1985 compared with 2.2 percent on average during the first eleven quarters of expansion from IIIQ2009 to IIIQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). The fractured US labor market denies an early start for young people.
Chart ESIII-4, US, Unemployment Rate 16-24 Years, Percent NSA, 1948-2012
Sources: US Bureau of Labor Statistics
It is more difficult to move to other jobs after a certain age because of fewer available opportunities for matured individuals than for new entrants into the labor force. Middle-aged unemployed are less likely to find another job. Table ESIII-4 provides the unemployment level ages 45 years and over. The number unemployed ages 45 years and over rose from 1.985 million in Jul 2006 to 4.821 million in July 2010 or by 142.9 percent. The number of unemployed ages 45 years and over declined to 4.405 million in Jul 2012 that is still higher by 121.9 percent than in Jul 2006. The number unemployed age 45 and over jumped from 1.704 million in Nov 2006 to 4.909 million in Nov 2010 or 188.1 percent and at 3.861 million in Nov 2012 is higher by 2.157 million or 126.6 percent higher than 1.704 million in Nov 2006.
Table ESIII-4, US, Unemployment Level 45 Years and Over, Thousands NSA
| Year | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 1539 | 1640 | 1586 | 1722 | 1786 | 1901 | 1576 |
| 2002 | 2173 | 2114 | 1966 | 1945 | 2013 | 2210 | 2114 |
| 2003 | 2281 | 2301 | 2157 | 2032 | 2132 | 2130 | 2253 |
| 2004 | 2116 | 2082 | 1951 | 1931 | 2053 | 2086 | 2149 |
| 2005 | 2119 | 1895 | 1992 | 1875 | 1920 | 1963 | 2009 |
| 2006 | 1985 | 1869 | 1710 | 1607 | 1704 | 1794 | 1848 |
| 2007 | 2053 | 1956 | 1854 | 1885 | 1925 | 2120 | 1966 |
| 2008 | 2492 | 2695 | 2595 | 2728 | 3078 | 3485 | 2540 |
| 2009 | 4757 | 4683 | 4560 | 4492 | 4655 | 4960 | 4500 |
| 2010 | 4821 | 5128 | 4640 | 4576 | 4909 | 4762 | 4879 |
| 2011 | 4772 | 4592 | 4426 | 4375 | 4195 | 4182 | 4537 |
| 2012 | 4405 | 4179 | 3899 | 3800 | 3861 |
Sources: US Bureau of Labor Statistics
Chart ESIII-5 provides the level unemployed ages 45 years and over. There was sharp increase during the global recession and inadequate decline. There was an increase during the 2001 recession and then stability. The US is facing a major challenge of reemploying middle-aged workers.
Chart ESIII-5, US, Unemployment Level Ages 45 Years and Over, Thousands, NSA, 1976-2012
Sources: US Bureau of Labor Statistics
ESIV World Inflation Waves. This section provides analysis and data on world inflation waves. The text has more extensive analysis. IIA1 Appendix: Transmission of Unconventional Monetary Policy in the text provides more technical analysis. Section IIB United States Inflation analyzes inflation in the United States in two subsections: IIC Long-term US Inflation and IID Current US Inflation.
The critical fact of current world financial markets is the combination of “unconventional” monetary policy with intermittent shocks of financial risk aversion. There are two interrelated unconventional monetary policies. First, unconventional monetary policy consists of (1) reducing short-term policy interest rates toward the “zero bound” such as fixing the fed funds rate at 0 to ¼ percent by decision of the Federal Open Market Committee (FOMC) since Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). Second, unconventional monetary policy also includes a battery of measures to also reduce long-term interest rates of government securities and asset-backed securities such as mortgage-backed securities.
When inflation is low, the central bank lowers interest rates to stimulate aggregate demand in the economy, which consists of consumption and investment. When inflation is subdued and unemployment high, monetary policy would lower interest rates to stimulate aggregate demand, reducing unemployment. When interest rates decline to zero, unconventional monetary policy would consist of policies such as large-scale purchases of long-term securities to lower their yields. A major portion of credit in the economy is financed with long-term asset-backed securities. Loans for purchasing houses, automobiles and other consumer products are bundled in securities that in turn are sold to investors. Corporations borrow funds for investment by issuing corporate bonds. Loans to small businesses are also financed by bundling them in long-term bonds. Securities markets bridge the needs of higher returns by savers obtaining funds from investors that are channeled to consumers and business for consumption and investment. Lowering the yields of these long-term bonds could lower costs of financing purchases of consumer durables and investment by business. The essential mechanism of transmission from lower interest rates to increases in aggregate demand is portfolio rebalancing. Withdrawal of bonds in a specific maturity segment or directly in a bond category such as currently mortgage-backed securities causes reductions in yield that are equivalent to increases in the prices of the bonds. There can be secondary increases in purchases of those bonds in private portfolios in pursuit of their increasing prices. Lower yields translate into lower costs of buying homes and consumer durables such as automobiles and also lower costs of investment for business. There are two additional intended routes of transmission.
1. Unconventional monetary policy or its expectation can increase stock market valuations (Bernanke 2010WP). Increases in equities traded in stock markets can augment perceptions of the wealth of consumers inducing increases in consumption.
2. Unconventional monetary policy causes devaluation of the dollar relative to other currencies, which can cause increases in net exports of the US that increase aggregate economic activity (Yellen 2011AS).
Monetary policy can lower short-term interest rates quite effectively. Lowering long-term yields is somewhat more difficult. The critical issue is that monetary policy cannot ensure that increasing credit at low interest cost increases consumption and investment. There is a large variety of possible allocation of funds at low interest rates from consumption and investment to multiple risk financial assets. Monetary policy does not control how investors will allocate asset categories. A critical financial practice is to borrow at low short-term interest rates to invest in high-risk, leveraged financial assets. Investors may increase in their portfolios asset categories such as equities, emerging market equities, high-yield bonds, currencies, commodity futures and options and multiple other risk financial assets including structured products. If there is risk appetite, the carry trade from zero interest rates to risk financial assets will consist of short positions at short-term interest rates (or borrowing) and short dollar assets with simultaneous long positions in high-risk, leveraged financial assets such as equities, commodities and high-yield bonds. Low interest rates may induce increases in valuations of risk financial assets that may fluctuate in accordance with perceptions of risk aversion by investors and the public. During periods of muted risk aversion, carry trades from zero interest rates to exposures in risk financial assets cause temporary waves of inflation that may foster instead of preventing financial instability. During periods of risk aversion such as fears of disruption of world financial markets and the global economy resulting from collapse of the European Monetary Union, carry trades are unwound with sharp deterioration of valuations of risk financial assets. More technical discussion is in IIA Appendix: Transmission of Unconventional Monetary Policy.
Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output. Monetary easing by unconventional measures is now open ended in perpetuity, or QE∞, as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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 economic recovery strengthens.”
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
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.”
The actual objective is attempting to bring the unemployment rate to 5.2 percent but because of the lag in effect of monetary policy impulses on income and prices policy uses “projections” such that the target of monetary policy is a forecast of unemployment and inflation. Unconventional monetary policy will remain in perpetuity, or QE∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.2 percent on average in the cyclical expansion in the 13 quarters from IIIQ2009 to IIIQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, reduction of the unemployment rate to normal would take between 15 and 43.3 years depending on the definition (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). The US labor force stood at 154.088 million in Oct 2011 and at 155.779 million in Oct 2012, not seasonally adjusted, for increase of 1.691 million, or 140,917 per month. The US labor force stood at 153.683 million in Nov 2011 and 154.953 million in Nov 2012, not seasonally adjusted, for increase of 1.270 million or 105,833 per month. The average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 is insufficient even to absorb 140,917 new entrants per month into the labor force. The difference between the average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 and the 105,833 average monthly increase in the labor force from Nov 2011 to Nov 2012 is 19,945 monthly new jobs net of absorption of new entrants in the labor force. There are 28.6 million in job stress in the US currently. The provision of 19,945 new jobs per month net of absorption of new entrants in the labor force would require 1434 months to provide jobs for the unemployed and underemployed (28.6 million divided by 19,945) or 119 years (1434 divided by 12). Net job creation of 19,945 jobs per month only adds 239,340 jobs in a year. The civilian labor force of the US in Nov 2012 not seasonally adjusted stood at 154.953 million with 11.404 million unemployed or effectively 18.094 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 4.2 years. Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.748 million for new net job creation of 3.656 million that at the current rate would take 15 years. Under the calculation in this blog there are 18.094 million unemployed by including those who ceased searching because they believe there is no job for them. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.346 million jobs net of labor force growth that at the current rate would take 43.2 years. These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply.
Second, calculations show that actual US GDP growth is around 1.5 percent per year that will perpetuate unemployment/underemployment (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.5 percent is well below trend growth of 3 percent per year from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.77 points of inventory accumulation to growth of 2.7 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.3 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.3 percent in IIIQ2012 annualizes to 1.5 percent in the first three quarters of 2012 {([(1.02)1/4(1.013)1/4(1.0131/4]4/3 -1)100 = 1.5%}. The actual rate required to reduce unemployment/underemployment to normal is even higher than 3 percent in historical trend.
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation QE∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.
Table ESIV-1 provides annual equivalent rates of inflation for producer price indexes followed in this blog of countries and regions that account for close to three quarters of world output. The behavior of the US producer price index in 2011 and into 2012 shows neatly multiple waves. (1) In Jan-Apr 2011, without risk aversion, US producer prices rose at the annual equivalent rate of 9.7 percent. (2) After risk aversion, producer prices increased in the US at the annual equivalent rate of 1.2 percent in May-Jun 2011. (3) From Jul to Sep 2011, under alternating episodes of risk aversion, producer prices increased at the annual equivalent rate of 6.6 percent. (4) Under the pressure of risk aversion because of the European debt crisis US producer prices fell at the annual equivalent rate of minus 1.2 percent in Oct-Nov 2011. (5) From Dec 2011 to Jan 2012, US producer prices rose at the annual equivalent rate of 1.2 percent with relaxed risk aversion and commodity-price increases at the margin. (6) Inflation of producer prices returned with 1.2 percent annual equivalent in Feb-Mar 2012. (7) With return of risk aversion from the European debt crisis, producer prices fell at the annual equivalent rate of 7.5 percent in Apr-Jun 2012. (8) New positions in commodity futures even with continuing risk aversion caused annual equivalent inflation of 3.0 percent in Jun-Jul 2012. (9) Relaxed risk aversion because of announcement of sovereign bond-buying by the European Central Bank caused restrained risk aversion inducing carry trades that resulted in annual equivalent producer price inflation in the US of 18.2 percent in Aug-Sep 2012. (10) Renewed risk aversion caused unwinding of carry trades of zero interest rates to commodity futures exposures with annual equivalent inflation of minus 2.4 percent in Oct 2012. Resolution of the European debt crisis if there is not an unfavorable growth event with political development in China would result in jumps of valuations of risk financial assets. Increases in commodity prices would cause the same high producer price inflation experienced in Jan-Apr 2011 and Aug-Sep 2012. An episode of exploding commodity prices could ignite inflationary expectations that would result in an inflation phenomenon of costly resolution. There are nine producer-price indexes in Table ESIV-1 for seven countries (two for the UK) and one region (euro area) showing very similar behavior. Zero interest rates without risk aversion cause increases in commodity prices that in turn increase input and output prices. Producer price inflation rose at very high rates during the first part of 2011 for the US, Japan, China, Euro Area, Germany, France, Italy and the UK when risk aversion was contained. With the increase in risk aversion in May and Jun 2011, inflation moderated because carry trades were unwound. Producer price inflation returned after July 2011, with alternating bouts of risk aversion. In the final months of the year producer price inflation collapsed because of the disincentive to exposures in commodity futures resulting from fears of resolution of the European debt crisis. There is renewed worldwide inflation in the early part of 2012 with subsequent collapse because of another round of sharp risk aversion. Sharp worldwide jump in producer prices occurred recently as a result of the combination of zero interest rates forever or QE∞ with temporarily relaxed risk aversion. Producer prices are moderating or falling currently because of renewed risk aversion that causes unwinding of carry trades from zero interest rates to commodity futures exposures. Unconventional monetary policy fails in stimulating the overall real economy, merely introducing undesirable instability as monetary authorities cannot control allocation of floods of money at zero interest rates to carry trades into risk financial assets. The economy is constrained in a suboptimal allocation of resources that is perpetuated along a continuum of short-term periods results in long-term or dynamic inefficiency in the form of a trajectory of economic activity that is lower than what would be attained with rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html).
Table ESIV-1, Annual Equivalent Rates of Producer Price Indexes
| INDEX 2011-2012 | AE ∆% |
| US Producer Price Index | |
| AE ∆% Oct-Nov | -5.8 |
| AE ∆% Aug-Sep 2012 | 18.2 |
| AE ∆% Jun-Jul 2012 | 3.0 |
| AE ∆% Apr-May 2012 | -7.5 |
| AE ∆% Feb-Mar 2012 | 1.2 |
| AE ∆% Dec 2011-Jan-2012 | 1.2 |
| AE ∆% Oct-Nov 2011 | -1.2 |
| AE ∆% Jul-Sep 2011 | 6.6 |
| AE ∆% May-Jun 2011 | 1.2 |
| AE ∆% Jan-Apr 2011 | 9.7 |
| Japan Corporate Goods Price Index | |
| AE ∆% Oct-Nov | -1.8 |
| AE ∆% Aug-Sep 2012 | 2.4 |
| AE ∆% May-Jul 2012 | -5.8 |
| AE ∆% Feb-Apr 2012 | 2.4 |
| AE ∆% Dec 2011-Jan 2012 | -0.6 |
| AE ∆% Jul-Nov 2011 | -2.2 |
| AE ∆% May-Jun 2011 | -1.2 |
| AE ∆% Jan-Apr 2011 | 5.9 |
| China Producer Price Index | |
| AE ∆% Oct-Nov | 0.6 |
| AE ∆% May-Sep 2012 | -5.8 |
| AE ∆% Feb-Apr 2012 | 2.4 |
| AE ∆% Dec 2011-Jan 2012 | -2.4 |
| AE ∆% Jul-Nov 2011 | -3.1 |
| AE ∆% Jan-Jun 2011 | 6.4 |
| Euro Zone Industrial Producer Prices | |
| AE ∆% Sep-Oct 2012 | 1.8 |
| AE ∆% Jul-Aug 2012 | 7.4 |
| AE ∆% Apr-Jun 2012 | -3.9 |
| AE ∆% Jan-Mar 2012 | 8.3 |
| AE ∆% Oct-Dec 2011 | 0.8 |
| AE ∆% Jul-Sep | 2.0 |
| AE ∆% May-Jun | -1.2 |
| AE ∆% Jan-Apr | 12.0 |
| Germany Producer Price Index | |
| AE ∆% Oct 2012 | 0.0 NSA 1.2SA |
| AE ∆% Aug-Sep 2012 | 4.9 NSA 5.5 SA |
| AE ∆% May-Jul 2012 | -2.8 NSA –0.8 SA |
| AE ∆% Feb-Apr 2012 | 4.9 NSA 1.2 SA |
| AE ∆% Dec 2011-Jan 2012 | 1.2 NSA –0.6 SA |
| AE ∆% Oct-Nov 2011 | 1.8 NSA 3.0 SA |
| AE ∆% Jul-Sep 2011 | 2.8 NSA 3.7 SA |
| AE ∆% May-Jun 2011 | 0.6 NSA 3.7 SA |
| AE ∆% Jan-Apr 2011 | 10.4 NSA 6.5 SA |
| France Producer Price Index for the French Market | |
| AE ∆% Jul-Sep 2012 | 9.2 |
| AE ∆% Apr-Jun 2012 | -7.7 |
| AE ∆% Jan-Mar 2012 | 8.3 |
| AE ∆% Oct-Dec 2011 | 2.4 |
| AE ∆% Jul-Sep 2011 | 2.8 |
| AE ∆% May-Jun 2011 | -3.5 |
| AE ∆% Jan-Apr 2011 | 11.7 |
| Italy Producer Price Index | |
| AE ∆% Sep-Oct 2012 | -2.4 |
| AE ∆% Jul-Aug 2012 | 6.8 |
| AE ∆% May-Jun 2012 | -2.4 |
| AE ∆% Mar-Apr 2012 | 4.3 |
| AE ∆% Jan-Feb 2012 | 7.4 |
| AE ∆% Oct-Dec 2011 | 0.4 |
| AE ∆% Jul-Sep 2011 | 2.4 |
| AE ∆% May-Jun 2011 | -1.2 |
| AE ∆% Jan-April 2011 | 10.7 |
| UK Output Prices | |
| AE ∆% Jul-Oct | 3.7 |
| AE ∆% May-Jun 2012 | -5.3 |
| AE ∆% Feb-Apr 2012 | 7.9 |
| AE ∆% Nov 2011-Jan-2012 | 1.6 |
| AE ∆% May-Oct 2011 | 2.0 |
| AE ∆% Jan-Apr 2011 | 12.0 |
| UK Input Prices | |
| AE ∆% Jul-Oct 2012 | 7.7 |
| AE ∆% Apr-Jun 2012 | -21.9 |
| AE ∆% Jan-Mar 2012 | 18.1 |
| AE ∆% Nov-Dec 2011 | -1.2 |
| AE ∆% May-Oct 2011 | -3.1 |
| AE ∆% Jan-Apr 2011 | 35.6 |
AE: Annual Equivalent
Sources:
http://www.stats.gov.cn/enGliSH/
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
https://www.destatis.de/EN/Homepage.html
http://www.insee.fr/en/default.asp
http://www.ons.gov.uk/ons/index.html
Similar world inflation waves are in the behavior of consumer price indexes of six countries and the euro zone in Table ESIV-2. US consumer price inflation shows similar waves. (1) Under risk appetite in Jan-Apr 2011 consumer prices increased at the annual equivalent rate of 4.9 percent. (2) Risk aversion caused the collapse of inflation to annual equivalent 2.8 percent in May-Jul 2011. (3) Risk appetite drove the rate of consumer price inflation in the US to 3.7 percent in Jul-Sep 2011. (4) Gloomier views of carry trades caused the collapse of inflation in Oct-Nov 2011 to annual equivalent 0.6 percent. (5) Consumer price inflation resuscitated with increased risk appetite at annual equivalent of 1.2 percent in Dec 2011 to Jan 2012. (6) Consumer price inflation returned at 2.8 percent annual equivalent in Feb-Apr 2012. (7) Under renewed risk aversion, annual equivalent consumer price inflation in the US is minus 1.2 percent in May-Jul 2012. (8) Inflation jumped to annual equivalent 7.4 percent in Aug-Sep 2012 and 5.3 percent in Aug-Oct 2012. Inflationary expectations can be triggered in one of these episodes of accelerating inflation because of commodity carry trades induced by unconventional monetary policy of zero interest rates in perpetuity or QE∞. Alternating episodes of increase and decrease of inflation introduce uncertainty in household planning that frustrates consumption and home buying. Announcement of purchases of impaired sovereign bonds by the European Central Bank relaxed risk aversion that induced carry trades into commodity exposures, increasing prices of food, raw materials and energy. There is similar behavior in all the other consumer price indexes in Table ESIV-2. China’s CPI increased at annual equivalent 8.3 percent in Jan-Mar 2011, 2.0 percent in Apr-Jun, 2.9 percent in Jul-Dec and resuscitated at 5.8 percent annual equivalent in Dec 2011 to Mar 2012, declining to minus 3.9 percent in Apr-Jun 2012 but resuscitating at 4.1 percent in Jul-Sep 2012, declining to minus 1.2 percent in Oct 2012 and 0.0 percent in Oct-Nov 2012. The euro zone harmonized index of consumer prices (HICP) increased at annual equivalent 5.2 percent in Jan-Apr 2011, minus 2.4 percent in May-Jul 2011, 4.3 percent in Aug-Dec 2011, minus 3.0 percent in Dec 2011-Jan 2012 and then 9.6 percent in Feb-Apr 2012, falling to minus 2.8 percent annual equivalent in May-Jul 2012 but resuscitating at 5.3 percent in Aug-Oct 2012. The current shock of risk aversion forced minus 2.4 percent annual equivalent in Nov 2012. The price indexes of the largest members of the euro zone, Germany, France and Italy, and the euro zone as a whole, exhibit the same inflation waves. The United Kingdom CPI increased at annual equivalent 6.5 percent in Jan-Apr 2011, falling to only 0.4 percent in May-Jul 2011 and then increasing at 4.6 percent in Aug-Nov 2011. UK consumer prices fell at 0.6 percent annual equivalent in Dec 2011 to Jan 2012 but increased at 6.2 percent annual equivalent from Feb to Apr 2012. In May-Jun 2012, with renewed risk aversion, UK consumer prices fell at the annual equivalent rate of minus 3.0 percent. Inflation returned in the UK at average annual equivalent of 4.6 percent in Jul-Oct 2012 with inflation in Oct 2012 caused mostly by increases of university tuition fees. Inflation returned at 4.1 percent annual equivalent in Jul-Sep 2012 and was higher in annual equivalent producer price inflation in the UK in Jul-Oct 2012 at 3.7 percent for output prices and 7.7 percent for input prices (see Table ESIV-1).
Table ESIV-2, Annual Equivalent Rates of Consumer Price Indexes
| Index 2011-2012 | AE ∆% |
| US Consumer Price Index | |
| AE ∆% Nov 2012 | -3.5 |
| AE ∆% Aug-Oct 2012 | 5.3 |
| AE ∆% May-Jul 2012 | -1.2 |
| AE ∆% Feb-Apr 2012 | 2.8 |
| AE ∆% Dec 2011-Jan 2012 | 1.2 |
| AE ∆% Oct-Nov 2011 | 0.6 |
| AE ∆% Jul-Sep 2011 | 3.7 |
| AE ∆% May-Jul 2011 | 2.8 |
| AE ∆% Jan-Apr 2011 | 4.9 |
| China Consumer Price Index | |
| AE ∆% Oct-Nov | 0.0 |
| AE ∆% Jul-Sep | 4.1 |
| AE ∆% Apr-Jun 2012 | -3.9 |
| AE ∆% Dec 2011-Mar 2012 | 5.8 |
| AE ∆% Jul-Nov 2011 | 2.9 |
| AE ∆% Apr-Jun 2011 | 2.0 |
| AE ∆% Jan-Mar 2011 | 8.3 |
| Euro Zone Harmonized Index of Consumer Prices | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Aug-Oct 2012 | 5.3 |
| AE ∆% May-Jul 2012 | -2.8 |
| AE ∆% Feb-Apr 2012 | 9.6 |
| AE ∆% Dec 2011-Jan 2012 | -3.0 |
| AE ∆% Aug-Nov 2011 | 4.3 |
| AE ∆% May-Jul 2011 | -2.4 |
| AE ∆% Jan-Apr 2011 | 5.2 |
| Germany Consumer Price Index | |
| AE ∆% Sep-Nov 2012 | -0.4 NSA 1.6 SA |
| AE ∆% Jul-Aug 2012 | 4.9 NSA 3.7 SA |
| AE ∆% May-Jun 2012 | -1.8 NSA 1.2 SA |
| AE ∆% Feb-Apr 2012 | 4.9 NSA 2.4 SA |
| AE ∆% Dec 2011-Jan 2012 | 1.8 NSA 1.8 SA |
| AE ∆% Jul-Nov 2011 | 1.2 NSA 2.2 SA |
| AE ∆% May-Jun 2011 | 0.6 NSA 2.4 SA |
| AE ∆% Feb-Apr 2011 | 2.4 NSA 2.4 SA |
| France Consumer Price Index | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Aug-Oct 2012 | 2.4 |
| AE ∆% May-Jul 2012 | -2.0 |
| AE ∆% Feb-Apr 2012 | 5.3 |
| AE ∆% Dec 2011-Jan 2012 | 0.0 |
| AE ∆% Aug-Nov 2011 | 2.7 |
| AE ∆% May-Jul 2011 | -0.8 |
| AE ∆% Jan-Apr 2011 | 4.3 |
| Italy Consumer Price Index | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Sep-Oct 2012 | 0.0 |
| AE ∆% Jul-Aug 2012 | 3.0 |
| AE ∆% May-Jun 2012 | 1.2 |
| AE ∆% Feb-Apr 2012 | 5.7 |
| AE ∆% Dec 2011-Jan 2012 | 4.3 |
| AE ∆% Oct-Nov 2011 | 3.0 |
| AE ∆% Jul-Sep 2011 | 2.4 |
| AE ∆% May-Jun 2011 | 1.2 |
| AE ∆% Jan-Apr 2011 | 4.9 |
| UK Consumer Price Index | |
| AE ∆% Jul-Oct 2012 | 4.6 |
| AE ∆% May-Jun 2012 | -3.0 |
| AE ∆% Feb-Apr 2012 | 6.2 |
| AE ∆% Dec 2011-Jan 2012 | -0.6 |
| AE ∆% Aug-Nov 2011 | 4.6 |
| AE ∆% May-Jul 2011 | 0.4 |
| AE ∆% Jan-Apr 2011 | 6.5 |
AE: Annual Equivalent
Sources:
http://www.stats.gov.cn/enGliSH/
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
https://www.destatis.de/EN/Homepage.html
http://www.insee.fr/en/default.asp
http://www.ons.gov.uk/ons/index.html
IA Recovery without Hiring. Professor Edward P. Lazear (2012Jan19) at Stanford University finds that recovery of hiring in the US to peaks attained in 2007 requires an increase of hiring by 30 percent while hiring levels have increased by only 4 percent since Jan 2009. The high level of unemployment with low level of hiring reduces the statistical probability that the unemployed will find a job. According to Lazear (2012Jan19), the probability of finding a new job currently is about one third of the probability of finding a job in 2007. Improvements in labor markets have not increased the probability of finding a new job. Lazear (2012Jan19) quotes an essay coauthored with James R. Spletzer forthcoming in the American Economic Review on the concept of churn. A dynamic labor market occurs when a similar amount of workers is hired as those who are separated. This replacement of separated workers is called churn, which explains about two-thirds of total hiring. Typically, wage increases received in a new job are higher by 8 percent. Lazear (2012Jan19) argues that churn has declined 35 percent from the level before the recession in IVQ2007. Because of the collapse of churn there are no opportunities in escaping falling real wages by moving to another job. As this blog argues, there are meager chances of escaping unemployment because of the collapse of hiring and those employed cannot escape falling real wages by moving to another job (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html). Lazear and Spletzer (2012Mar, 1) argue that reductions of churn reduce the operational effectiveness of labor markets. Churn is part of the allocation of resources or in this case labor to occupations of higher marginal returns. The decline in churn can harm static and dynamic economic efficiency. Losses from decline of churn during recessions can affect an economy over the long-term by preventing optimal growth trajectories because resources are not used in the occupations where they provide highest marginal returns. Lazear and Spletzer (2012Mar 7-8) conclude that: “under a number of assumptions, we estimate that the loss in output during the recession [of 2007 to 2009] and its aftermath resulting from reduced churn equaled $208 billion. On an annual basis, this amounts to about .4% of GDP for a period of 3½ years.”
There are two additional facts discussed below: (1) there are about ten million fewer full-time jobs currently than before the recession of 2008 and 2009; and (2) the extremely high and rigid rate of youth unemployment is denying an early start to young people ages 16 to 24 years while unemployment of ages 45 years or over has swelled. There are four subsections. IA1 Hiring Collapse provides the data and analysis on the weakness of hiring in the United States economy. IA2 Labor Underutilization provides the measures of labor underutilization of the Bureau of Labor Statistics (BLS). Statistics on the decline of full-time employment are in IA3 Ten Million Fewer Full-time Jobs. IA4 Youth and Middle-Age Unemployment provides the data on high unemployment of ages 16 to 24 years and of ages 45 years or over.
IA1 Hiring Collapse. An important characteristic of the current fractured labor market of the US is the closing of the avenue for exiting unemployment and underemployment normally available through dynamic hiring. Another avenue that is closed is the opportunity for advancement in moving to new jobs that pay better salaries and benefits again because of the collapse of hiring in the United States. Those who are unemployed or underemployed cannot find a new job even accepting lower wages and no benefits. The employed cannot escape declining inflation-adjusted earnings because there is no hiring. The objective of this section is to analyze hiring and labor underutilization in the United States.
An appropriate measure of job stress is considered by Blanchard and Katz (1997, 53):
“The right measure of the state of the labor market is the exit rate from unemployment, defined as the number of hires divided by the number unemployed, rather than the unemployment rate itself. What matters to the unemployed is not how many of them there are, but how many of them there are in relation to the number of hires by firms.”
The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).
The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):
“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”
The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS (see also Lazear and Spletzer 2012Mar, 6-7).
Hiring in the nonfarm sector (HNF) has declined from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million while hiring in the private sector (HP) has declined from 59.5 million in 2006 to 46.9 million in 2011 or by 12.6 million, as shown in Table I-1. The ratio of nonfarm hiring to employment (RNF) has fallen from 47.2 in 2005 to 38.1 in 2011 and in the private sector (RHP) from 52.1 in 2006 to 42.9 in 2011. The collapse of hiring in the US has not been followed by dynamic labor markets because of the low rate of economic growth of 2.2 percent in the first thirteen quarters of expansion from IIIQ2009 to IIIQ2012 compared with 6.2 percent in prior cyclical expansions (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Table I-1, US, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment
| HNF | Rate RNF | HP | Rate HP | |
| 2001 | 62,948 | 47.8 | 58,825 | 53.1 |
| 2002 | 58,583 | 44.9 | 54,759 | 50.3 |
| 2003 | 56,451 | 43.4 | 53,056 | 48.9 |
| 2004 | 60,367 | 45.9 | 56,617 | 51.6 |
| 2005 | 63,150 | 47.2 | 59,372 | 53.1 |
| 2006 | 63,773 | 46.9 | 59,494 | 52.1 |
| 2007 | 62,421 | 45.4 | 58,035 | 50.3 |
| 2008 | 55,166 | 40.3 | 51,606 | 45.2 |
| 2009 | 46,398 | 35.5 | 43,052 | 39.8 |
| 2010 | 48,647 | 37.5 | 44,826 | 41.7 |
| 2011 | 50,083 | 38.1 | 46,869 | 42.9 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Chart I-2 shows the ratio or rate of nonfarm hiring to employment (RNF) that also fell much more in the recession of 2007 to 2009 than in the shallow recession of 2001. Recovery is weak.
Chart I-1, US, Level Total Nonfarm Hiring (HNF), Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Chart I-2 shows the ratio or rate of nonfarm hiring to employment (RNF) that also fell much more in the recession of 2007 to 2009 than in the shallow recession of 2001. Recovery is weak.
Chart I-2, US, Rate Total Nonfarm Hiring (HNF), Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Yearly percentage changes of total nonfarm hiring (HNF) are provided in Table I-2. There were much milder declines in 2002 of 6.9 percent and 3.6 percent in 2003 followed by strong rebounds of 6.9 percent in 2004 and 4.6 percent in 2005. In contrast, the contractions of nonfarm hiring in the recession after 2007 were much sharper in percentage points: 2.1 in 2007, 11.6 in 2008 and 15.9 percent in 2009. On a yearly basis, nonfarm hiring grew 4.8 percent in 2010 relative to 2009 and 3.0 percent in 2011.
Table I-2, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2001-2011
| Year | Annual |
| 2002 | -6.9 |
| 2003 | -3.6 |
| 2004 | 6.9 |
| 2005 | 4.6 |
| 2006 | 1.0 |
| 2007 | -2.1 |
| 2008 | -11.6 |
| 2009 | -15.9 |
| 2010 | 4.8 |
| 2011 | 3.0 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Chart I-3 plots yearly percentage changes of nonfarm hiring. Percentage declines after 2007 were quite sharp.
Chart I-3, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Total private hiring (HP) yearly data are provided in Chart I-4. There has been sharp contraction of total private hiring in the US and only milder recovery in 2011 than in 2010.
Chart I-4, US, Total Private Hiring Level, Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Chart I-5 plots the rate of total private hiring relative to employment (RHP). The rate collapsed during the global recession after 2007 with insufficient recovery.
Chart I-5, US, Rate Total Private Hiring, Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Total nonfarm hiring (HNF), total private hiring (HP) and their respective rates are provided for the month of Oct in the years from 2001 to 2012 in Table I-3. Hiring numbers are in thousands. There is some recovery in HNF from 4012 thousand (or 4.0 million) in Oct 2009 to 4507 thousand in Oct 2011 and 4608 thousand in Oct 2012 for cumulative gain of 14.8 percent. HP rose from 3725 thousand in Oct 2009 to 4275 thousand in Oct 2011 and 4352 thousand in Oct 2012 for cumulative gain of 16.8 percent. HNF has fallen from 5572 in Oct 2006 to 4608 in Oct 2012 or by 17.3 percent. HP has fallen from 5264 in Oct 2007 to 4352 in Oct 2012 or by 17.3 percent. The labor market continues to be fractured, failing to provide an opportunity to exit from unemployment/underemployment or to find an opportunity for advancement away from declining inflation-adjusted earnings.
Table I-3, US, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted
| HNF | Rate RNF | HP | Rate HP | |
| 2001 Oct | 5401 | 4.1 | 5090 | 4.6 |
| 2002 Oct | 5156 | 3.9 | 4840 | 4.4 |
| 2003 Oct | 5234 | 4.0 | 4922 | 4.5 |
| 2004 Oct | 5490 | 4.1 | 5176 | 4.7 |
| 2005 Oct | 5357 | 4.0 | 5067 | 4.5 |
| 2006 Oct | 5544 | 4.0 | 5246 | 4.6 |
| 2007 Oct | 5572 | 4.0 | 5264 | 4.5 |
| 2008 Oct | 4785 | 3.5 | 4515 | 4.0 |
| 2009 Oct | 4012 | 3.1 | 3725 | 3.5 |
| 2010 Oct | 4307 | 3.3 | 4038 | 3.7 |
| 2011 Oct | 4507 | 3.4 | 4275 | 3.9 |
| 2012 Sep | 4509 | 3.4 | 4352 | 3.3 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Chart I-6 provides total nonfarm hiring on a monthly basis from 2001 to 2012. Nonfarm hiring rebounded in early 2010 but then fell and stabilized at a lower level than the early peak not-seasonally adjusted (NSA) of 4786 in May 2010 until it surpassed it with 4869 in Jun 2011 but declined to 4608 in Oct 2012. Nonfarm hiring fell again in Dec 2011 to 3038 from 3844 in Nov and to revised 3633 in Feb 2012, increasing to 4127 in Mar 2012, 4490 in Apr 2012, 4926 in May 2012, 4988 in Jun 2012, 4732 in Jul 2012, 4962 in Aug 2012, 4380 in Sep 2012 and 4608 in Oct 2012. Chart I-6 provides seasonally-adjusted (SA) monthly data. The number of seasonally-adjusted hires in Aug 2011 was 4221 thousand, increasing to revised 4444 thousand in Feb 2012, or 5.3 percent, but falling to revised 4335 thousand in Mar 2012 and 4213 in Apr 2012, or cumulative decline of 0.2 percent relative to Aug 2011, moving to 4339 in Oct 2012 for cumulative increase of 2.8 percent from 4220 in Oct 2011 and increase of 3.2 percent relative to 4204 in Sep 2012. The number of hires not seasonally adjusted was 4655 in Aug 2011, falling to 3038 in Dec 2011 but increasing to 4072 in Jan 2012 and 4608 in Oct 2012. The number of nonfarm hiring not seasonally adjusted fell by 34.7 percent from 4655 in Aug 2011 to 3038 in Dec 2011 in a yearly-repeated seasonal pattern.
Chart I-6, US, Total Nonfarm Hiring (HNF), 2001-2012 Month SA
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Similar behavior occurs in the rate of nonfarm hiring plot in Chart I-7. Recovery in early 2010 was followed by decline and stabilization at a lower level but with stability in monthly SA estimates of 3.2 in Sep 2011 to 3.2 in Jan 2012, increasing to 3.4 in May 2012 and falling to 3.2 in both Jun and Jul 2012, increasing to 3.3 in Aug 2012 but falling to 3.2 in Oct 2012. The rate not seasonally adjusted fell from 3.7 in Jun 2011 to 2.3 in Dec, climbing to 3.1 in Jan 2012, 3.7 in both May and Jun 2012 and falling to 3,6 in Jul, increasing to 3.7 in Aug and falling to 3.3 in Sep 2012 and 3.4 in Oct 2012. Rates of nonfarm hiring NSA were in the range of 2.8 (Dec) to 4.5 (Jun) in 2006.
Chart I-7, US, Rate Total Nonfarm Hiring, Month SA 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
There is only milder improvement in total private hiring shown in Chart I-8. Hiring private (HP) rose in 2010 with stability and renewed increase in 2011 followed by stationary series in 2012. The number of private hiring seasonally adjusted fell from 4002 thousand in Sep 2011 to 3889 in Dec 2011 or by 2.8 percent, increasing to 3945 in Jan 2012 or decline by 1.4 relative to the level in Sep 2011 but decreasing to 3922 in Sep 2012 or lower by 2.0 percent relative to Sep 2011 and increasing to 4056 in Oct 2012 for increase of 2.8 percent relative to 3945 in Jan 2012. The number of private hiring not seasonally adjusted fell from 4130 in Sep 2011 to 2856 in Dec or by 30.8 percent, reaching 3782 in Jan 2012 or decline of 8.4 percent relative to Sep 2011 and increasing to 4352 in Oct 2012 or 5.4 percent higher relative to Sep 2011. Companies do not hire in the latter part of the year that explains the high seasonality in year-end employment data. For example, NSA private hiring fell from 4934 in Sep 2006 to 3635 in Dec 2006 or by 26.3 percent. Private hiring NSA data are useful in showing the huge declines from the period before the global recession. In Jul 2006 private hiring NSA was 5555, declining to 4293 in Jul 2011 or by 22.7 percent and to 4403 in Jul 2012 or lower by 20.7 percent relative to Jul 2006. Private hiring NSA fell from 5215in Sep 2005 to 3999 in Sep 2012 or 23.3 percent and fell from 5264 in Oct 2007 to 4352 in Oct 2007 or 17.3 percent. The conclusion is that private hiring in the US is around 20 percent below the hiring before the global recession. The main problem in recovery of the US labor market has been the low rate of growth of 2.2 percent in the twelve quarters of expansion of the economy from IIIQ2009 to IIIQ2012 compared with average 6.2 percent in prior expansions from contractions (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart I-8, US, Total Private Hiring Month SA 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Chart I-9 shows similar behavior in the rate of private hiring. The rate in 2011 in monthly SA data did not rise significantly above the peak in 2010. The rate seasonally adjusted fell from 3.6 in Sep 2011 to 3.5 in Dec 2011 and reached 3.6 in Oct 2012. The rate not seasonally adjusted (NSA) fell from 3.8 in Sep 2011 to 2.6 in Dec 2011, increasing to 3.9 in Oct 2012. The NSA rate of private hiring fell from 4.8 in Jul 2006 to 3.4 in Jul 2009 but recovery was insufficient to only 3.9 in Oct 2012.
Chart I-9, US, Rate Total Private Hiring Month SA 2011-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
The JOLTS report of the Bureau of Labor Statistics also provides total nonfarm job openings (TNF JOB), TNF JOB rate and TNF LD (layoffs and discharges) shown in Table I-4 for the month of Oct from 2001 to 2012. The final column provides annual TNF LD for the years from 2001 to 2011. Nonfarm job openings fell from a peak of 4678 in Oct 2006 to 3982 in Oct 2012 or by 14.9 percent while the rate dropped from 3.3 to 2.8. Nonfarm layoffs and discharges (TNF LD) rose from 1843 in Oct 2005 to 2319 in Oct 2008 or by 25.8 percent. The annual data show layoffs and discharges rising from 21.2 million in 2006 to 26.8 million in 2009 or by 26.4 percent.
Table I-4, US, Job Openings and Total Separations, Thousands NSA
| TNF JOB | TNF JOB | TNF LD | TNF LD | |
| Oct 2001 | 3817 | 2.8 | 2556 | 24499 |
| Oct 2002 | 3828 | 2.8 | 2091 | 22922 |
| Oct 2003 | 3384 | 2.5 | 2147 | 23294 |
| Oct 2004 | 4104 | 3.0 | 2059 | 22802 |
| Oct 2005 | 4496 | 3.2 | 1843 | 22185 |
| Oct 2006 | 4678 | 3.3 | 1970 | 21157 |
| Oct 2007 | 4486 | 3.1 | 2053 | 22142 |
| Oct 2008 | 3592 | 2.6 | 2319 | 24166 |
| Oct 2009 | 2547 | 1.9 | 2111 | 26783 |
| Oct 2010 | 3221 | 2.4 | 1755 | 21784 |
| Oct 2011 | 3659 | 2.7 | 1861 | 20718 |
| Oct 2012 | 3928 | 2.8 | 1765 |
Notes: TNF JOB: Total Nonfarm Job Openings; LD: Layoffs and Discharges
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/home.htm
Chart I-10 shows monthly job openings rising from the trough in 2009 to a high in the beginning of 2010. Job openings then stabilized into 2011 but have surpassed the peak of 3057 seasonally adjusted in Nov 2010 with 3675 seasonally adjusted in Oct 2012, which is higher by 7.8 percent than 3408 in Oct 2011 and lower than 3741 in Mar 2012 by 1.8 percent. The high of job openings not seasonally adjusted in 2010 was 3221 in Oct 2010 that was surpassed by 3659 in Oct 2011, increasing to 3928 in Oct 2012. The level of job openings not seasonally adjusted fell to 2912 in Nov 2011 or by 17.9 percent relative to 3546 in Sep 2011. There is here again the strong seasonality of year-end labor data. Job openings NSA fell from 4678 in Oct 2006 to 2547 in Oct 2009 or by 45.6 percent, recovering to 3221 in Oct 2010 or by 26.5 percent, which is still 21.8 percent lower at 3659 in Oct 2011 relative to Oct 2006. The level of job openings of 3928 in Oct 2012 NSA is lower by 16.0 percent relative to 4678 in Oct 2007. Again, the main problem in recovery of the US labor market has been the low rate of growth of 2.2 percent in the thirteen quarters of expansion of the economy since IIIQ2009 compared with average 6.2 percent in prior expansions from contractions (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart I-10, US Job Openings, Thousands NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
The rate of job openings in Chart I-11 shows similar behavior. The rate seasonally adjusted rose from 2.1 percent in Jan 2011 to 2.6 percent in Dec 2011 and 2.7 in Oct 2012. The rate not seasonally adjusted rose from the high of 2.6 in Apr 2010 to 2.7 in Jul 2011 and 2.7 in all months from Jan to Jun 2012 with exception of 2.5 in Feb 2012 and then to 2.9 in Jul 2012 but back to 2.7 in Aug 2012, 2.6 in Sep 2012 and 2.8 in Oct 2012. The rate of job openings NSA fell from 3.0 in Sep 2005 to 1.9 in Sep 2009, recovering insufficiently to 2.8 in Oct 2012.
Chart I-11, US, Rate of Job Openings, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Total separations are shown in Chart I-12. Separations are much lower in 2012 than before the global recession.
Chart I-12, US, Total Nonfarm Separations, Month SA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Annual total separations are shown in Chart I-13. Separations are much lower in 2011 than before the global recession.
Chart I-13, US, Total Separations, Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Table I-5 provides total nonfarm total separations from 2001 to 2011. Separations fell from 61.6 million in 2006 to 47.6 million in 2010 or by 14.0 million and 48.2 million in 2011 or by 13.4 million.
Table I-5, US, Total Nonfarm Total Separations, Thousands, 2001-201
| Year | Annual |
| 2001 | 64765 |
| 2002 | 59190 |
| 2003 | 56487 |
| 2004 | 58340 |
| 2005 | 60733 |
| 2006 | 61565 |
| 2007 | 61162 |
| 2008 | 58601 |
| 2009 | 51527 |
| 2010 | 47641 |
| 2011 | 48242 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Monthly data of layoffs and discharges reach a peak in early 2009, as shown in Chart I-14. Layoffs and discharges dropped sharply with the recovery of the economy in 2010 and 2011 once employers reduced their job count to what was required for cost reductions and loss of business.
Chart I-14, US, Total Nonfarm Layoffs and Discharges, Monthly SA, 2011-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Layoffs and discharges in Chart I-15 rose sharply to a peak in 2009. There was pronounced drop into 2010 and 2011.
Chart I-15, US, Total Nonfarm Layoffs and Discharges, Annual, 2001-2011
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
Table I-6 provides annual nonfarm layoffs and discharges from 2001 to 2011. Layoffs and discharges peaked at 26.8 million in 2009 and then fell to 20.7 million in 2011, by 6.1 million, or 22.8 percent.
Table I-6, US, Total Nonfarm Layoffs and Discharges, 2001-2011
| Year | Annual |
| 2001 | 24499 |
| 2002 | 22922 |
| 2003 | 23294 |
| 2004 | 22802 |
| 2005 | 22185 |
| 2006 | 21157 |
| 2007 | 22142 |
| 2008 | 24166 |
| 2009 | 26783 |
| 2010 | 21784 |
| 2011 | 20718 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/jlt/data.htm
IA2 Labor Underutilization. The Bureau of Labor Statistics also provides alternative measures of labor underutilization shown in Table I-7. The most comprehensive measure is U6 that consists of total unemployed plus total employed part time for economic reasons plus all marginally attached workers as percent of the labor force. U6 not seasonally annualized has risen from 8.2 percent in 2006 to 13.9 percent in Nov 2012.
Table I-7, US, Alternative Measures of Labor Underutilization NSA %
| U1 | U2 | U3 | U4 | U5 | U6 | |
| 2012 | ||||||
| Nov | 4.2 | 3.9 | 7.4 | 7.9 | 8.8 | 13.9 |
| Oct | 4.3 | 3.9 | 7.5 | 8.0 | 9.0 | 13.9 |
| Sep | 4.2 | 4.0 | 7.6 | 8.0 | 9.0 | 14.2 |
| Aug | 4.3 | 4.4 | 8.2 | 8.7 | 9.7 | 14.6 |
| Jul | 4.3 | 4.6 | 8.6 | 9.1 | 10.0 | 15.2 |
| Jun | 4.5 | 4.4 | 8.4 | 8.9 | 9.9 | 15.1 |
| May | 4.7 | 4.3 | 7.9 | 8.4 | 9.3 | 14.3 |
| Apr | 4.8 | 4.3 | 7.7 | 8.3 | 9.1 | 14.1 |
| Mar | 4.9 | 4.8 | 8.4 | 8.9 | 9.7 | 14.8 |
| Feb | 4.9 | 5.1 | 8.7 | 9.3 | 10.2 | 15.6 |
| Jan | 4.9 | 5.4 | 8.8 | 9.4 | 10.5 | 16.2 |
| 2011 | ||||||
| Dec | 4.8 | 5.0 | 8.3 | 8.8 | 9.8 | 15.2 |
| Nov | 4.9 | 4.7 | 8.2 | 8.9 | 9.7 | 15.0 |
| Oct | 5.0 | 4.8 | 8.5 | 9.1 | 10.0 | 15.3 |
| Sep | 5.2 | 5.0 | 8.8 | 9.4 | 10.2 | 15.7 |
| Aug | 5.2 | 5.1 | 9.1 | 9.6 | 10.6 | 16.1 |
| Jul | 5.2 | 5.2 | 9.3 | 10.0 | 10.9 | 16.3 |
| Jun | 5.1 | 5.1 | 9.3 | 9.9 | 10.9 | 16.4 |
| May | 5.5 | 5.1 | 8.7 | 9.2 | 10.0 | 15.4 |
| Apr | 5.5 | 5.2 | 8.7 | 9.2 | 10.1 | 15.5 |
| Mar | 5.7 | 5.8 | 9.2 | 9.7 | 10.6 | 16.2 |
| Feb | 5.6 | 6.0 | 9.5 | 10.1 | 11.1 | 16.7 |
| Jan | 5.6 | 6.2 | 9.8 | 10.4 | 11.4 | 17.3 |
| Dec 2010 | 5.4 | 5.9 | 9.1 | 9.9 | 10.7 | 16.6 |
| Annual | ||||||
| 2011 | 5.3 | 5.3 | 8.9 | 9.5 | 10.4 | 15.9 |
| 2010 | 5.7 | 6.0 | 9.6 | 10.3 | 11.1 | 16.7 |
| 2009 | 4.7 | 5.9 | 9.3 | 9.7 | 10.5 | 16.2 |
| 2008 | 2.1 | 3.1 | 5.8 | 6.1 | 6.8 | 10.5 |
| 2007 | 1.5 | 2.3 | 4.6 | 4.9 | 5.5 | 8.3 |
| 2006 | 1.5 | 2.2 | 4.6 | 4.9 | 5.5 | 8.2 |
| 2005 | 1.8 | 2.5 | 5.1 | 5.4 | 6.1 | 8.9 |
| 2004 | 2.1 | 2.8 | 5.5 | 5.8 | 6.5 | 9.6 |
| 2003 | 2.3 | 3.3 | 6.0 | 6.3 | 7.0 | 10.1 |
| 2002 | 2.0 | 3.2 | 5.8 | 6.0 | 6.7 | 9.6 |
| 2001 | 1.2 | 2.4 | 4.7 | 4.9 | 5.6 | 8.1 |
| 2000 | 0.9 | 1.8 | 4.0 | 4.2 | 4.8 | 7.0 |
Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Monthly seasonally adjusted measures of labor underutilization are provided in Table I-8. U6 climbed from 16.2 percent in Aug 2011 to 16.4 percent in Sep 2011 and then fell to 14.5 percent in Apr 2012, increasing to 15.0 percent in Jul 2012, 14.7 percent in both Aug and Sep 2012, 14.6 percent in Oct 2012 and 14.4 percent in Nov 2012. Unemployment is an incomplete measure of the stress in US job markets. A different calculation in this blog is provided by using the participation rate in the labor force before the global recession. This calculation shows 28.6 million in job stress of unemployment/underemployment in Oct 2012, not seasonally adjusted, corresponding to 17.7 percent of the labor force (Table I-4 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html).
Table I-8, US, Alternative Measures of Labor Underutilization SA %
| U1 | U2 | U3 | U4 | U5 | U6 | |
| Nov 2012 | 4.3 | 4.1 | 7.7 | 8.3 | 9.2 | 14.4 |
| Oct | 4.4 | 4.2 | 7.9 | 8.4 | 9.3 | 14.6 |
| Sep | 4.3 | 4.2 | 7.8 | 8.3 | 9.3 | 14.7 |
| Aug | 4.4 | 4.5 | 8.1 | 8.6 | 9.6 | 14.7 |
| Jul | 4.5 | 4.6 | 8.3 | 8.8 | 9.7 | 15.0 |
| Jun | 4.6 | 4.6 | 8.2 | 8.7 | 9.7 | 14.9 |
| May | 4.6 | 4.5 | 8.2 | 8.7 | 9.6 | 14.8 |
| Apr | 4.5 | 4.4 | 8.1 | 8.7 | 9.5 | 14.5 |
| Mar | 4.6 | 4.5 | 8.2 | 8.7 | 9.6 | 14.5 |
| Feb | 4.8 | 4.7 | 8.3 | 8.9 | 9.8 | 14.9 |
| Jan | 4.9 | 4.7 | 8.3 | 8.9 | 9.9 | 15.1 |
| Dec 2011 | 5.0 | 4.9 | 8.5 | 9.1 | 10.0 | 15.2 |
| Nov | 5.0 | 4.9 | 8.7 | 9.3 | 10.2 | 15.6 |
| Oct | 5.1 | 5.1 | 8.9 | 9.5 | 10.4 | 16.0 |
| Sep | 5.3 | 5.2 | 9.0 | 9.6 | 10.5 | 16.4 |
| Aug | 5.3 | 5.3 | 9.1 | 9.6 | 10.6 | 16.2 |
| Jul | 5.3 | 5.3 | 9.1 | 9.7 | 10.7 | 16.1 |
| Jun | 5.3 | 5.4 | 9.1 | 9.7 | 10.7 | 16.2 |
| May | 5.3 | 5.4 | 9.0 | 9.5 | 10.3 | 15.8 |
| Apr | 5.2 | 5.3 | 9.0 | 9.6 | 10.4 | 15.9 |
| Mar | 5.3 | 5.4 | 8.9 | 9.4 | 10.3 | 15.7 |
| Feb | 5.4 | 5.4 | 9.0 | 9.6 | 10.6 | 15.9 |
| Jan | 5.5 | 5.5 | 9.1 | 9.7 | 10.7 | 16.1 |
Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-16 provides U6 on a monthly basis from 2001 to 2012. There was a steep climb from 2007 into 2009 and then this measure of unemployment and underemployment stabilized at that high level but declined into 2012. The low of U16 SA was 7.9 percent in Dec 2006 and the peak was 17.2 percent in Oct 2009. The low NSA was 7.6 percent in Oct 2006 and the peak was 18.0 percent in Jan 2010.
Chart I-16, US, U6, total unemployed, plus all marginally attached workers, plus total employed part Month, SA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Chart I-17 provides the number employed part-time for economic reasons or who cannot find full-time employment. There are sharp declines at the end of 2009, 2010 and 2011 but an increase in 2012.
Chart I-17, US, Working Part-time for Economic Reasons
Thousands, Month SA 2001-2012
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
There is strong seasonality in US labor markets around the end of the year. The number employed part-time for economic reasons because they could not find full-time employment fell from 9.270 million in Sep 2011 to 8.031 million in Aug 2012, seasonally adjusted, or decline of 1.239 million in nine months, as shown in Table I-9, but then rebounded to 8.613 million in Sep 2012 for increase of 582,000 in one month from Aug to Sep 2012, declining to 8.344 in Oct 2012 or by 269,000 again in one month and further declining to 8.176 million in Nov 2012 for another major one-month decline of 168,000. There is an increase of 313,000 in part-time for economic reasons from Aug 2012 to Oct 2012 and of 145,000 from Aug 2012 to Nov 2012. The number employed full-time increased from 112.841 million in Oct 2011 to 115.290 million in Mar 2012 or 2.449 million but then fell to 114.212 million in May 2012 or 1.078 million fewer full-time employed than in Mar 2012. The number employed full-time increased from 114,388 million in Aug 2012 to 115.459 million in Oct 2012 or increase of 1.071 million full-time jobs in two months and further to 115.657 in Nov 2012 or increase of 1.269 million more full-time jobs in three months from Aug 2012 to Nov 2012. The number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.271 million in Nov 2011 to 8.428 million in Dec 2011 or by 157,000 and then to 8.918 million in Jan 2012 or by an additional 490,000 for cumulative increase from Nov 2011 to Jan 2012 of 647,000. The level of employed part-time for economic reasons then fell from 8.918 million in Jan 2012 to 7.867 million in Mar 2012 or by 1.0151 million and to 7.694 million in Apr 2012 or 1.224 million fewer relative to Jan 2012. In Aug 2012, the number employed part-time for economic reasons reached 7.842 million NSA or 148,000 more than in Apr 2012. The number employed part-time for economic reasons increased from 7.842 million in Aug 2012 to 8.110 million in Sep 2012 or by 3.4 percent. The number part-time for economic reasons fell from 8.110 million in Sep 2012 to 7.870 million in Oct 2012 or by 240.000 in one month and fell to 7.794 million in Nov 2012 for an additional decline of 76.000 and cumulative from Sep 2012 of 316,000. The number employed full time without seasonal adjustment fell from 113.138 million in Nov 2011 to 113.050 million in Dec 2011 or by 88,000 and fell further to 111.879 in Jan 2012 for cumulative decrease of 1.259 million. The number employed full-time not seasonally adjusted fell from 113.138 million in Nov 2011 to 112.587 million in Feb 2012 or by 551.000 but increased to 116.214 million in Aug 2012 or 3.076 million more full-time jobs than in Nov 2011. The number employed full-time not seasonally adjusted decreased from 116.214 million in Aug 2012 to 115.678 million in Sep 2012 for loss of 536,000 full-time jobs and rose to 116.045 million in Oct 2012 or by 367,000 full-time jobs in one month relative to Sep 2012. The number employed full-time NSA fell from 116.045 million in Oct 2012 to 115.515 million in Nov 2012 or decline of 530.000 in one month. Comparisons over long periods require use of NSA data. The number with full-time jobs fell from a high of 123.219 million in Jul 2007 to 108.777 million in Jan 2010 or by 14.442 million. The number with full-time jobs in Nov 2012 is 115.515 million, which is lower by 7.704 million relative to the peak of 123.219 million in Jul 2007. There appear to be around 10 million fewer full-time jobs in the US than before the global recession. Growth at 2.2 percent on average in the thirteen quarters of expansion from IIIQ2009 to IIIQ2012 compared with 6.2 percent on average in expansions from postwar cyclical contractions is the main culprit of the fractured US labor market (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Table I-9, US, Employed Part-time for Economic Reasons, Thousands, and Full-time, Millions
| Part-time Thousands | Full-time Millions | |
| Seasonally Adjusted | ||
| Nov 2012 | 8,176 | 115.657 |
| Oct 2012 | 8,344 | 115.459 |
| Sep 2012 | 8,613 | 115.226 |
| Aug 2012 | 8,031 | 114.388 |
| Jul 2012 | 8,246 | 114.345 |
| Jun 2012 | 8,210 | 114.573 |
| May 2012 | 8,098 | 114.212 |
| Apr 2012 | 7,853 | 114.478 |
| Mar 2012 | 7,672 | 115.290 |
| Feb 2012 | 8,119 | 114.408 |
| Jan 2012 | 8,230 | 113.845 |
| Dec 2011 | 8,098 | 113.765 |
| Nov 2011 | 8,469 | 113.212 |
| Oct 2011 | 8,790 | 112.841 |
| Sep 2011 | 9,270 | 112.479 |
| Aug 2011 | 8,787 | 112.406 |
| Jul 2011 | 8,437 | 112.006 |
| Not Seasonally Adjusted | ||
| Nov 2012 | 7,794 | 115.515 |
| Oct 2012 | 7,870 | 116.045 |
| Sep 2012 | 8,110 | 115.678 |
| Aug 2012 | 7,842 | 116.214 |
| Jul 2012 | 8,316 | 116.131 |
| Jun 2012 | 8,394 | 116.024 |
| May 2012 | 7,837 | 114.634 |
| Apr 2012 | 7,694 | 113.999 |
| Mar 2012 | 7,867 | 113.916 |
| Feb 2012 | 8,455 | 112.587 |
| Jan 2012 | 8,918 | 111.879 |
| Dec 2011 | 8,428 | 113.050 |
| Nov 2011 | 8,271 | 113.138 |
| Oct 2011 | 8,258 | 113.456 |
| Sep 2011 | 8,541 | 112.980 |
| Aug 2011 | 8,604 | 114.286 |
| Jul 2011 | 8,514 | 113.759 |
| Jun 2011 | 8,738 | 113.255 |
| May 2011 | 8,270 | 112.618 |
| Apr 2011 | 8,425 | 111.844 |
| Mar 2011 | 8,737 | 111.186 |
| Feb 2011 | 8,749 | 110.731 |
| Jan 2011 | 9,187 | 110.373 |
| Dec 2010 | 9,205 | 111.207 |
| Nov 2010 | 8,670 | 111.348 |
| Oct 2010 | 8,408 | 112.342 |
| Sep 2010 | 8,628 | 112.385 |
| Aug 2010 | 8,628 | 113.508 |
| Jul 2010 | 8,737 | 113.974 |
| Jun 2010 | 8,867 | 113.856 |
| May 2010 | 8,513 | 112.809 |
| Apr 2010 | 8,921 | 111.391 |
| Mar 2010 | 9,343 | 109.877 |
| Feb 2010 | 9,282 | 109.100 |
| Jan 2010 | 9,290 | 108.777 (low) |
| Dec 2009 | 9,354 (high) | 109.875 |
| Nov 2009 | 8,670 | 111.274 |
| Oct 2009 | 8,474 | 111.599 |
| Sep 2009 | 8,255 | 111.991 |
| Aug 2009 | 8,835 | 113.863 |
| Jul 2009 | 9,103 | 114.184 |
| Jun 2009 | 9,301 | 114.014 |
| May 2009 | 8,785 | 113.083 |
| Apr 2009 | 8,648 | 112.746 |
| Mar 2009 | 9,305 | 112.215 |
| Feb 2009 | 9,170 | 112.947 |
| Jan 2009 | 8,829 | 113.815 |
| Nov 2008 | 7,135 | 118.432 |
| Oct 2008 | 6,267 | 120.020 |
| Sep 2008 | 5,701 | 120.213 |
| Aug 2008 | 5,736 | 121.556 |
| Jul 2008 | 6,054 | 122.378 |
| Jun 2008 | 5,697 | 121.845 |
| May 2008 | 5,096 | 120.809 |
| Apr 2008 | 5,071 | 120.027 |
| Mar 2008 | 5,038 | 119.875 |
| Feb 2008 | 5,114 | 119.452 |
| Jan 2008 | 5,340 | 119.332 |
| Nov 2007 | 4,374 | 121.846 |
| Oct 2007 | 4,028 | 122.006 |
| Sep 2007 | 4,137 | 121.728 |
| Aug 2007 | 4,494 | 122.870 |
| Jul 2007 | 4,516 | 123.219 (high) |
| Jun 2007 | 4,469 | 122.150 |
| May 2007 | 4,315 | 120.846 |
| Apr 2007 | 4,205 | 119.609 |
| Mar 2007 | 4,384 | 119.640 |
| Feb 2007 | 4,417 | 119.041 |
| Jan 2007 | 4,726 | 119.094 |
| Nov 2006 | 4,054 | 120.507 |
| Oct 2006 | 4,010 | 121.199 |
| Sep 2006 | 3,735 (low) | 120.780 |
| Aug 2006 | 4,104 | 121.979 |
| Jul 2006 | 4,450 | 121.951 |
| Jun 2006 | 4,456 | 121.070 |
| May 2006 | 3,968 | 118.925 |
| Apr 2006 | 3,787 | 118.559 |
| Mar 2006 | 4,097 | 117.693 |
| Feb 2006 | 4,403 | 116.823 |
| Jan 2006 | 4,597 | 116.395 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart I-18 shows the sharp rise in unemployed over 27 weeks and stabilization at an extremely high level.
Chart I-18, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2011
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Another segment of U6 consists of people marginally attached to the labor force who continue to seek employment but less frequently on the frustration there may not be a job for them. Chart I-19 shows the sharp rise in people marginally attached to the labor force after 2007 and subsequent stabilization.
Chart I-19, US, Marginally Attached to the Labor Force, NSA Month 2001-2012
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
IA3 Ten Million Fewer Full-time Jobs. Chart I-20 reveals the fracture in the US labor market. The number of workers with full-time jobs not-seasonally-adjusted rose with fluctuations from 2002 to a peak in 2007, collapsing during the global recession. The terrible state of the job market is shown in the segment from 2009 to 2012 with fluctuations around the typical behavior of a stationary series: there is no improvement in the United States in creating full-time jobs.
Chart I-20, US, Full-time Employed, Thousands, NSA, 2001-2012
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
IA4 Youth Unemployment and Middle-Aged Unemployment. The United States is experiencing high youth unemployment as in European economies. Table I-10 provides the employment level for ages 16 to 24 years of age estimated by the Bureau of Labor Statistics. On an annual basis, youth employment fell from 20.041 million in 2006 to 17.362 million in 2011 or 2.679 million fewer youth jobs. During the seasonal peak months of youth employment in the summer from Jun to Aug, youth employment has fallen by more than two million jobs relative to 21.914 million in Jul 2006 with 19.461 for 2.453 fewer youth jobs. There are two hardships behind these data. First, young people cannot find employment after finishing high-school and college, reducing prospects for achievement in older age. Second, students with more modest means cannot find employment to keep them in college.
Table I-10, US, Employment Level 16-24 Years, Thousands, NSA
| Year | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 20529 | 19706 | 19694 | 19675 | 19547 | 20088 |
| 2002 | 20653 | 19466 | 19542 | 19397 | 19394 | 19683 |
| 2003 | 20181 | 18909 | 19139 | 19163 | 19136 | 19351 |
| 2004 | 20660 | 19158 | 19609 | 19615 | 19619 | 19630 |
| 2005 | 20814 | 19503 | 19794 | 19750 | 19733 | 19770 |
| 2006 | 21167 | 19604 | 19853 | 19903 | 20129 | 20041 |
| 2007 | 20413 | 19498 | 19564 | 19660 | 19361 | 19875 |
| 2008 | 20096 | 18818 | 18757 | 18454 | 18378 | 19202 |
| 2009 | 18270 | 16972 | 16671 | 16689 | 16615 | 17601 |
| 2010 | 18061 | 16874 | 16867 | 16946 | 16727 | 17077 |
| 2011 | 18067 | 17238 | 17532 | 17402 | 17234 | 17362 |
| 2012 | 18171 | 17687 | 17842 | 17877 |
Sources: US Bureau of Labor Statistics
http://www.bls.gov/cps/data.htm
Chart I-21 provides US employment level ages 16 to 24 years from 2002 to 2012. Employment level is sharply lower in Jun 2012 relative to the peak in 2007.
Chart I-21, US, Employment Level 16-24 Years, Thousands SA, 2001-2012
Sources: US Bureau of Labor Statistics
Table I-11 provides US unemployment level ages 16 to 24 years. The number unemployed ages 16 to 24 years increased from 2342 thousand in 2007 to 3634 thousand in 2011 or by 1.292 million. This situation may persist for many years.
Table I-11, US, Unemployment Level 16-24 Years, Thousands NSA
| Year | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 2585 | 2461 | 2301 | 2424 | 2470 | 2412 | 2371 |
| 2002 | 3034 | 2688 | 2506 | 2468 | 2570 | 2374 | 2683 |
| 2003 | 3200 | 2724 | 2698 | 2522 | 2522 | 2248 | 2746 |
| 2004 | 3018 | 2585 | 2493 | 2572 | 2448 | 2294 | 2638 |
| 2005 | 2688 | 2519 | 2339 | 2285 | 2369 | 2055 | 2521 |
| 2006 | 2750 | 2467 | 2297 | 2252 | 2242 | 2007 | 2353 |
| 2007 | 2622 | 2388 | 2419 | 2258 | 2250 | 2323 | 2342 |
| 2008 | 3408 | 2990 | 2904 | 2842 | 2833 | 2928 | 2830 |
| 2009 | 4387 | 4004 | 3774 | 3789 | 3699 | 3532 | 3760 |
| 2010 | 4374 | 3903 | 3604 | 3731 | 3561 | 3352 | 3857 |
| 2011 | 4110 | 3820 | 3541 | 3386 | 3287 | 3161 | 3634 |
| 2012 | 4011 | 3672 | 3174 | 3285 | 3102 |
Sources: US Bureau of Labor Statistics
Chart I-22 provides the unemployment level ages 16 to 24 from 2002 to 2012. The level rose sharply from 2007 to 2010 with tepid improvement into 2012.
Chart I-22, US, Unemployment Level 16-24 Years, Thousands SA, 2001-2012
Sources: US Bureau of Labor Statistics
Table I-12 provides the rate of unemployment of young peoples in ages 16 to 24 years. The annual rate jumped from 10.5 percent in 2007 to 18.4 percent in 2010 and 17.3 percent in 2011. During the seasonal peak in Jul 2011 the rate of youth unemployed was 18.1 percent and 17.1 percent in Jul 2012 compared with 10.8 percent in Jul 2007.
Table I-12, US, Unemployment Rate 16-24 Years, Thousands, NSA
| Year | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 11.6 | 10.5 | 10.7 | 10.5 | 11.0 | 11.2 | 11.0 | 10.6 |
| 2002 | 13.2 | 12.4 | 11.5 | 11.4 | 11.2 | 11.7 | 10.9 | 12.0 |
| 2003 | 14.8 | 13.3 | 11.9 | 12.5 | 11.6 | 11.6 | 10.5 | 12.4 |
| 2004 | 13.4 | 12.3 | 11.1 | 11.5 | 11.6 | 11.1 | 10.5 | 11.8 |
| 2005 | 12.6 | 11.0 | 10.8 | 10.7 | 10.3 | 10.7 | 9.4 | 11.3 |
| 2006 | 11.9 | 11.2 | 10.4 | 10.5 | 10.2 | 10.1 | 9.1 | 10.5 |
| 2007 | 12.0 | 10.8 | 10.5 | 11.0 | 10.3 | 10.3 | 10.7 | 10.5 |
| 2008 | 14.4 | 14.0 | 13.0 | 13.4 | 13.2 | 13.3 | 13.7 | 12.8 |
| 2009 | 19.9 | 18.5 | 18.0 | 18.2 | 18.5 | 18.1 | 17.5 | 17.6 |
| 2010 | 20.0 | 19.1 | 17.8 | 17.6 | 18.1 | 17.4 | 16.7 | 18.4 |
| 2011 | 18.9 | 18.1 | 17.5 | 17.0 | 16.2 | 15.9 | 15.5 | 17.3 |
| 2012 | 18.1 | 17.1 | 16.8 | 15.2 | 15.5 | 14.8 |
Sources: US Bureau of Labor Statistics
Chart I-23 provides the BLS estimate of the not-seasonally-adjusted rate of youth unemployment for ages 16 to 24 years from 2002 to 2012. The rate of youth unemployment increased sharply during the global recession of 2008 and 2009 but has failed to drop to earlier lower levels during the twelve consecutive quarters of expansion of the economy since IIIQ2009 because of much lower growth at 2.2 percent annual equivalent on average compared with 6.2 percent on average in cyclical expansions since World War II Table I -5 (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Chart I-23, US, Unemployment Rate 16-24 Years, Percent, NSA, 2001-2012
Sources: US Bureau of Labor Statistics
Chart I-24 provides longer perspective with the rate of youth unemployment in ages 16 to 24 years from 1948 to 2012. The rate of youth unemployment rose to 20 percent during the contractions of the early 1980s and also during the contraction of the global recession in 2008 and 2009. The data illustrate again the claim in this blog that the contractions of the early 1980s are the valid framework for comparison with the global recession of 2008 and 2009 instead of misleading comparisons with the 1930s. During the initial phase of recovery, the rate of youth unemployment 16 to 24 years NSA fell from 18.9 percent in Jun 1983 to 14.5 percent in Jun 1984 while the rate of youth unemployment 16 to 24 years was nearly the same during the expansion after IIIQ2009: 18.1 percent in Nov 2009, 17.4 percent in Nov 2010, 15.9 percent in Nov 2011 and 14.8 percent in Nov 2012. In Jul 2007, the rate of youth unemployment was 10.8 percent, increasing to 17.1 percent in Jul 2012. The difference originates in the vigorous seasonally-adjusted annual equivalent average rate of GDP growth of 5.7 percent during the recovery from IQ1983 to IVQ1985 compared with 2.2 percent on average during the first eleven quarters of expansion from IIIQ2009 to IIIQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). The fractured US labor market denies an early start for young people.
Chart I-24, US, Unemployment Rate 16-24 Years, Percent NSA, 1948-2012
Sources: US Bureau of Labor Statistics
It is more difficult to move to other jobs after a certain age because of fewer available opportunities for matured individuals than for new entrants into the labor force. Middle-aged unemployed are less likely to find another job. Table I-13 provides the unemployment level ages 45 years and over. The number unemployed ages 45 years and over rose from 1.985 million in Jul 2006 to 4.821 million in July 2010 or by 142.9 percent. The number of unemployed ages 45 years and over declined to 4.405 million in Jul 2012 that is still higher by 121.9 percent than in Jul 2006. The number unemployed age 45 and over jumped from 1.704 million in Nov 2006 to 4.909 million in Nov 2010 or 188.1 percent and at 3.861 million in Nov 2012 is higher by 2.157 million or 126.6 percent higher than 1.704 million in Nov 2006.
Table I-13, US, Unemployment Level 45 Years and Over, Thousands NSA
| Year | Jul | Aug | Sep | Oct | Nov | Dec | Annual |
| 2001 | 1539 | 1640 | 1586 | 1722 | 1786 | 1901 | 1576 |
| 2002 | 2173 | 2114 | 1966 | 1945 | 2013 | 2210 | 2114 |
| 2003 | 2281 | 2301 | 2157 | 2032 | 2132 | 2130 | 2253 |
| 2004 | 2116 | 2082 | 1951 | 1931 | 2053 | 2086 | 2149 |
| 2005 | 2119 | 1895 | 1992 | 1875 | 1920 | 1963 | 2009 |
| 2006 | 1985 | 1869 | 1710 | 1607 | 1704 | 1794 | 1848 |
| 2007 | 2053 | 1956 | 1854 | 1885 | 1925 | 2120 | 1966 |
| 2008 | 2492 | 2695 | 2595 | 2728 | 3078 | 3485 | 2540 |
| 2009 | 4757 | 4683 | 4560 | 4492 | 4655 | 4960 | 4500 |
| 2010 | 4821 | 5128 | 4640 | 4576 | 4909 | 4762 | 4879 |
| 2011 | 4772 | 4592 | 4426 | 4375 | 4195 | 4182 | 4537 |
| 2012 | 4405 | 4179 | 3899 | 3800 | 3861 |
Sources: US Bureau of Labor Statistics
Chart I-25 provides the level unemployed ages 45 years and over. There was sharp increase during the global recession and inadequate decline. There was an increase during the 2001 recession and then stability. The US is facing a major challenge of reemploying middle-aged workers.
Chart I-25, US, Unemployment Level Ages 45 Years and Over, Thousands, NSA, 1976-2012
Sources: US Bureau of Labor Statistics
II World Inflation Waves. This section provides analysis and data on world inflation waves. IIA Appendix: Transmission of Unconventional Monetary Policy provides more technical analysis. Section IIB United States Inflation analyzes inflation in the United States in two subsections: IIC Long-term US Inflation and IID Current US Inflation.
The critical fact of current world financial markets is the combination of “unconventional” monetary policy with intermittent shocks of financial risk aversion. There are two interrelated unconventional monetary policies. First, unconventional monetary policy consists of (1) reducing short-term policy interest rates toward the “zero bound” such as fixing the fed funds rate at 0 to ¼ percent by decision of the Federal Open Market Committee (FOMC) since Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). Second, unconventional monetary policy also includes a battery of measures to also reduce long-term interest rates of government securities and asset-backed securities such as mortgage-backed securities.
When inflation is low, the central bank lowers interest rates to stimulate aggregate demand in the economy, which consists of consumption and investment. When inflation is subdued and unemployment high, monetary policy would lower interest rates to stimulate aggregate demand, reducing unemployment. When interest rates decline to zero, unconventional monetary policy would consist of policies such as large-scale purchases of long-term securities to lower their yields. A major portion of credit in the economy is financed with long-term asset-backed securities. Loans for purchasing houses, automobiles and other consumer products are bundled in securities that in turn are sold to investors. Corporations borrow funds for investment by issuing corporate bonds. Loans to small businesses are also financed by bundling them in long-term bonds. Securities markets bridge the needs of higher returns by savers obtaining funds from investors that are channeled to consumers and business for consumption and investment. Lowering the yields of these long-term bonds could lower costs of financing purchases of consumer durables and investment by business. The essential mechanism of transmission from lower interest rates to increases in aggregate demand is portfolio rebalancing. Withdrawal of bonds in a specific maturity segment or directly in a bond category such as currently mortgage-backed securities causes reductions in yield that are equivalent to increases in the prices of the bonds. There can be secondary increases in purchases of those bonds in private portfolios in pursuit of their increasing prices. Lower yields translate into lower costs of buying homes and consumer durables such as automobiles and also lower costs of investment for business. There are two additional intended routes of transmission.
3. Unconventional monetary policy or its expectation can increase stock market valuations (Bernanke 2010WP). Increases in equities traded in stock markets can augment perceptions of the wealth of consumers inducing increases in consumption.
4. Unconventional monetary policy causes devaluation of the dollar relative to other currencies, which can cause increases in net exports of the US that increase aggregate economic activity (Yellen 2011AS).
Monetary policy can lower short-term interest rates quite effectively. Lowering long-term yields is somewhat more difficult. The critical issue is that monetary policy cannot ensure that increasing credit at low interest cost increases consumption and investment. There is a large variety of possible allocation of funds at low interest rates from consumption and investment to multiple risk financial assets. Monetary policy does not control how investors will allocate asset categories. A critical financial practice is to borrow at low short-term interest rates to invest in high-risk, leveraged financial assets. Investors may increase in their portfolios asset categories such as equities, emerging market equities, high-yield bonds, currencies, commodity futures and options and multiple other risk financial assets including structured products. If there is risk appetite, the carry trade from zero interest rates to risk financial assets will consist of short positions at short-term interest rates (or borrowing) and short dollar assets with simultaneous long positions in high-risk, leveraged financial assets such as equities, commodities and high-yield bonds. Low interest rates may induce increases in valuations of risk financial assets that may fluctuate in accordance with perceptions of risk aversion by investors and the public. During periods of muted risk aversion, carry trades from zero interest rates to exposures in risk financial assets cause temporary waves of inflation that may foster instead of preventing financial instability. During periods of risk aversion such as fears of disruption of world financial markets and the global economy resulting from collapse of the European Monetary Union, carry trades are unwound with sharp deterioration of valuations of risk financial assets. More technical discussion is in IIA Appendix: Transmission of Unconventional Monetary Policy.
Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output. Monetary easing by unconventional measures is now open ended in perpetuity, or QE∞, as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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 economic recovery strengthens.”
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
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.”
The actual objective is attempting to bring the unemployment rate to 5.2 percent but because of the lag in effect of monetary policy impulses on income and prices policy uses “projections” such that the target of monetary policy is a forecast of unemployment and inflation. Unconventional monetary policy will remain in perpetuity, or QE∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.2 percent on average in the cyclical expansion in the 13 quarters from IIIQ2009 to IIIQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, reduction of the unemployment rate to normal would take between 15 and 43.3 years depending on the definition (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). The US labor force stood at 154.088 million in Oct 2011 and at 155.779 million in Oct 2012, not seasonally adjusted, for increase of 1.691 million, or 140,917 per month. The US labor force stood at 153.683 million in Nov 2011 and 154.953 million in Nov 2012, not seasonally adjusted, for increase of 1.270 million or 105,833 per month. The average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 is insufficient even to absorb 140,917 new entrants per month into the labor force. The difference between the average increase of 125,778 new nonfarm jobs per month in the US from Mar to Oct 2012 and the 105,833 average monthly increase in the labor force from Nov 2011 to Nov 2012 is 19,945 monthly new jobs net of absorption of new entrants in the labor force. There are 28.6 million in job stress in the US currently. The provision of 19,945 new jobs per month net of absorption of new entrants in the labor force would require 1434 months to provide jobs for the unemployed and underemployed (28.6 million divided by 19,945) or 119 years (1434 divided by 12). Net job creation of 19,945 jobs per month only adds 239,340 jobs in a year. The civilian labor force of the US in Nov 2012 not seasonally adjusted stood at 154.953 million with 11.404 million unemployed or effectively 18.094 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 4.2 years. Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.748 million for new net job creation of 3.656 million that at the current rate would take 15 years. Under the calculation in this blog there are 18.094 million unemployed by including those who ceased searching because they believe there is no job for them. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.346 million jobs net of labor force growth that at the current rate would take 43.2 years. These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply.
Second, calculations show that actual US GDP growth is around 1.5 percent per year that will perpetuate unemployment/underemployment (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.5 percent is well below trend growth of 3 percent per year from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.77 points of inventory accumulation to growth of 2.7 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.3 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.3 percent in IIIQ2012 annualizes to 1.5 percent in the first three quarters of 2012 {([(1.02)1/4(1.013)1/4(1.0131/4]4/3 -1)100 = 1.5%}. The actual rate required to reduce unemployment/underemployment to normal is even higher than 3 percent in historical trend.
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation QE∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.
Table IIA-1 provides annual equivalent rates of inflation for producer price indexes followed in this blog of countries and regions that account for close to three quarters of world output. The behavior of the US producer price index in 2011 and into 2012 shows neatly multiple waves. (1) In Jan-Apr 2011, without risk aversion, US producer prices rose at the annual equivalent rate of 9.7 percent. (2) After risk aversion, producer prices increased in the US at the annual equivalent rate of 1.2 percent in May-Jun 2011. (3) From Jul to Sep 2011, under alternating episodes of risk aversion, producer prices increased at the annual equivalent rate of 6.6 percent. (4) Under the pressure of risk aversion because of the European debt crisis US producer prices fell at the annual equivalent rate of minus 1.2 percent in Oct-Nov 2011. (5) From Dec 2011 to Jan 2012, US producer prices rose at the annual equivalent rate of 1.2 percent with relaxed risk aversion and commodity-price increases at the margin. (6) Inflation of producer prices returned with 1.2 percent annual equivalent in Feb-Mar 2012. (7) With return of risk aversion from the European debt crisis, producer prices fell at the annual equivalent rate of 7.5 percent in Apr-Jun 2012. (8) New positions in commodity futures even with continuing risk aversion caused annual equivalent inflation of 3.0 percent in Jun-Jul 2012. (9) Relaxed risk aversion because of announcement of sovereign bond-buying by the European Central Bank caused restrained risk aversion inducing carry trades that resulted in annual equivalent producer price inflation in the US of 18.2 percent in Aug-Sep 2012. (10) Renewed risk aversion caused unwinding of carry trades of zero interest rates to commodity futures exposures with annual equivalent inflation of minus 2.4 percent in Oct 2012. Resolution of the European debt crisis if there is not an unfavorable growth event with political development in China would result in jumps of valuations of risk financial assets. Increases in commodity prices would cause the same high producer price inflation experienced in Jan-Apr 2011 and Aug-Sep 2012. An episode of exploding commodity prices could ignite inflationary expectations that would result in an inflation phenomenon of costly resolution. There are nine producer-price indexes in Table IIA-1 for seven countries (two for the UK) and one region (euro area) showing very similar behavior. Zero interest rates without risk aversion cause increases in commodity prices that in turn increase input and output prices. Producer price inflation rose at very high rates during the first part of 2011 for the US, Japan, China, Euro Area, Germany, France, Italy and the UK when risk aversion was contained. With the increase in risk aversion in May and Jun 2011, inflation moderated because carry trades were unwound. Producer price inflation returned after July 2011, with alternating bouts of risk aversion. In the final months of the year producer price inflation collapsed because of the disincentive to exposures in commodity futures resulting from fears of resolution of the European debt crisis. There is renewed worldwide inflation in the early part of 2012 with subsequent collapse because of another round of sharp risk aversion. Sharp worldwide jump in producer prices occurred recently as a result of the combination of zero interest rates forever or QE∞ with temporarily relaxed risk aversion. Producer prices are moderating or falling currently because of renewed risk aversion that causes unwinding of carry trades from zero interest rates to commodity futures exposures. Unconventional monetary policy fails in stimulating the overall real economy, merely introducing undesirable instability as monetary authorities cannot control allocation of floods of money at zero interest rates to carry trades into risk financial assets. The economy is constrained in a suboptimal allocation of resources that is perpetuated along a continuum of short-term periods results in long-term or dynamic inefficiency in the form of a trajectory of economic activity that is lower than what would be attained with rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html).
Table IIA-1, Annual Equivalent Rates of Producer Price Indexes
| INDEX 2011-2012 | AE ∆% |
| US Producer Price Index | |
| AE ∆% Oct-Nov | -5.8 |
| AE ∆% Aug-Sep 2012 | 18.2 |
| AE ∆% Jun-Jul 2012 | 3.0 |
| AE ∆% Apr-May 2012 | -7.5 |
| AE ∆% Feb-Mar 2012 | 1.2 |
| AE ∆% Dec 2011-Jan-2012 | 1.2 |
| AE ∆% Oct-Nov 2011 | -1.2 |
| AE ∆% Jul-Sep 2011 | 6.6 |
| AE ∆% May-Jun 2011 | 1.2 |
| AE ∆% Jan-Apr 2011 | 9.7 |
| Japan Corporate Goods Price Index | |
| AE ∆% Oct-Nov | -1.8 |
| AE ∆% Aug-Sep 2012 | 2.4 |
| AE ∆% May-Jul 2012 | -5.8 |
| AE ∆% Feb-Apr 2012 | 2.4 |
| AE ∆% Dec 2011-Jan 2012 | -0.6 |
| AE ∆% Jul-Nov 2011 | -2.2 |
| AE ∆% May-Jun 2011 | -1.2 |
| AE ∆% Jan-Apr 2011 | 5.9 |
| China Producer Price Index | |
| AE ∆% Oct-Nov | 0.6 |
| AE ∆% May-Sep 2012 | -5.8 |
| AE ∆% Feb-Apr 2012 | 2.4 |
| AE ∆% Dec 2011-Jan 2012 | -2.4 |
| AE ∆% Jul-Nov 2011 | -3.1 |
| AE ∆% Jan-Jun 2011 | 6.4 |
| Euro Zone Industrial Producer Prices | |
| AE ∆% Sep-Oct 2012 | 1.8 |
| AE ∆% Jul-Aug 2012 | 7.4 |
| AE ∆% Apr-Jun 2012 | -3.9 |
| AE ∆% Jan-Mar 2012 | 8.3 |
| AE ∆% Oct-Dec 2011 | 0.8 |
| AE ∆% Jul-Sep | 2.0 |
| AE ∆% May-Jun | -1.2 |
| AE ∆% Jan-Apr | 12.0 |
| Germany Producer Price Index | |
| AE ∆% Oct 2012 | 0.0 NSA 1.2SA |
| AE ∆% Aug-Sep 2012 | 4.9 NSA 5.5 SA |
| AE ∆% May-Jul 2012 | -2.8 NSA –0.8 SA |
| AE ∆% Feb-Apr 2012 | 4.9 NSA 1.2 SA |
| AE ∆% Dec 2011-Jan 2012 | 1.2 NSA –0.6 SA |
| AE ∆% Oct-Nov 2011 | 1.8 NSA 3.0 SA |
| AE ∆% Jul-Sep 2011 | 2.8 NSA 3.7 SA |
| AE ∆% May-Jun 2011 | 0.6 NSA 3.7 SA |
| AE ∆% Jan-Apr 2011 | 10.4 NSA 6.5 SA |
| France Producer Price Index for the French Market | |
| AE ∆% Jul-Sep 2012 | 9.2 |
| AE ∆% Apr-Jun 2012 | -7.7 |
| AE ∆% Jan-Mar 2012 | 8.3 |
| AE ∆% Oct-Dec 2011 | 2.4 |
| AE ∆% Jul-Sep 2011 | 2.8 |
| AE ∆% May-Jun 2011 | -3.5 |
| AE ∆% Jan-Apr 2011 | 11.7 |
| Italy Producer Price Index | |
| AE ∆% Sep-Oct 2012 | -2.4 |
| AE ∆% Jul-Aug 2012 | 6.8 |
| AE ∆% May-Jun 2012 | -2.4 |
| AE ∆% Mar-Apr 2012 | 4.3 |
| AE ∆% Jan-Feb 2012 | 7.4 |
| AE ∆% Oct-Dec 2011 | 0.4 |
| AE ∆% Jul-Sep 2011 | 2.4 |
| AE ∆% May-Jun 2011 | -1.2 |
| AE ∆% Jan-April 2011 | 10.7 |
| UK Output Prices | |
| AE ∆% Jul-Oct | 3.7 |
| AE ∆% May-Jun 2012 | -5.3 |
| AE ∆% Feb-Apr 2012 | 7.9 |
| AE ∆% Nov 2011-Jan-2012 | 1.6 |
| AE ∆% May-Oct 2011 | 2.0 |
| AE ∆% Jan-Apr 2011 | 12.0 |
| UK Input Prices | |
| AE ∆% Jul-Oct 2012 | 7.7 |
| AE ∆% Apr-Jun 2012 | -21.9 |
| AE ∆% Jan-Mar 2012 | 18.1 |
| AE ∆% Nov-Dec 2011 | -1.2 |
| AE ∆% May-Oct 2011 | -3.1 |
| AE ∆% Jan-Apr 2011 | 35.6 |
AE: Annual Equivalent
Sources:
http://www.stats.gov.cn/enGliSH/
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
https://www.destatis.de/EN/Homepage.html
http://www.insee.fr/en/default.asp
http://www.ons.gov.uk/ons/index.html
Similar world inflation waves are in the behavior of consumer price indexes of six countries and the euro zone in Table IIA-2. US consumer price inflation shows similar waves. (1) Under risk appetite in Jan-Apr 2011 consumer prices increased at the annual equivalent rate of 4.9 percent. (2) Risk aversion caused the collapse of inflation to annual equivalent 2.8 percent in May-Jul 2011. (3) Risk appetite drove the rate of consumer price inflation in the US to 3.7 percent in Jul-Sep 2011. (4) Gloomier views of carry trades caused the collapse of inflation in Oct-Nov 2011 to annual equivalent 0.6 percent. (5) Consumer price inflation resuscitated with increased risk appetite at annual equivalent of 1.2 percent in Dec 2011 to Jan 2012. (6) Consumer price inflation returned at 2.8 percent annual equivalent in Feb-Apr 2012. (7) Under renewed risk aversion, annual equivalent consumer price inflation in the US is minus 1.2 percent in May-Jul 2012. (8) Inflation jumped to annual equivalent 7.4 percent in Aug-Sep 2012 and 5.3 percent in Aug-Oct 2012. Inflationary expectations can be triggered in one of these episodes of accelerating inflation because of commodity carry trades induced by unconventional monetary policy of zero interest rates in perpetuity or QE∞. Alternating episodes of increase and decrease of inflation introduce uncertainty in household planning that frustrates consumption and home buying. Announcement of purchases of impaired sovereign bonds by the European Central Bank relaxed risk aversion that induced carry trades into commodity exposures, increasing prices of food, raw materials and energy. There is similar behavior in all the other consumer price indexes in Table I-2. China’s CPI increased at annual equivalent 8.3 percent in Jan-Mar 2011, 2.0 percent in Apr-Jun, 2.9 percent in Jul-Dec and resuscitated at 5.8 percent annual equivalent in Dec 2011 to Mar 2012, declining to minus 3.9 percent in Apr-Jun 2012 but resuscitating at 4.1 percent in Jul-Sep 2012, declining to minus 1.2 percent in Oct 2012 and 0.0 percent in Oct-Nov 2012. The euro zone harmonized index of consumer prices (HICP) increased at annual equivalent 5.2 percent in Jan-Apr 2011, minus 2.4 percent in May-Jul 2011, 4.3 percent in Aug-Dec 2011, minus 3.0 percent in Dec 2011-Jan 2012 and then 9.6 percent in Feb-Apr 2012, falling to minus 2.8 percent annual equivalent in May-Jul 2012 but resuscitating at 5.3 percent in Aug-Oct 2012. The current shock of risk aversion forced minus 2.4 percent annual equivalent in Nov 2012. The price indexes of the largest members of the euro zone, Germany, France and Italy, and the euro zone as a whole, exhibit the same inflation waves. The United Kingdom CPI increased at annual equivalent 6.5 percent in Jan-Apr 2011, falling to only 0.4 percent in May-Jul 2011 and then increasing at 4.6 percent in Aug-Nov 2011. UK consumer prices fell at 0.6 percent annual equivalent in Dec 2011 to Jan 2012 but increased at 6.2 percent annual equivalent from Feb to Apr 2012. In May-Jun 2012, with renewed risk aversion, UK consumer prices fell at the annual equivalent rate of minus 3.0 percent. Inflation returned in the UK at average annual equivalent of 4.6 percent in Jul-Oct 2012 with inflation in Oct 2012 caused mostly by increases of university tuition fees. Inflation returned at 4.1 percent annual equivalent in Jul-Sep 2012 and was higher in annual equivalent producer price inflation in the UK in Jul-Oct 2012 at 3.7 percent for output prices and 7.7 percent for input prices (see Table IIA-1).
Table IIA-2, Annual Equivalent Rates of Consumer Price Indexes
| Index 2011-2012 | AE ∆% |
| US Consumer Price Index | |
| AE ∆% Nov 2012 | -3.5 |
| AE ∆% Aug-Oct 2012 | 5.3 |
| AE ∆% May-Jul 2012 | -1.2 |
| AE ∆% Feb-Apr 2012 | 2.8 |
| AE ∆% Dec 2011-Jan 2012 | 1.2 |
| AE ∆% Oct-Nov 2011 | 0.6 |
| AE ∆% Jul-Sep 2011 | 3.7 |
| AE ∆% May-Jul 2011 | 2.8 |
| AE ∆% Jan-Apr 2011 | 4.9 |
| China Consumer Price Index | |
| AE ∆% Oct-Nov | 0.0 |
| AE ∆% Jul-Sep | 4.1 |
| AE ∆% Apr-Jun 2012 | -3.9 |
| AE ∆% Dec 2011-Mar 2012 | 5.8 |
| AE ∆% Jul-Nov 2011 | 2.9 |
| AE ∆% Apr-Jun 2011 | 2.0 |
| AE ∆% Jan-Mar 2011 | 8.3 |
| Euro Zone Harmonized Index of Consumer Prices | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Aug-Oct 2012 | 5.3 |
| AE ∆% May-Jul 2012 | -2.8 |
| AE ∆% Feb-Apr 2012 | 9.6 |
| AE ∆% Dec 2011-Jan 2012 | -3.0 |
| AE ∆% Aug-Nov 2011 | 4.3 |
| AE ∆% May-Jul 2011 | -2.4 |
| AE ∆% Jan-Apr 2011 | 5.2 |
| Germany Consumer Price Index | |
| AE ∆% Sep-Nov 2012 | -0.4 NSA 1.6 SA |
| AE ∆% Jul-Aug 2012 | 4.9 NSA 3.7 SA |
| AE ∆% May-Jun 2012 | -1.8 NSA 1.2 SA |
| AE ∆% Feb-Apr 2012 | 4.9 NSA 2.4 SA |
| AE ∆% Dec 2011-Jan 2012 | 1.8 NSA 1.8 SA |
| AE ∆% Jul-Nov 2011 | 1.2 NSA 2.2 SA |
| AE ∆% May-Jun 2011 | 0.6 NSA 2.4 SA |
| AE ∆% Feb-Apr 2011 | 2.4 NSA 2.4 SA |
| France Consumer Price Index | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Aug-Oct 2012 | 2.4 |
| AE ∆% May-Jul 2012 | -2.0 |
| AE ∆% Feb-Apr 2012 | 5.3 |
| AE ∆% Dec 2011-Jan 2012 | 0.0 |
| AE ∆% Aug-Nov 2011 | 2.7 |
| AE ∆% May-Jul 2011 | -0.8 |
| AE ∆% Jan-Apr 2011 | 4.3 |
| Italy Consumer Price Index | |
| AE ∆% Nov 2012 | -2.4 |
| AE ∆% Sep-Oct 2012 | 0.0 |
| AE ∆% Jul-Aug 2012 | 3.0 |
| AE ∆% May-Jun 2012 | 1.2 |
| AE ∆% Feb-Apr 2012 | 5.7 |
| AE ∆% Dec 2011-Jan 2012 | 4.3 |
| AE ∆% Oct-Nov 2011 | 3.0 |
| AE ∆% Jul-Sep 2011 | 2.4 |
| AE ∆% May-Jun 2011 | 1.2 |
| AE ∆% Jan-Apr 2011 | 4.9 |
| UK Consumer Price Index | |
| AE ∆% Jul-Oct 2012 | 4.6 |
| AE ∆% May-Jun 2012 | -3.0 |
| AE ∆% Feb-Apr 2012 | 6.2 |
| AE ∆% Dec 2011-Jan 2012 | -0.6 |
| AE ∆% Aug-Nov 2011 | 4.6 |
| AE ∆% May-Jul 2011 | 0.4 |
| AE ∆% Jan-Apr 2011 | 6.5 |
AE: Annual Equivalent
Sources:
http://www.stats.gov.cn/enGliSH/
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
https://www.destatis.de/EN/Homepage.html
http://www.insee.fr/en/default.asp
http://www.ons.gov.uk/ons/index.html
IIA Appendix: Transmission of Unconventional Monetary Policy. Janet L. Yellen, Vice Chair of the Board of Governors of the Federal Reserve System, provides analysis of the policy of purchasing large amounts of long-term securities for the Fed’s balance sheet. The new analysis provides three channels of transmission of quantitative easing to the ultimate objectives of increasing growth and employment and increasing inflation to “levels of 2 percent or a bit less that most Committee participants judge to be consistent, over the long run, with the FOMC’s dual mandate” (Yellen 2011AS, 4, 7):
“There are several distinct channels through which these purchases tend to influence aggregate demand, including a reduced cost of credit to consumers and businesses, a rise in asset prices that boost household wealth and spending, and a moderate change in the foreign exchange value of the dollar that provides support to net exports.”
The new analysis by Yellen (2011AS) is considered below in four separate subsections: IIA1 Theory; IIA2 Policy; IIA3 Evidence; and IIA4 Unwinding Strategy.
IIA1 Theory. The transmission mechanism of quantitative easing can be analyzed in three different forms. (1) Portfolio choice theory. General equilibrium value theory was proposed by Hicks (1935) in analyzing the balance sheets of individuals and institutions with assets in the capital segment consisting of money, debts, stocks and productive equipment. Net worth or wealth would be comparable to income in value theory. Expected yield and risk would be the constraint comparable to income in value theory. Markowitz (1952) considers a portfolio of individual securities with mean μp and variance σp. The Markowitz (1952, 82) rule states that “investors would (or should” want to choose a portfolio of combinations of (μp, σp) that are efficient, which are those with minimum variance or risk for given expected return μp or more and maximum expected μp for given variance or risk or less. The more complete model of Tobin (1958) consists of portfolio choice of monetary assets by maximizing a utility function subject to a budget constraint. Tobin (1961, 28) proposes general equilibrium analysis of the capital account to derive choices of capital assets in balance sheets of economic units with the determination of yields in markets for capital assets with the constraint of net worth. A general equilibrium model of choice of portfolios was developed simultaneously by various authors (Hicks 1962; Treynor 1962; Sharpe 1964; Lintner 1965; Mossin 1966). If shocks such as by quantitative easing displace investors from the efficient frontier, there would be reallocations of portfolios among assets until another efficient point is reached. Investors would bid up the prices or lower the returns (interest plus capital gains) of long-term assets targeted by quantitative easing, causing the desired effect of lowering long-term costs of investment and consumption.
(2) General Equilibrium Theory. Bernanke and Reinhart (2004, 88) argue that “the possibility monetary policy works through portfolio substitution effects, even in normal times, has a long intellectual history, having been espoused by both Keynesians (James Tobin 1969) and monetarists (Karl Brunner and Allan Meltzer 1973).” Andres et al. (2004) explain the Tobin (1969) contribution by optimizing agents in a general-equilibrium model. Both Tobin (1969) and Brunner and Meltzer (1973) consider capital assets to be gross instead of perfect substitutes with positive partial derivatives of own rates of return and negative partial derivatives of cross rates in the vector of asset returns (interest plus principal gain or loss) as argument in portfolio balancing equations (see Pelaez and Suzigan 1978, 113-23). Tobin (1969, 26) explains portfolio substitution after monetary policy:
“When the supply of any asset is increased, the structure of rates of return, on this and other assets, must change in a way that induces the public to hold the new supply. When the asset’s own rate can rise, a large part of the necessary adjustment can occur in this way. But if the rate is fixed, the whole adjustment must take place through reductions in other rates or increases in prices of other assets. This is the secret of the special role of money; it is a secret that would be shared by any other asset with a fixed interest rate.”
Andrés et al. (2004, 682) find that in their multiple-channels model “base money expansion now matters for the deviations of long rates from the expected path of short rates. Monetary policy operates by both the expectations channel (the path of current and expected future short rates) and this additional channel. As in Tobin’s framework, interest rates spreads (specifically, the deviations from the pure expectations theory of the term structure) are an endogenous function of the relative quantities of assets supplied.”
The interrelation among yields of default-free securities is measured by the term structure of interest rates. This schedule of interest rates along time incorporates expectations of investors. (Cox, Ingersoll and Ross 1985). The expectations hypothesis postulates that the expectations of investors about the level of future spot rates influence the level of current long-term rates. The normal channel of transmission of monetary policy in a recession is to lower the target of the fed funds rate that will lower future spot rates through the term structure and also the yields of long-term securities. The expectations hypothesis is consistent with term premiums (Cox, Ingersoll and Ross 1981, 774-7) such as liquidity to compensate for risk or uncertainty about future events that can cause changes in prices or yields of long-term securities (Hicks 1935; see Cox, Ingersoll and Ross 1981, 784; Chung et al. 2011, 22).
(3) Preferred Habitat. Another approach is by the preferred-habitat models proposed by Culbertson (1957, 1963) and Modigliani and Sutch (1966). This approach is formalized by Vayanos and Vila (2009). The model considers investors or “clientele” who do not abandon their segment of operations unless there are extremely high potential returns and arbitrageurs who take positions to profit from discrepancies. Pension funds matching benefit liabilities would operate in segments above 15 years; life insurance companies operate around 15 years or more; and asset managers and bank treasury managers are active in maturities of less than 10 years (Ibid, 1). Hedge funds, proprietary trading desks and bank maturity transformation activities are examples of potential arbitrageurs. The role of arbitrageurs is to incorporate “information about current and future short rates into bond prices” (Ibid, 12). Suppose monetary policy raises the short-term rate above a certain level. Clientele would not trade on this information, but arbitrageurs would engage in carry trade, shorting bonds and investing at the short-term rate, in a “roll-up” trade, resulting in decline of bond prices or equivalently increases in yields. This is a situation of an upward-sloping yield curve. If the short-term rate were lowered, arbitrageurs would engage in carry trade borrowing at the short-term rate and going long bonds, resulting in an increase in bond prices or equivalently decline in yields, or “roll-down” trade. The carry trade is the mechanism by which bond yields adjust to changes in current and expected short-term interest rates. The risk premiums of bonds are positively associated with the slope of the term structure (Ibid, 13). Fama and Bliss (1987, 689) find with data for 1964-85 that “1-year expected returns for US Treasury maturities to 5 years, measured net of the interest rate on a 1-year bond, vary through time. Expected term premiums are mostly positive during good times but mostly negative during recessions.” Vayanos and Vila (2009) develop a model with two-factors, the short-term rate and demand or quantity. The term structure moves because of shocks of short-term rates and demand. An important finding is that demand or quantity shocks are largest for intermediate and long maturities while short-rate shocks are largest for short-term maturities.
IIA2 Policy. 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 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. There have been at least seven approaches on the role of monetary policy in purchasing long-term securities that have increased the classes of rates of return targeted by the Fed:
(1) Suspension of Auctions of 30-year Treasury Bonds. Auctions of 30-year Treasury bonds were suspended between 2001 and 2005. This was Treasury policy not Fed policy. The effects were similar to those of quantitative easing: withdrawal of supply from the segment of 30-year bonds would result in higher prices or lower yields for close-substitute mortgage-backed securities with resulting lower mortgage rates. The objective was to encourage refinancing of house loans that would increase family income and consumption by freeing income from reducing monthly mortgage payments.
(2) Purchase of Long-term Securities by the Fed. Between Nov 2008 and Mar 2009 the Fed announced the intention of purchasing $1750 billion of long-term securities: $600 billion of agency mortgage-backed securities and agency debt announced on Nov 25 and $850 billion of agency mortgaged-backed securities and agency debt plus $300 billion of Treasury securities announced on Mar 18, 2009 (Yellen 2011AS, 5-6). The objective of buying mortgage-backed securities was to lower mortgage rates that would “support the housing sector” (Bernanke 2009SL). The FOMC statement on Dec 16, 2008 informs that: “over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and its stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant” (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). The Mar 18, 2009, statement of the FOMC explained that: “to provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities up to $1.25 trillion this year, and to increase its purchase of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months” (http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm). Policy changed to increase prices or reduce yields of mortgage-backed securities and Treasury securities with the objective of supporting housing markets and private credit markets by lowering costs of housing and long-term private credit.
(3) Portfolio Reinvestment. On Aug 10, 2010, the FOMC statement explains the reinvestment policy: “to help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in long-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature” (http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm). The objective of policy appears to be supporting conditions in housing and mortgage markets with slow transfer of the portfolio to Treasury securities that would support private-sector markets.
(4) Increasing Portfolio. As widely anticipated, the FOMC decided on Dec 3, 2010: “to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month” (http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm). The emphasis appears to shift from housing markets and private-sector credit markets to the general economy, employment and preventing deflation.
(5) Increasing Stock Market Valuations. Chairman Bernanke (2010WP) explained on Nov 4 the objectives of purchasing an additional $600 billion of long-term Treasury securities and reinvesting maturing principal and interest in the Fed portfolio. Long-term interest rates fell and stock prices rose when investors anticipated the new round of quantitative easing. Growth would be promoted by easier lending such as for refinancing of home mortgages and more investment by lower corporate bond yields. Consumers would experience higher confidence as their wealth in stocks rose, increasing outlays. Income and profits would rise and, in a “virtuous circle,” support higher economic growth. Bernanke (2000) analyzes the role of stock markets in central bank policy (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-100). Fed policy in 1929 increased interest rates to avert a gold outflow and failed to prevent the deepening of the banking crisis without which the Great Depression may not have occurred. In the crisis of Oct 19, 1987, Fed policy supported stock and futures markets by persuading banks to extend credit to brokerages. Collapse of stock markets would slow consumer spending.
(6) Devaluing the Dollar. Yellen (2011AS, 6) broadens the effects of quantitative easing by adding dollar devaluation: “there are several distinct channels through which these purchases tend to influence aggregate demand, including a reduced cost of credit to consumers and businesses, a rise in asset prices that boosts household wealth and spending, and a moderate change in the foreign exchange value of the dollar that provides support to net exports.”
(7) Let’s Twist Again Monetary Policy. The term “operation twist” grew out of the dance “twist” popularized by successful musical performer Chubby Chekker (http://www.youtube.com/watch?v=aWaJ0s0-E1o). Meulendyke (1998, 39) describes the coordination of policy by Treasury and the FOMC in the beginning of the Kennedy administration in 1961 (see Modigliani and Sutch 1966, 1967; 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):
“In 1961, several developments led the FOMC to abandon its “bills only” restrictions. The new Kennedy administration was concerned about gold outflows and balance of payments deficits and, at the same time, it wanted to encourage a rapid recovery from the recent recession. Higher rates seemed desirable to limit the gold outflows and help the balance of payments, while lower rates were wanted to speed up economic growth.
To deal with these problems simultaneously, the Treasury and the FOMC attempted to encourage lower long-term rates without pushing down short-term rates. The policy was referred to in internal Federal Reserve documents as “operation nudge” and elsewhere as “operation twist.” For a few months, the Treasury engaged in maturity exchanges with trust accounts and concentrated its cash offerings in shorter maturities.
The Federal Reserve participated with some reluctance and skepticism, but it did not see any great danger in experimenting with the new procedure.
It attempted to flatten the yield curve by purchasing Treasury notes and bonds while selling short-term Treasury securities. The domestic portfolio grew by $1.7 billion over the course of 1961. Note and bond holdings increased by a substantial $8.8 billion, while certificate of indebtedness holdings fell by almost $7.4 billion (Table 2). The extent to which these actions changed the yield curve or modified investment decisions is a source of dispute, although the predominant view is that the impact on yields was minimal. The Federal Reserve continued to buy coupon issues thereafter, but its efforts were not very aggressive. Reference to the efforts disappeared once short-term rates rose in 1963. The Treasury did not press for continued Fed purchases of long-term debt. Indeed, in the second half of the decade, the Treasury faced an unwanted shortening of its portfolio. Bonds could not carry a coupon with a rate above 4 1/4 percent, and market rates persistently exceeded that level. Notes—which were not subject to interest rate restrictions—had a maximum maturity of five years; it was extended to seven years in 1967.”
As widely anticipated by markets, perhaps intentionally, the Federal Open Market Committee (FOMC) decided at its meeting on Sep 21 that it was again “twisting time” (http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm):
“Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.”
The FOMC decided at its meeting on Jun 20, 2012, to continue “Let’s Twist Again” monetary policy until the end of 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.htm http://www.newyorkfed.org/markets/opolicy/operating_policy_120620.html):
“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
IIA3 Evidence. There are multiple empirical studies on the effectiveness of quantitative easing that have been covered in past posts such as (Andrés et al. 2004, D’Amico and King 2010, Doh 2010, Gagnon et al. 2010, Hamilton and Wu 2010). On the basis of simulations of quantitative easing with the FRB/US econometric model, Chung et al (2011, 28-9) find that:
”Lower long-term interest rates, coupled with higher stock market valuations and a lower foreign exchange value of the dollar, provide a considerable stimulus to real activity over time. Phase 1 of the program by itself is estimated to boost the level of real GDP almost 2 percent above baseline by early 2012, while the full program raises the level of real GDP almost 3 percent by the second half of 2012. This boost to real output in turn helps to keep labor market conditions noticeably better than they would have been without large scale asset purchases. In particular, the model simulations suggest that private payroll employment is currently 1.8 million higher, and the unemployment rate ¾ percentage point lower, that would otherwise be the case. These benefits are predicted to grow further over time; by 2012, the incremental contribution of the full program is estimated to be 3 million jobs, with an additional 700,000 jobs provided by the most recent phase of the program alone.”
An additional conclusion of these simulations is that quantitative easing may have prevented actual deflation. Empirical research is continuing.
IIA4 Unwinding Strategy. Fed Vice-Chair Yellen (2011AS) considers four concerns on quantitative easing discussed below in turn. First, Excessive Inflation. Yellen (2011AS, 9-12) considers concerns that quantitative easing could result in excessive inflation because fast increases in aggregate demand from quantitative easing could raise the rate of inflation, posing another problem of adjustment with tighter monetary policy or higher interest rates. The Fed estimates significant slack of resources in the economy as measured by the difference of four percentage points between the high current rate of unemployment above 9 percent and the NAIRU (non-accelerating rate of unemployment) of 5.75 percent (Ibid, 2). Thus, faster economic growth resulting from quantitative easing would not likely result in upward trend of costs as resources are bid up competitively. The Fed monitors frequently slack indicators and is committed to maintaining inflation at a “level of 2 percent or a bit less than that” (Ibid, 13), say, in the narrow open interval (1.9, 2.1).
Second, Inflation and Bank Reserves. On Jan 12, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2450.6 billion, or $2.5 trillion, with the portfolio of long-term securities of $2175.7 billion, or $2.2 trillion, composed of $987.6 billion of notes and bonds, $49.7 billion of inflation-adjusted notes and bonds, $146.3 billion of Federal agency debt securities, and $992.1 billion of mortgage-backed securities; reserves balances with Federal Reserve Banks stood at $1095.5 billion, or $1.1 trillion (http://federalreserve.gov/releases/h41/current/h41.htm#h41tab1). The concern addressed by Yellen (2011AS, 12-4) is that this high level of reserves could eventually result in demand growth that could accelerate inflation. Reserves would be excessively high relative to the levels before the recession. Reserves of depository institutions at the Federal Reserve Banks rose from $45.6 billion in Aug 2008 to $1084.8 billion in Aug 2010, not seasonally adjusted, multiplying by 23.8 times, or to $1038.2 billion in Nov 2010, multiplying by 22.8 times. The monetary base consists of the monetary liabilities of the government, composed largely of currency held by the public plus reserves of depository institutions at the Federal Reserve Banks. The monetary base not seasonally adjusted, or issue of money by the government, rose from $841.1 billion in Aug 2008 to $1991.1 billion or by 136.7 percent and to $1968.1 billion in Nov 2010 or by 133.9 percent (http://federalreserve.gov/releases/h3/hist/h3hist1.pdf). Policy can be viewed as creating government monetary liabilities that ended mostly in reserves of banks deposited at the Fed to purchase $2.1 trillion of long-term securities or assets, which in nontechnical language would be “printing money” (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). The marketable debt of the US government in Treasury securities held by the public stood at $8.7 trillion on Nov 30, 2010 (http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds112010.pdf). The current holdings of long-term securities by the Fed of $2.1 trillion, in the process of converting fully into Treasury securities, are equivalent to 24 percent of US government debt held by the public, and would represent 29.9 percent with the new round of quantitative easing if all the portfolio of the Fed, as intended, were in Treasury securities. Debt in Treasury securities held by the public on Dec 31, 2009, stood at $7.2 trillion (http://www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds122009.pdf), growing on Nov 30, 2010, to $1.5 trillion or by 20.8 percent. In spite of this growth of bank reserves, “the 12-month change in core PCE [personal consumption expenditures] prices dropped from about 2 ½ percent in mid-2008 to around 1 ½ percent in 2009 and declined further to less than 1 percent by late 2010” (Yellen 2011AS, 3). The PCE price index, excluding food and energy, is around 0.8 percent in the past 12 months, which could be, in the Fed’s view, too close for comfort to negative inflation or deflation. Yellen (2011AS, 12) agrees “that an accommodative monetary policy left in place too long can cause inflation to rise to undesirable levels” that would be true whether policy was constrained or not by “the zero bound on interest rates.” The FOMC is monitoring and reviewing the “asset purchase program regularly in light of incoming information” and will “adjust the program as needed to meet its objectives” (Ibid, 12). That is, the FOMC would withdraw the stimulus once the economy is closer to full capacity to maintain inflation around 2 percent. In testimony at the Senate Committee on the Budget, Chairman Bernanke stated that “the Federal Reserve has all the tools its needs to ensure that it will be able to smoothly and effectively exit from this program at the appropriate time” (http://federalreserve.gov/newsevents/testimony/bernanke20110107a.htm). The large quantity of reserves would not be an obstacle in attaining the 2 percent inflation level. Yellen (2011A, 13-4) enumerates Fed tools that would be deployed to withdraw reserves as desired: (1) increasing the interest rate paid on reserves deposited at the Fed currently at 0.25 percent per year; (2) withdrawing reserves with reverse sale and repurchase agreement in addition to those with primary dealers by using mortgage-backed securities; (3) offering a Term Deposit Facility similar to term certificates of deposit for member institutions; and (4) sale or redemption of all or parts of the portfolio of long-term securities. The Fed would be able to increase interest rates and withdraw reserves as required to attain its mandates of maximum employment and price stability.
Third, Financial Imbalances. Fed policy intends to lower costs to business and households with the objective of stimulating investment and consumption generating higher growth and employment. Yellen (2011A, 14-7) considers a possible consequence of excessively reducing interest rates: “a reasonable fear is that this process could go too far, encouraging potential borrowers to employ excessive leverage to take advantage of low financing costs and leading investors to accept less compensation for bearing risks as they seek to enhance their rates of return in an environment of very low yields. This concern deserves to be taken seriously, and the Federal Reserve is carefully monitoring financial indicators for signs of potential threats to financial stability.” Regulation and supervision would be the “first line of defense” against imbalances threatening financial stability but the Fed would also use monetary policy to check imbalances (Yellen 2011AS, 17).
Fourth, Adverse Effects on Foreign Economies. The issue is whether the now recognized dollar devaluation would promote higher growth and employment in the US at the expense of lower growth and employment in other countries.
IIB United States Inflation. Monetary policy pursues symmetric inflation targets of maintaining core inflation of the index of personal consumption expenditures (core PCE) in an open interval of 2.00 percent. If inflation increases above 2.00 percent, the central bank could use restrictive monetary policy such as increases in interest rates to contain inflation in a tight range or interval around 2.00 percent. If inflation falls below 2 percent, the central bank could use restrictive monetary policy such as lowering interest rates to prevent inflation from falling too much below 2.00 percent. Currently, with about thirty million unemployed and underemployed (http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html ) and depressed hiring (http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html), there may even be a policy bias to raise or at least ignore inflation, even with falling real wages, maintaining accommodation as a form of promoting full employment. There are two arguments in favor of symmetric inflation targets preventing inflation from falling to very low levels.
1. Room for interest rate policy. Nominal interest rates hardly ever fall below zero. In economic jargon, the floor of zero nominal interest rates is referred to as “the zero bound.” Symmetric targets are proposed to maintain a sufficiently high inflation rate such that interest rates can be lowered to promote economic activity when recession threatens. With inflation close to zero there is no room for lowering interest rates with policy tools.
2. Fear of Deflation. Inflation is a process of sustained increases in prices. Deflation is a process of sustained decreases in prices. The probability of deflation increases as inflation approximates zero. The influence of fear of deflation in monetary policy is discussed in Pelaez and Pelaez (International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-95).
IIB United States Inflation. Subsection IIC Long-term US Inflation evaluates long-term inflation in the US, concluding that there has not been deflation risk since World War II. Subsection IID Current US Inflation finds no evidence in current inflation justifying fear of deflation.
IIC Long-term US Inflation. Key percentage average yearly rates of the US economy on growth and inflation are provided in Table II-1 updated with release of new data. The choice of dates prevents the measurement of long-term potential economic growth because of two recessions from IQ2001 (Mar) to IVQ2001 (Nov) with decline of GDP of 0.4 percent and the drop in GDP of 4.7 percent in the recession from IVQ2007 (Dec) to IIQ2009 (June) (http://www.nber.org/cycles.html) followed with unusually low economic growth for an expansion phase after recession (http://cmpassocregulationblog.blogspot.com/2012/10/mediocre-and-decelerating-united-states.html). Calculations show that actual US GDP growth is around 1.5 percent per year that will perpetuate unemployment/underemployment (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.5 percent is well below trend growth of 3 percent per year from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense together with 0.77 points of inventory accumulation to growth of 2.7 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.3 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.3 percent in IIIQ2012 annualizes to 1.5 percent in the first three quarters of 2012 {([(1.02)1/4(1.013)1/4(1.0131/4]4/3 -1)100 = 1.5%}. Between 2000 and 2011, real GDP grew at the average rate of 1.6 percent per year, nominal GDP at 3.9 percent and the implicit deflator at 2.3 percent. Between 2000 and 2012, the average rate of CPI inflation was 2.4 percent per year and 2.0 percent excluding food and energy. PPI inflation increased at 2.8 percent per year on average from 2000 to 2012 and at 1.8 percent excluding food and energy. Producer price inflation of finished energy goods increased at average 5.4 percent between 2000 and 2012. There is also inflation in international trade. Import prices increased at 2.7 percent per year between 2000 and 2012. The commodity price shock is revealed by inflation of import prices of petroleum increasing at 12.4 percent per year between 2000 and 2011 and at 10.7 percent between 2000 and 2012. The average percentage rates of increase of import prices excluding fuels are much lower at 2.1 percent for 2002 to 2011 and 1.6 percent for 2002 to 2012. Export prices rose at the average rate of 2.6 percent between 2000 and 2011 and at 2.4 percent from 2000 to 2012. What spared the US of sharper decade-long deterioration of the terms of trade, (export prices)/(import prices), was its diversification and competitiveness in agriculture. Agricultural export prices grew at the average yearly rate of 6.7 percent from 2000 to 2011 and at 6.9 percent from 2000 to 2012. US nonagricultural export prices rose at 2.2 percent per year from 2000 to 2011 and at 2.0 percent from 2000 to 2012. The share of petroleum imports in US trade far exceeds that of agricultural exports. Unconventional monetary policy inducing carry trades in commodities has deteriorated US terms of trade, prices of exports relative to prices of imports, tending to restrict growth of US aggregate real income. These dynamic inflation rates are not similar to those for the economy of Japan where inflation was negative in seven of the 10 years in the 2000s.
II-1, US, Average Growth Rates of Real and Nominal GDP, Consumer Price Index, Producer Price Index and Import and Export Prices, Percent per Year
| Real GDP | 2000-2011: 1.6% |
| Nominal GDP | 2000-2011: 3.9% |
| Implicit Price Deflator | 2000-2011: 2.3% |
| CPI | 2000-2011: 2.4% |
| CPI ex Food and Energy | 2000-2011: 2.0% |
| PPI | 2000-2011: 2.9% |
| PPI ex Food and Energy | 2000-2011: 1.7% |
| PPI Finished Energy Goods | 2000-2011: 6.1% 2000-2012: 5.4% |
| Import Prices | 2000-2011: 3.1% |
| Import Prices of Petroleum and Petroleum Products | 2000-2011: 12.4% |
| Import Prices Excluding Petroleum | 2000-2011: 1.4% |
| Import Prices Excluding Fuels | 2002-2011: 2.1% |
| Export Prices | 2000-2011: 2.6% |
| Agricultural Export Prices | 2000-2011: 6.7% |
| Nonagricultural Export Prices | 2000-2011: 2.2% |
Note: rates for price indexes in the row beginning with “CPI” and ending in the row “Nonagricultural Export Prices” are for Nov 2000 to Nov 2011 and for Nov 2000 to Nov 2012 using not seasonally adjusted indexes. Import prices excluding fuels are not available before 2002.
Sources:
http://www.bea.gov/iTable/index_nipa.cfm
http://www.bls.gov/cpi/data.htm http://www.bls.gov/ppi/data.htm http://www.bls.gov/mxp/data.htm
Unconventional monetary policy of zero interest rates and large-scale purchases of long-term securities for the balance sheet of the central bank is proposed to prevent deflation. The data of CPI inflation of all goods and CPI inflation excluding food and energy for the past six decades show only one negative change by 0.4 percent in the CPI all goods annual index in 2009 but not one year of negative annual yearly change in the CPI excluding food and energy measuring annual inflation (http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html). Zero interest rates and quantitative easing are designed to lower costs of borrowing for investment and consumption, increase stock market valuations and devalue the dollar. In practice, the carry trade is from zero interest rates to a large variety of risk financial assets including commodities. Resulting commodity price inflation squeezes family budgets and deteriorates the terms of trade with negative effects on aggregate demand and employment. Excessive valuations of risk financial assets eventually result in crashes of financial markets with possible adverse effects on economic activity and employment.
Producer price inflation history in the past five decades does not provide evidence of deflation. The finished core PPI does not register even one single year of decline. The headline PPI experienced only six isolated cases of decline (http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html):
-0.3 percent in 1963,
-1.4 percent in 1986,
-0.8 percent in 1986,
-0.8 percent in 1998,
-1.3 percent in 2001
-2.6 percent in 2009.
Deflation should show persistent cases of decline of prices and not isolated events. Fear of deflation in the US has caused a distraction of monetary policy. Symmetric inflation targets around 2 percent in the presence of multiple lags in effect of monetary policy and imperfect knowledge and forecasting are mostly unfeasible and likely to cause price and financial instability instead of desired price and financial stability.
Chart II-1 provides US nominal GDP from 1980 to 2010. The only major bump in the chart occurred in the recession of IVQ2007 to IIQ2009 with revised cumulative decline of GDP of 4.7 percent. Tendency for deflation would be reflected in persistent bumps. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html).
Chart II-1, US, Nominal GDP 1980-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-2 provides US real GDP from 1980 to 2011. Persistent deflation threatening real economic activity would also be reflected in the series of long-term growth of GDP. There is no such behavior in Chart II-2 except for periodic recessions in the US economy that have occurred throughout history.
Chart II-2, US, Real GDP 1980-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Deflation would also be in evidence in long-term series of prices in the form of bumps. The GDP implicit deflator series in Chart II-3 from 1980 to 2012 shows sharp dynamic behavior over time. The US economy is not plagued by deflation but by long-run inflation.
Chart II-3, US, GDP Implicit Price Deflator 1980-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-4 provides percent change from preceding quarter in prices of GDP at seasonally-adjusted annual rates (SAAR) from 1980 to 2011. There is one case of negative change in IIQ2009. There has not been actual deflation or risk of deflation in the US that would justify unconventional monetary policy.
Chart II-4, Percent Change from Preceding Period in Prices for GDP Seasonally Adjusted at Annual Rates 1980-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-5 provides percent change from preceding year in prices of GDP from 1980 to 2011. There was not one single year of deflation or risk of deflation in the past three decades.
Chart II-5, Percent Change from Preceding Year in Prices for Gross Domestic Product 1980-2011
Source: http://www.bea.gov/iTable/index_nipa.cfm
The producer price index of the US from 1947 to 2012 in Chart II-6 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.
Chart II-6, US, Producer Price Index, Finished Goods, NSA, 1947-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
Chart II-7 provides 12-month percentage changes of the producer price index from 1948 to 2012. The distinguishing event in Chart II-7 is the Great Inflation of the 1970s. The shape of the two-hump Bactrian camel of the 1970s resembles the double hump from 2007 to 2012.
Chart II-7, US, Producer Price Index, Finished Goods, 12-Month Percentage Change, NSA, 1948-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
The producer price index excluding food and energy from 1973 to 2012, the first historical date of availability in the dataset of the Bureau of Labor Statistics (BLS), shows similarly dynamic behavior as the overall index, as shown in Chart II-8. There is no evidence of persistent deflation in the US PPI.
Chart II-8, US Producer Price Index, Finished Goods Excluding Food and Energy, NSA, 1973-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
Chart II-9 provides 12-month percentage rates of change of the finished goods index excluding food and energy. The dominating characteristic is the Great Inflation of the 1970s. The double hump illustrates how inflation may appear to be subdued and then returns with strength.
Chart II-9, US Producer Price Index, Finished Goods Excluding Food and Energy, 12-Month Percentage Change, NSA, 1974-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
The producer price index of energy goods from 1974 to 2012 is provided in Chart II-10. The first jump occurred during the Great Inflation of the 1970s analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html 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 in Appendix I. There is relative stability of producer prices after 1986 with another jump and decline in the late 1990s into the early 2000s. The episode of commodity price increases during a global recession in 2008 could only have occurred with interest rates dropping toward zero, which stimulated the carry trade from zero interest rates to leveraged positions in commodity futures. Commodity futures exposures were dropped in the flight to government securities after Sep 2008. Commodity future exposures were created again when risk aversion diminished around Mar 2011 after the finding that US bank balance sheets did not have the toxic assets that were mentioned in proposing TARP in Congress (see Cochrane and Zingales 2009). Fluctuations in commodity prices and other risk financial assets originate in carry trade when risk aversion ameliorates.
Chart II-10, US, Producer Price Index, Finished Energy Goods, NSA, 1974-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
Chart II-11 shows 12-month percentage changes of the producer price index of finished energy goods from 1975 to 2012. This index is only available after 1974 and captures only one of the humps of energy prices during the Great Inflation. Fluctuations in energy prices have occurred throughout history in the US but without provoking deflation. Two cases are the decline of oil prices in 2001 to 2002 that has been analyzed by Barsky and Kilian (2004) and the collapse of oil prices from over $140/barrel with shock of risk aversion to the carry trade in Sep 2008.
Chart II-11, US, Producer Price Index, Finished Energy Goods, 12-Month Percentage Change, NSA, 1974-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/
Chart II-12 provides the consumer price index NSA from 1913 to 2012. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.
Chart II-12, US, Consumer Price Index, NSA, 1913-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-13 provides 12-month percentage changes of the consumer price index from 1914 to 2012. The only episode of deflation after 1950 is in 2009, which is explained by the reversal of speculative commodity futures carry trades that were induced by interest rates driven to zero in a shock of monetary policy in 2008. The only persistent case of deflation is from 1930 to 1933, which has little if any relevance to the contemporary United States economy. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Inflation rates then stabilized in a range with only two episodes above 5 percent.
Chart II-13, US, Consumer Price Index, All Items, 12- Month Percentage Change 1914-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Table II-2 provides annual percentage changes of United States consumer price inflation from 1914 to 2011. There have been only cases of annual declines of the CPI after World War II: -1.2 percent in 1949, -0.4 percent in 1955 and -0.4 percent in 2009. The decline of 0.4 percent in 2009 followed increase of 3.8 percent in 2008 and is explained by the reversal of speculative carry trades that were created in 2008 as monetary policy rates were driven to zero. The reversal occurred after misleading statement on toxic assets in banks in the proposal for TARP (Cochrane and Zingales 2009). The only persistent deflationary period since 1914 was during the Great Depression in the years from 1930 to 1933. Fear of deflation on the basis of that experience does not justify unconventional monetary policy of zero interest rates that has failed to stop deflation in Japan. Financial repression causes far more adverse effects on allocation of resources by distorting the calculus of risk/returns than alleged employment-creating effects or there would not be current recovery without jobs and hiring after zero interest rates since Dec 2008 and intended now forever in a self-imposed growth and employment mandate of monetary policy.
Table II-2, US, Annual CPI Inflation ∆% 1914-2011
| Year | Annual |
| 1914 | 1.0 |
| 1915 | 1.0 |
| 1916 | 7.9 |
| 1917 | 17.4 |
| 1918 | 18.0 |
| 1919 | 14.6 |
| 1920 | 15.6 |
| 1921 | -10.5 |
| 1922 | -6.1 |
| 1923 | 1.8 |
| 1924 | 0.0 |
| 1925 | 2.3 |
| 1926 | 1.1 |
| 1927 | -1.7 |
| 1928 | -1.7 |
| 1929 | 0.0 |
| 1930 | -2.3 |
| 1931 | -9.0 |
| 1932 | -9.9 |
| 1933 | -5.1 |
| 1934 | 3.1 |
| 1935 | 2.2 |
| 1936 | 1.5 |
| 1937 | 3.6 |
| 1938 | -2.1 |
| 1939 | -1.4 |
| 1940 | 0.7 |
| 1941 | 5.0 |
| 1942 | 10.9 |
| 1943 | 6.1 |
| 1944 | 1.7 |
| 1945 | 2.3 |
| 1946 | 8.3 |
| 1947 | 14.4 |
| 1948 | 8.1 |
| 1949 | -1.2 |
| 1950 | 1.3 |
| 1951 | 7.9 |
| 1952 | 1.9 |
| 1953 | 0.8 |
| 1954 | 0.7 |
| 1955 | -0.4 |
| 1956 | 1.5 |
| 1957 | 3.3 |
| 1958 | 2.8 |
| 1959 | 0.7 |
| 1960 | 1.7 |
| 1961 | 1.0 |
| 1962 | 1.0 |
| 1963 | 1.3 |
| 1964 | 1.3 |
| 1965 | 1.6 |
| 1966 | 2.9 |
| 1967 | 3.1 |
| 1968 | 4.2 |
| 1969 | 5.5 |
| 1970 | 5.7 |
| 1971 | 4.4 |
| 1972 | 3.2 |
| 1973 | 6.2 |
| 1974 | 11.0 |
| 1975 | 9.1 |
| 1976 | 5.8 |
| 1977 | 6.5 |
| 1978 | 7.6 |
| 1979 | 11.3 |
| 1980 | 13.5 |
| 1981 | 10.3 |
| 1982 | 6.2 |
| 1983 | 3.2 |
| 1984 | 4.3 |
| 1985 | 3.6 |
| 1986 | 1.9 |
| 1987 | 3.6 |
| 1988 | 4.1 |
| 1989 | 4.8 |
| 1990 | 5.4 |
| 1991 | 4.2 |
| 1992 | 3.0 |
| 1993 | 3.0 |
| 1994 | 2.6 |
| 1995 | 2.8 |
| 1996 | 3.0 |
| 1997 | 2.3 |
| 1998 | 1.6 |
| 1999 | 2.2 |
| 2000 | 3.4 |
| 2001 | 2.8 |
| 2002 | 1.6 |
| 2003 | 2.3 |
| 2004 | 2.7 |
| 2005 | 3.4 |
| 2006 | 3.2 |
| 2007 | 2.8 |
| 2008 | 3.8 |
| 2009 | -0.4 |
| 2010 | 1.6 |
| 2011 | 3.2 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-14 provides the consumer price index excluding food and energy from 1960 to 2012. There is long-term inflation in the US without episodes of deflation.
Chart II-14, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-15 provides 12-month percentage changes of the consumer price index excluding food and energy from 1960 to 2012. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.
Chart II-15, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The consumer price index of housing is provided in Chart II-16. There was also acceleration during the Great Inflation of the 1970s. The index flattens after the global recession in IVQ2007 to IIQ2009. Housing prices collapsed under the weight of construction of several times more housing than needed. Surplus housing originated in subsidies and artificially low interest rates in the shock of unconventional monetary policy in 2003 to 2004 in fear of deflation.
Chart II-16, US, Consumer Price Index Housing, NSA, 1967-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-17 provides 12-month percentage changes of the housing CPI. The Great Inflation also had extremely high rates of housing inflation. Housing is considered as potential hedge of inflation.
Chart II-17, US, Consumer Price Index, Housing, 12- Month Percentage Change, NSA, 1968-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
IID Current US Inflation. Consumer price inflation has fluctuated in recent months. Table II-3 provides 12-month consumer price inflation in Nov and annual equivalent percentage changes for the months of Sep-Nov 2012 of the CPI and major segments. The final column provides inflation from Oct 2012 to Nov 2012. CPI inflation in the 12 months ending in Oct reached 1.8 percent, the annual equivalent rate Aug to Oct was 1.6 percent in the new episode of risk aversion and the monthly inflation rate of minus 0.3 percent annualizes at minus 3.5 percent. These inflation rates fluctuate in accordance with inducement of risk appetite or frustration by risk aversion of carry trades from zero interest rates to commodity futures. At the margin, the decline in commodity prices in sharp current risk aversion in financial markets caused lower inflation worldwide that is followed by a jump in Aug-Sep 2012 because of the relaxed risk aversion resulting from the bond-buying program of the European Central Bank. With zero interest rates, commodity prices would increase again in an environment of risk appetite. Excluding food and energy, CPI inflation was 1.9 percent in the 12 months ending in Nov 2012 and 1.6 percent in annual equivalent in Sep-Nov 2012. There is no deflation in the US economy that could justify further quantitative easing, which is now open-ended or forever with zero interest rates and bond-buying by the central bank, or QE∞, even if the economy grows back to potential. Financial repression of zero interest rates is now intended as a permanent distortion of resource allocation by clouding risk/return decisions, preventing the economy from expanding along its optimal growth path. Consumer food prices in the US have risen 1.8 percent in 12 months ending in Nov 2012 and at 1.6 percent in annual equivalent in Sep-Nov 2012. Monetary policies stimulating carry trades of commodities futures that increase prices of food constitute a highly regressive tax on lower income families for whom food is a major portion of the consumption basket especially with wage increases below inflation in a recovery without hiring (Section I) and without jobs (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). Energy consumer prices increased 0.3 percent in 12 months, increased 0.1 percent in annual equivalent in Sep-Nov and decreased 4.1 percent in Nov or at minus 39.5 percent in annual equivalent as carry trades from zero interest rates to commodity futures were unwound and repositioned during alternating risk aversion and risk appetite originating in the European debt crisis and increasingly in growth and politics in China. For lower income families, food and energy are a major part of the family budget. Inflation is not persistently low or threatening deflation in annual equivalent in Sep-Nov in any of the categories in Table II-2 but simply reflecting waves of inflation originating in carry trades. An upward trend is determined by carry trades from zero interest rates to commodity futures positions with episodes of risk aversion causing fluctuations.
Table II-3, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| % RI | ∆% 12 Months Nov 2012/Nov | ∆% Annual Equivalent Sep to Nov 2012 SA | ∆% Nov 2012/Oct 2012 SA | |
| CPI All Items | 100.000 | 1.8 | 1.6 | -0.3 |
| CPI ex Food and Energy | 75.642 | 1.9 | 1.6 | 0.1 |
| Food | 14.175 | 1.8 | 2.0 | 0.2 |
| Food at Home | 8.518 | 1.3 | 2.4 | 0.3 |
| Food Away from Home | 5.656 | 2.6 | 1.6 | 0.1 |
| Energy | 10.184 | 0.3 | 0.1 | -4.1 |
| Gasoline | 5.919 | 1.9 | -5.9 | -7.4 |
| Electricity | 2.868 | -0.7 | 5.7 | 0.7 |
| Commodities less Food and Energy | 19.647 | 0.5 | -1.6 | -0.1 |
| New Vehicles | 3.140 | 1.4 | 0.0 | 0.2 |
| Used Cars and Trucks | 1.869 | -2.3 | -10.7 | -0.5 |
| Medical Care Commodities | 1.717 | 2.3 | -2.0 | -0.4 |
| Apparel | 3.698 | 1.8 | 1.6 | 0.6 |
| Services Less Energy Services | 55.995 | 2.5 | 2.8 | 0.3 |
| Shelter | 31.389 | 2.2 | 2.8 | 0.2 |
| Rent of Primary Residence | 6.462 | 2.7 | 3.7 | 0.2 |
| Owner’s Equivalent Rent of Residences | 23.782 | 2.1 | 2.4 | 0.2 |
| Transportation Services | 5.761 | 2.2 | 5.7 | 0.2 |
| Medical Care Services | 5.387 | 3.7 | 2.8 | 0.3 |
% RI: Percent Relative Importance Oct 2012
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/
The weights of the CPI, US city average for all urban consumers representing about 87 percent of the US population (http://www.bls.gov/cpi/cpiovrvw.htm#item1), are shown in Table II-4 with the BLS update of Mar 7, 2012 (http://www.bls.gov/cpi/cpiri2011.pdf). Housing has a weight of 41.020 percent. The combined weight of housing and transportation is 57.895 percent or more than one half of consumer expenditures of all urban consumers. The combined weight of housing, transportation and food and beverages is 73.151 percent of the US CPI. Table II-3 provides relative importance of key items in Oct 2012.
Table II-4, US, Relative Importance, 2009-2010 Weights, of Components in the Consumer Price Index, US City Average, Dec 2011
| All Items | 100.000 |
| Food and Beverages | 15.256 |
| Food | 14.308 |
| Food at home | 8.638 |
| Food away from home | 5.669 |
| Housing | 41.020 |
| Shelter | 31.539 |
| Rent of primary residence | 6.485 |
| Owners’ equivalent rent | 23.957 |
| Apparel | 3.562 |
| Transportation | 16.875 |
| Private Transportation | 15.694 |
| New vehicles | 3.195 |
| Used cars and trucks | 1.913 |
| Motor fuel | 5.463 |
| Gasoline | 5.273 |
| Medical Care | 7.061 |
| Medical care commodities | 1.716 |
| Medical care services | 5.345 |
| Recreation | 6.044 |
| Education and Communication | 6.797 |
| Other Goods and Services | 3.385 |
Note: reissued Mar 7, 2012. Refers to all urban consumers, covering approximately 87 percent of the US population (see http://www.bls.gov/cpi/cpiovrvw.htm#item1). Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/cpiri2011.pdf http://www.bls.gov/cpi/cpiriar.htm
Chart II-18 provides the US consumer price index for housing from 2001 to 2012. Housing prices rose sharply during the decade until the bump of the global recession and increased again in 2011 with some stabilization currently. The CPI excluding housing would likely show much higher inflation. Income remaining after paying for indispensable shelter has been compressed by the commodity carry trades resulting from unconventional monetary policy.
Chart II-18, US, Consumer Price Index, Housing, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-19 provides 12-month percentage changes of the housing CPI. Percentage changes collapsed during the global recession but have been rising into positive territory in 2011 and 2012 but with the rate declining recently.
Chart II-19, US, Consumer Price Index, Housing, 12-Month Percentage Change, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
There have been waves of consumer price inflation in the US in 2011 and into 2012 (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
) that are illustrated in Table II-5. The first wave occurred in Jan-Apr 2011 and was caused by the carry trade of commodity prices induced by unconventional monetary policy of zero interest rates. Cheap money at zero opportunity cost in environment of risk appetite was channeled into financial risk assets, causing increases in commodity prices. The annual equivalent rate of increase of the all-items CPI in Jan-Apr 2011 was 4.9 percent and the CPI excluding food and energy increased at annual equivalent rate of 2.4 percent. The second wave occurred during the collapse of the carry trade from zero interest rates to exposures in commodity futures as a result of risk aversion in financial markets created by the sovereign debt crisis in Europe. The annual equivalent rate of increase of the all-items CPI dropped to 2.4 percent in May-Jul 2011 while the annual equivalent rate of the CPI excluding food and energy increased at 3.0 percent. In the third wave in Jul-Sep 2011, annual equivalent CPI inflation rose to 3.7 percent while the core CPI increased at 2.0 percent. The fourth wave occurred in the form of decrease of the CPI all-items annual equivalent rate to 0.6 percent in Oct-Nov 2011 with the annual equivalent rate of the CPI excluding food and energy remaining at 2.4 percent. The fifth wave occurred in Dec 2011 to Jan 2012 with annual equivalent headline inflation of 1.2 percent and core inflation of 1.8 percent. In the sixth wave, headline CPI inflation increased at annual equivalent 4.3 percent in Feb-Mar 2012 and core CPI inflation at 1.8 percent but including Apr, the annual equivalent inflation of the headline CPI was 2.8 percent in Feb-Apr and 2.0 percent for the core CPI. The seventh wave in May-Jul occurred with annual equivalent inflation of minus 1.2 percent for the headline CPI in May-Jul 2012 and 2.0 percent for the core CPI. The eighth wave is with annual equivalent inflation of 7.4 percent in Aug-Sep 2012 but 5.3 percent including Oct. In the ninth wave, annual equivalent inflation in Nov 2012 was minus 3.5 percent under the new shock of risk aversion. The conclusion is that inflation accelerates and decelerates in unpredictable fashion that turns symmetric inflation targets in a source of destabilizing shocks to the financial system and eventually the overall economy. Unconventional monetary policy of zero interest rates and withdrawal of bonds to lower long-term interest rates distorts risk/return decisions required for efficient allocation of resources and attaining optimal growth paths and prosperity.
Table II-5, US, Headline and Core CPI Inflation Monthly SA and 12 Months NSA ∆%
| All Items SA Month | All Items NSA 12 month | Core SA | Core NSA | |
| Nov 2012 | -0.3 | 1.8 | 0.1 | 1.9 |
| AE ∆% Nov | -3.5 | 1.2 | ||
| Oct | 0.1 | 2.2 | 0.2 | 2.0 |
| Sep | 0.6 | 2.0 | 0.1 | 2.0 |
| Aug | 0.6 | 1.7 | 0.1 | 1.9 |
| AE ∆% Aug-Oct | 5.3 | 1.6 | ||
| Jul | 0.0 | 1.4 | 0.1 | 2.1 |
| Jun | 0.0 | 1.7 | 0.2 | 2.2 |
| May | -0.3 | 1.7 | 0.2 | 2.3 |
| AE ∆% May-Jul | -1.2 | 2.0 | ||
| Apr | 0.0 | 2.3 | 0.2 | 2.3 |
| Mar | 0.3 | 2.7 | 0.2 | 2.3 |
| Feb | 0.4 | 2.9 | 0.1 | 2.2 |
| AE ∆% Feb-Apr | 2.8 | 2.0 | ||
| Jan | 0.2 | 2.9 | 0.2 | 2.3 |
| Dec 2011 | 0.0 | 3.0 | 0.1 | 2.2 |
| AE ∆% Dec-Jan | 1.2 | 1.8 | ||
| Nov | 0.1 | 3.4 | 0.2 | 2.2 |
| Oct | 0.0 | 3.5 | 0.2 | 2.1 |
| AE ∆% Oct-Nov | 0.6 | 2.4 | ||
| Sep | 0.3 | 3.9 | 0.1 | 2.0 |
| Aug | 0.3 | 3.8 | 0.2 | 2.0 |
| Jul | 0.3 | 3.6 | 0.2 | 1.8 |
| AE ∆% Jul-Sep | 3.7 | 2.0 | ||
| Jun | 0.1 | 3.6 | 0.2 | 1.6 |
| May | 0.3 | 3.6 | 0.3 | 1.5 |
| AE ∆% May-Jul | 2.4 | 3.0 | ||
| Apr | 0.4 | 3.2 | 0.2 | 1.3 |
| Mar | 0.5 | 2.7 | 0.2 | 1.2 |
| Feb | 0.4 | 2.1 | 0.2 | 1.1 |
| Jan | 0.3 | 1.6 | 0.2 | 1.0 |
| AE ∆% Jan-Apr | 4.9 | 2.4 | ||
| Dec 2010 | 0.4 | 1.5 | 0.1 | 0.8 |
| Nov | 0.2 | 1.1 | 0.1 | 0.8 |
| Oct | 0.3 | 1.2 | 0.0 | 0.6 |
| Sep | 0.1 | 1.1 | 0.0 | 0.8 |
| Aug | 0.2 | 1.1 | 0.1 | 0.9 |
| Jul | 0.2 | 1.2 | 0.1 | 0.9 |
| Jun | 0.0 | 1.1 | 0.1 | 0.9 |
| May | -0.1 | 2.0 | 0.1 | 0.9 |
| Apr | 0.0 | 2.2 | 0.0 | 0.9 |
| Mar | 0.0 | 2.3 | 0.1 | 1.1 |
| Feb | 0.0 | 2.1 | 0.1 | 1.3 |
| Jan | 0.1 | 2.6 | -0.1 | 1.6 |
Note: Core: excluding food and energy; AE: annual equivalent
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/data.htm
The behavior of the US consumer price index NSA from 2001 to 2011 is provided in Chart II-20. Inflation in the US is very dynamic without deflation risks that would justify symmetric inflation targets. The hump in 2008 originated in the carry trade from interest rates dropping to zero into commodity futures. There is no other explanation for the increase of the Cushing OK Crude Oil Future Contract 1 from $55.64/barrel on Jan 9, 2007 to $145.29/barrel on July 3, 2008 during deep global recession, collapsing under a panic of flight into government obligations and the US dollar to $37.51/barrel on Feb 13, 2009 and then rising by carry trades to $113.93/barrel on Apr 29, 2012, collapsing again and then recovering again to $105.23/barrel, all during mediocre economic recovery with peaks and troughs influenced by bouts of risk appetite and risk aversion (data from the US Energy Information Administration EIA, http://www.eia.gov/). The unwinding of the carry trade with the TARP announcement of toxic assets in banks channeled cheap money into government obligations (see Cochrane and Zingales 2009).
Chart II-20, US, Consumer Price Index, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-21 provides 12-month percentage changes of the consumer price index from 2001 to 2012. There was no deflation or threat of deflation from 2008 into 2009. Commodity prices collapsed during the panic of toxic assets in banks. When stress tests in 2009 revealed US bank balance sheets in much stronger position, cheap money at zero opportunity cost exited government obligations and flowed into carry trades of risk financial assets. Increases in commodity prices drove again the all items CPI with interruptions during risk aversion originating in multiple fears but especially from the sovereign debt crisis of Europe.
Chart II-21, US, Consumer Price Index, 12-Month Percentage Change, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The trend of increase of the consumer price index excluding food and industry in Chart II-22 does not reveal any threat of deflation that would justify symmetric inflation targets. There are mild oscillations in a neat upward trend.
Chart II-22, US, Consumer Price Index Excluding Food and Energy, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart II-23 provides 12-month percentage change of the consumer price index excluding food and energy. Past-year rates of inflation fell toward 1 percent from 2001 into 2003 as a result of the recession and the decline of commodity prices beginning before the recession with declines of real oil prices. Near zero interest rates with fed funds at 1 percent between Jun 2003 and Jun 2004 stimulated carry trades of all types, including in buying homes with subprime mortgages in expectation that low interest rates forever would increase home prices permanently, creating the equity that would permit the conversion of subprime mortgages into creditworthy mortgages (Gorton 2009EFM; see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Inflation rose and then collapsed during the unwinding of carry trades and the housing debacle of the global recession. Carry trades into 2011 and 2012 gave a new impulse to CPI inflation, all items and core. Symmetric inflation targets destabilize the economy by encouraging hunts for yields that inflate and deflate financial assets, obscuring risk/return decisions on production, investment, consumption and hiring.
Chart II-23, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Headline and core producer price indexes are in Table II-6. The headline PPI SA decreased 0.8 percent in Nov 2012 and increased 1.5 percent NSA in the 12 months ending in Nov 2012. The core PPI SA increased 0.1 percent in Nov 2012 and rose 2.2 percent in 12 months. Analysis of annual equivalent rates of change shows inflation waves similar to those worldwide. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe motivated the carry trade from zero interest rates into commodity futures that caused the average equivalent rate of 9.7 percent in the headline PPI in Jan-Apr 2011 and 4.0 percent in the core PPI. In the second wave, commodity futures prices collapsed in May 2011 with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline PPI inflation collapsed to 1.2 percent in May-Jun 2011 but the core annual equivalent inflation rate was much higher at 3.0 percent. In the third wave, headline PPI inflation resuscitated with annual equivalent at 6.6 percent in Jul-Sep 2011 and core PPI inflation at 4.1 percent. Core PPI inflation was persistent throughout 2011, jumping from annual equivalent at 1.8 percent in the first four months of 2010 to 3.0 percent in 12 months ending in Dec 2011. Unconventional monetary policy is based on the proposition that core rates reflect more fundamental inflation and are thus better predictors of the future. In practice, the relation of core and headline inflation is as difficult to predict as future inflation (see IIID Supply Shocks in http://cmpassocregulationblog.blogspot.com/2011_05_01_archive.html). In the fourth wave, risk aversion originating in the lack of resolution of the European debt crisis caused unwinding of carry trades with annual equivalent headline PPI inflation of minus 1.2 percent in Oct-Nov 2011 and 0.6 percent in the core annual equivalent. In the fifth wave from Dec 2011 to Jan 2012, annual equivalent inflation was 1.2 percent for the headline index but 4.9 percent for the core index excluding food and energy. In the sixth wave, annual equivalent inflation in Feb-Mar 2012 was 1.2 percent for the headline PPI and 1.8 percent for the core. In the seventh wave, renewed risk aversion caused reversal of carry trade commodity exposures with annual equivalent headline inflation of minus 7.5 percent in Apr-May 2012 while core PPI inflation was at annual equivalent 1.2 percent. In the eighth wave, annual equivalent inflation returned at 3.0 percent in Jun-Jul 2012 and 4.9 percent for the core index. In the ninth wave, relaxed risk aversion because of the announcement of the impaired bond buying program or outright monetary transactions (OMT) of the European Central Bank induced carry trades that drove annual equivalent inflation of producer prices of the United States at 18.2 percent in Aug-Sep 2012 and 1.2 percent in the core index. In the tenth wave, renewed risk aversion caused annual equivalent inflation of minus 2.4 percent in Oct in the head and core PPI index and minus 5.8 percent in the headline index for Oct-Nov and minus 0.6 percent for the core index. It is almost impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.
Table II-6, US, Headline and Core PPI Inflation Monthly SA and 12-Month NSA ∆%
| Finished | Finished | Finished Core SA | Finished Core NSA | |
| Nov 2012 | -0.8 | 1.5 | 0.1 | 2.2 |
| Oct | -0.2 | 2.3 | -0.2 | 2.1 |
| AE ∆% Oct-Nov | -5.8 | -0.6 | ||
| Sep | 1.1 | 2.1 | 0.0 | 2.3 |
| Aug | 1.7 | 2.0 | 0.1 | 2.5 |
| AE ∆% Aug-Sep | 18.2 | 1.2 | ||
| Jul | 0.3 | 0.5 | 0.6 | 2.5 |
| Jun | 0.2 | 0.7 | 0.2 | 2.6 |
| AE ∆% Jun-Jul | 3.0 | 4.9 | ||
| May | -1.0 | 0.6 | 0.1 | 2.7 |
| Apr | -0.3 | 1.8 | 0.1 | 2.7 |
| AE ∆% Apr-May | -7.5 | 1.2 | ||
| Mar | -0.2 | 2.8 | 0.2 | 2.9 |
| Feb | 0.4 | 3.4 | 0.1 | 3.1 |
| AE ∆% Feb-Mar | 1.2 | 1.8 | ||
| Jan | 0.3 | 4.1 | 0.6 | 3.1 |
| Dec 2011 | -0.1 | 4.7 | 0.2 | 3.0 |
| AE ∆% Dec-Jan | 1.2 | 4.9 | ||
| Nov | 0.1 | 5.6 | 0.1 | 3.0 |
| Oct | -0.3 | 5.8 | 0.0 | 2.9 |
| AE ∆% Oct-Nov | -1.2 | 0.6 | ||
| Sep | 0.9 | 7.0 | 0.3 | 2.8 |
| Aug | 0.2 | 6.6 | 0.2 | 2.7 |
| Jul | 0.5 | 7.1 | 0.5 | 2.7 |
| AE ∆% Jul-Sep | 6.6 | 4.1 | ||
| Jun | 0.1 | 6.9 | 0.3 | 2.3 |
| May | 0.1 | 7.1 | 0.2 | 2.1 |
| AE ∆% May-Jun | 1.2 | 3.0 | ||
| Apr | 0.7 | 6.6 | 0.3 | 2.3 |
| Mar | 0.5 | 5.6 | 0.3 | 2.0 |
| Feb | 1.1 | 5.4 | 0.2 | 1.8 |
| Jan | 0.8 | 3.6 | 0.5 | 1.6 |
| AE ∆% Jan-Apr | 9.7 | 4.0 | ||
| Dec 2010 | 0.9 | 3.8 | 0.2 | 1.4 |
| Nov | 0.4 | 3.4 | -0.1 | 1.2 |
| Oct | 0.8 | 4.3 | -0.2 | 1.6 |
| Sep | 0.4 | 3.9 | 0.2 | 1.6 |
| Aug | 0.7 | 3.3 | 0.2 | 1.3 |
| Jul | 0.2 | 4.1 | 0.2 | 1.5 |
| Jun | -0.2 | 2.7 | 0.1 | 1.1 |
| May | -0.2 | 5.1 | 0.3 | 1.3 |
| Apr | -0.1 | 5.4 | 0.1 | 0.9 |
| Mar | 0.5 | 5.9 | 0.2 | 0.9 |
| Feb | -0.6 | 4.2 | 0.0 | 1.0 |
| Jan | 1.0 | 4.5 | 0.3 | 1.0 |
Note: Core: excluding food and energy; AE: annual equivalent
Source: US Bureau of Labor Statistics http://www.bls.gov/ppi/data.htm
The US producer price index NSA from 2000 to 2012 is shown in Chart II-24. There are two episodes of decline of the PPI during recessions in 2001 and in 2008. Barsky and Kilian (2004) consider the 2001 episode as one in which real oil prices were declining when recession began. Recession and the fall of commodity prices instead of generalized deflation explain the behavior of US inflation in 2008.
Chart II-24, US, Producer Price Index, NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Twelve-month percentage changes of the PPI NSA from 2000 to 2012 are shown in Chart II-25. It may be possible to forecast trends a few months in the future under adaptive expectations but turning points are almost impossible to anticipate especially when related to fluctuations of commodity prices in response to risk aversion. In a sense, monetary policy has been tied to behavior of the PPI in the negative 12-month rates in 2001 to 2003 and then again in 2009 to 2010. Monetary policy following deflation fears caused by commodity price fluctuations would introduce significant volatility and risks in financial markets and eventually in consumption and investment.
Chart II-25, US, Producer Price Index, 12-Month Percentage Change NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
The US PPI excluding food and energy from 2000 to 2012 is shown in Chart II-26. There is here again a smooth trend of inflation instead of prolonged deflation as in Japan.
Chart II-26, US, Producer Price Index Excluding Food and Energy, NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Twelve-month percentage changes of the producer price index excluding food and energy are shown in Chart II-27. Fluctuations replicate those in the headline PPI. There is an evident trend of increase of 12 months rates of core PPI inflation in 2011 but lower rates in the beginning of 2012.
Chart II-27, US, Producer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
The US producer price index of energy goods from 2000 to 2012 is in Chart II-28. There is a clear upward trend with fluctuations that would not occur under persistent deflation.
Chart II-28, US, Producer Price Index Finished Energy Goods, NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Chart II-29 provides 12-month percentage changes of the producer price index of energy goods from 2000 to 2012. The episode of declining prices of energy goods in 2001 to 2002 is related to the analysis of decline of real oil prices by Barsky and Kilian (2004). Interest rates dropping to zero during the global recession explain the rise of the PPI of energy goods toward 30 percent. Bouts of risk aversion with policy interest rates held close to zero explain the fluctuations in the 12-month rates of the PPI of energy goods in the expansion phase of the economy. Symmetric inflation targets induce significant instability in inflation and interest rates with adverse effects on financial markets and the overall economy.
Chart II-29, US, Producer Price Index Energy Goods, 12-Month Percentage Change, NSA, 2000-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Table II-7 provides 12-month percentage changes of the CPI all items, CPI core and CPI housing from 2001 to 2012. There is no evidence in these data supporting symmetric inflation targets that would only induce greater instability in inflation, interest rates and financial markets. Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output (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.”
The actual objective is attempting to bring the unemployment rate to 5.2 percent but because of the lag in effect of monetary policy of income and prices policy uses “projections” such that the target of monetary policy is a forecast of unemployment and inflation. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until a forecast is attained or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 and beyond such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever with QE∞ discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.
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_image110[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDikYFT5MnQ3s-my_rk7yuV7VERLPWaVKXFGknEjgaZHH_zw5954PysX8hxaQvc3nEfPMU3JyMlXRjYjDBBmwCWSnS5vLDjJKUFbikSdXW-hbmSk8HrnrMfdaIdekNmZT74pk6YE2iC2o/s1600-h/clip_image110%25255B1%25255D%25255B2%25255D.gif "clip_image110[1]"){kind=small}
declines. Equally, decline in expected revenue from the stock or project, Rτ, causes decline in valuation. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.
Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). There is no simple exit from the trap of zero interest rates. If interest rates are expected to increase, r → ∞, W, or wealth, declines, W → 0.
Table II-7, CPI All Items, CPI Core and CPI Housing, 12-Month Percentage Change, NSA 2001-2012
| Nov | CPI All Items | CPI Core ex Food and Energy | CPI Housing |
| 2012 | 1.8 | 1.9 | 1.7 |
| 2011 | 3.4 | 2.2 | 1.9 |
| 2010 | 1.1 | 0.8 | 0.0 |
| 2009 | 1.8 | 1.7 | -0.3 |
| 2008 | 1.1 | 2.0 | 2.7 |
| 2007 | 4.3 | 2.3 | 3.1 |
| 2006 | 2.0 | 2.6 | 3.0 |
| 2005 | 3.5 | 2.1 | 4.0 |
| 2004 | 3.5 | 2.2 | 3.1 |
| 2003 | 1.8 | 1.1 | 2.2 |
| 2002 | 2.2 | 2.0 | 2.4 |
| 2001 | 1.9 | 2.8 | 3.1 |
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/data.htm
IIE United States International Trade. Subsection IIE1 United States International Trade provides data and analysis of US foreign trade. Subsection IIE2 Import Export Prices provides analysis of prices in US foreign trade.
IIE1 United States International Trade. The United States Census Bureau has released revisions of trade statistics from Jan 2009 to Mar 2012 (http://www.census.gov/foreign-trade/Press-Release/2011pr/final_revisions/). Table IIE-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (http://www.census.gov/foreign-trade/). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). The US trade balance improved from deficit of $51,647 million in Mar 2012 to deficit of $49,647 million in Apr 2012 and lower deficits of $46,930 million in May, $40,846 million in Jun and $41,630 million in Jul 2012 but with increase to 42,581 million in Aug 2012. The increase of exports in Sep of 3.1 percent was higher than increase of imports of 1.5 percent, resulting in decrease of the trade deficit in Sep to $40,277 million. Exports decreased 3.6 percent in Oct 2012 and imports decreased 2.1 percent for increase in the trade deficit to $42,240 million in Oct 2012. The deterioration of the trade deficit from $44,507 million in Feb 2012 to $51,647 million in Mar 2012 resulted from growth of exports of 2.5 percent while imports jumped 5.2 percent. The US trade balance had improved from deficit of $52,209 million in Jan 2012 to lower deficit of $44,507 million in Feb 2012 mostly because of decline of imports by 2.7 percent while exports increased 0.9 percent. The US trade balance deteriorated sharply from Nov 2011 to Jan 2012 with growth of imports by cumulative 3.0 percent and cumulative increase of exports of 0.1 percent, resulting in deficits of $48,835 million in Nov, $51,748 million in Dec and $52,209 million in Jan, which are the highest since $50,234 million in Jun 2011. In the months of Jun to Oct 2011, exports increased 1.8 percent while imports increased 0.5 percent, resulting in improvement of the trade deficit from $50,234 million in Jun to $45,703 million in Oct. The trade balance deteriorated from cumulative deficit of $494,737 million in Jan-Dec 2010 to deficit of $559,880 million in Jan-Dec 2011.
Table IIE-1, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%
| Trade Balance | Exports | Month ∆% | Imports | Month ∆% | |
| Oct 2012 | -42,240 | 180,512 | -3.6 | 222,752 | -2.1 |
| Sep | -40,277 | 187,327 | 3.1 | 227,604 | 1.5 |
| Aug | -42,581 | 181,694 | -1.0 | 224,275 | -0.4 |
| Jul | -41,630 | 183,498 | -1.2 | 225,128 | -0.6 |
| Jun | -40,846 | 185,728 | 1.3 | 226,574 | -1.6 |
| May | -46,930 | 183,290 | 0.4 | 230,220 | -0.9 |
| Apr | -49,647 | 182,649 | -1.2 | 232,296 | -1.8 |
| Mar | -51,647 | 184,867 | 2.5 | 236,514 | 5.2 |
| Feb | -44,507 | 180,348 | 0.9 | 224,855 | -2.7 |
| Jan | -52,209 | 178,802 | 0.6 | 231,011 | 0.7 |
| Dec 2011 | -51,748 | 177,751 | 0.6 | 229,499 | 1.8 |
| Nov | -48,835 | 176,710 | -1.1 | 225,545 | 0.5 |
| Oct | -45,703 | 178,742 | -1.0 | 224,445 | -0.3 |
| Sep | -44,467 | 180,629 | 1.3 | 225,096 | 0.9 |
| Aug | -44,775 | 178,382 | 0.0 | 223,157 | -0.3 |
| Jul | -45,580 | 178,339 | 3.3 | 223,919 | 0.4 |
| Jun | -50,234 | 172,664 | -1.7 | 222,988 | -0.2 |
| May | -47,669 | 175,673 | 0.0 | 223,343 | 1.9 |
| Apr | -43,556 | 175,662 | 0.9 | 219,218 | 0.1 |
| Mar | -44,902 | 174,169 | 4.6 | 219,071 | 3.7 |
| Feb | -44,801 | 166,545 | -0.9 | 211,346 | -2.0 |
| Jan | -47,523 | 168,098 | 1.6 | 215,621 | 4.6 |
| Dec 2010 | -40,677 | 165,499 | 1.7 | 206,176 | 2.2 |
| Jan-Dec | -559,880 | 2,103,367 | 2,663,247 | ||
| Jan-Dec | -494,737 | 1,842,485 | 2,337,222 |
Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding and seasonality. Source: US Census Bureau http://www.census.gov/foreign-trade/
Table IIE-2 provides the US international trade balance, exports and imports on an annual basis from 1992 to 2011. The trade balance deteriorated sharply over the long term. The 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 decreased from $124.5 billion in IIQ2011, or 3.2 percent of GDP to $123.2 billion in IIQ2012, or 3.1 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html). The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table IIE-2, US, International Trade Balance, Exports and Imports SA, Millions of Dollars
| Period | Balance | Exports | Imports |
| Total | |||
| Annual | |||
| 1992 | -39,212 | 616,882 | 656,094 |
| 1993 | -70,311 | 642,863 | 713,174 |
| 1994 | -98,493 | 703,254 | 801,747 |
| 1995 | -96,384 | 794,387 | 890,771 |
| 1996 | -104,065 | 851,602 | 955,667 |
| 1997 | -108,273 | 934,453 | 1,042,726 |
| 1998 | -166,140 | 933,174 | 1,099,314 |
| 1999 | -263,160 | 967,008 | 1,230,168 |
| 2000 | -376,749 | 1,072,783 | 1,449,532 |
| 2001 | -361,771 | 1,007,726 | 1,369,496 |
| 2002 | -417,432 | 980,879 | 1,398,311 |
| 2003 | -490,984 | 1,023,519 | 1,514,503 |
| 2004 | -605,357 | 1,163,146 | 1,768,502 |
| 2005 | -708,624 | 1,287,441 | 1,996,065 |
| 2006 | -753,288 | 1,459,823 | 2,213,111 |
| 2007 | -696,728 | 1,654,561 | 2,351,289 |
| 2008 | -698,338 | 1,842,682 | 2,541,020 |
| 2009 | -379,154 | 1,578,945 | 1,958,099 |
| 2010 | -494,737 | 1,842,485 | 2,337,222 |
| 2011 | -559,880 | 2,103,367 | 2,663,247 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
Chart IIE-1 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. There was slight improvement at the margin from Jul to Oct 2011 but new increase in the gap from Nov 2011 to Jan 2012 and again in Mar as exports grow less rapidly than imports. There is improvement in Apr 2012 with imports declining at a faster rate of 1.8 percent than decline of exports by 1.2 percent and growth of exports of 0.4 percent in May 2012 with imports declining 0.9 percent. Further improvement occurred in Jun with imports increasing 1.3 percent and exports declining 1.6 percent. There was deterioration in Jul with exports declining 1.2 percent and imports only 0.6 percent but deterioration in Aug with exports decreasing 1.0 percent while imports declined only 0.4 percent. In Sep 2012, exports increased 3.1 percent while imports increased only 1.5 percent. Further deterioration occurred in Oct with exports declining 3.6 percent but imports falling 2.1 percent. Weaker world and internal demand and fluctuating commodity price increases explain the declining or less dynamic changes in exports and imports in Chart IIE-1.
Chart IIE-1, US Balance, Exports and Imports of Goods and Services $ Billions
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr042.html
Chart IIE-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Oct 2012. There is a long-term trend of deterioration of the US trade deficit shown vividly by Chart IIE-2. The trend of deterioration was reversed by the global recession from IVQ2007 to IIQ2009. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in 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 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). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks.
Chart IIE-2. US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Oct 2012
Source: US Census Bureau
http://www.census.gov/foreign-trade/
Chart IIE-3 of the US Census Bureau provides US exports SA from Jan 1992 to Oct 2012. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment.
Chart IIE-3. US, Exports SA, Monthly, Millions of Dollars Jan 1992-Oct 2012
Source: US Census Bureau http://www.census.gov/foreign-trade/
Chart IIE-4 of the US Census Bureau provides US imports SA from Jan 1992 to Oct 2012. Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment resulting from weaker world economic growth and diminishing inflation because of risk aversion.
Chart IIE-4. US, Imports SA, Monthly, Millions of Dollars Jan 1992-Oct 2012
Source: US Census Bureau http://www.census.gov/foreign-trade/
The balance of international trade in goods of the US seasonally-adjusted is shown in Table IIE-3. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The balance in international trade of goods improved from $60.5 billion in Oct 2011 to $59.1 billion in Oct 2012. Improvement of the goods balance in Oct 2012 relative to Oct 2011 occurred mostly in the petroleum balance, exports less imports of goods other than petroleum, in the magnitude of reducing the deficit by $839 million, while there was moderate deterioration in the nonpetroleum balance, exports less imports of petroleum goods, in the magnitude of increasing the deficit by $13 billion. US terms of trade, export prices relative to import prices, and the US trade account fluctuate in accordance with the carry trade from zero interest rates to commodity futures exposures, especially oil futures. Exports fell 0.4 percent with non-petroleum exports decreasing 2.1 percent. Total imports fell 1.0 percent with petroleum imports declining 1.7 percent and nonpetroleum imports decreasing 0.5 percent.
Table IIE-3, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA
| Oct 2012 | Oct 2011 | ∆% | |
| Total Balance | -59,154 | -60,526 | |
| Petroleum | -24,612 | -25,451 | |
| Non Petroleum | -33,751 | -33,738 | |
| Total Exports | 127,472 | 127,920 | -0.4 |
| Petroleum | 10,481 | 10,266 | 2.1 |
| Non Petroleum | 115,625 | 116,431 | -0.7 |
| Total Imports | 186,626 | 188,446 | -1.0 |
| Petroleum | 35,092 | 35,717 | -1.7 |
| Non Petroleum | 149,376 | 150,168 | -0.5 |
Details may not add because of rounding and seasonal adjustment
Source: US Census Bureau http://www.census.gov/foreign-trade/
US exports and imports of goods not seasonally adjusted in Jan-Oct 2012 and Jan-Oct 2011 are shown in Table IIE-4. The rate of growth of exports was 4.7 percent and 3.8 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 1.8 percent and of mineral fuels that increased 6.7 percent both because higher prices of raw materials and commodities increase and fall recurrently because of shocks of risk aversion. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose 5.4 percent while imports rose 6.2 percent. Significant part of the US trade imbalance originates in imports of mineral fuels decreasing 1.8 percent and crude oil decreasing 3.3 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html).
Table IIE-4, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %
| Jan-Oct 2012 $ Millions | Jan-Oct 2011 $ Millions | ∆% | |
| Exports | 1,286,010 | 1,227,696 | 4.7 |
| Manufactured | 851,662 | 807,667 | 5.4 |
| Agricultural | 113,997 | 112,013 | 1.8 |
| Mineral Fuels | 111,835 | 104,810 | 6.7 |
| Crude Oil | 1,594 | 1,130 | 41.1 |
| Imports | 1,903,569 | 1,833,118 | 3.8 |
| Manufactured | 1,419,387 | 1,336,124 | 6.2 |
| Agricultural | 86,390 | 82,109 | 5.2 |
| Mineral Fuels | 362,232 | 368,968 | -1.8 |
| Crude Oil | 270,518 | 279,751 | -3.3 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
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 IIE-4 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 IIE-5, 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/
IIE2 Import Export Prices. Chart IIE2-1 provides prices of total US imports 2001-2012. Prices fell during the contraction of 2001. Import price inflation accelerated after unconventional monetary policy of near zero interest rates in 2003-2004 and quantitative easing by withdrawing supply with the suspension of 30-year Treasury bond auctions. Slow pace of adjusting fed funds rates from 1 percent by increments of 25 basis points in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006 continued to give impetus to carry trades. The reduction of fed funds rates toward zero in 2008 fueled a spectacular global hunt for yields that caused commodity price inflation in the middle of a global recession. After risk aversion in 2009 because of the announcement of TARP (Troubled Asset Relief Program) creating anxiety on “toxic assets” in bank balance sheets (see Cochrane and Zingales 2009), prices collapsed because of unwinding carry trades. Renewed price increases returned with zero interest rates and quantitative easing. Monetary policy impulses in massive doses have driven inflation and valuation of risk financial assets in wide fluctuations over a decade.
Chart IIE2-1, US, Prices of Total US Imports 2001=100, 2001-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-2 provides 12-month percentage changes of prices of total US imports from 2001 to 2012. The only plausible explanation for the wide oscillations is by the carry trade originating in unconventional monetary policy. Import prices jumped in 2008 during deep and protracted global recession driven by carry trades from zero interest rates to long, leveraged positions in commodity futures. Carry trades were unwound during the financial panic in the final quarter of 2008 that resulted in flight to government obligations. Import prices jumped again in 2009 with subdued risk aversion because US banks did not have unsustainable toxic assets. Import prices then fluctuated as carry trades were resumed during periods of risk appetite and unwound during risk aversion resulting from the European debt crisis.
Chart IIE2-2, US, Prices of Total US Imports, 12-Month Percentage Changes, 2001-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-3 provides prices of US imports from 1982 to 2012. There is no similar episode to that of the increase of commodity prices in 2008 during a protracted and deep global recession with subsequent collapse during a flight into government obligations. Trade prices have been driven by carry trades created by unconventional monetary policy in the past decade.
Chart IIE2-3, US, Prices of Total US Imports, 2001=100, 1982-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-4 provides 12-month percentage changes of US total imports from 1982 to 2012. There have not been wide consecutive oscillations as the ones during the global recession of IVQ2007 to IIQ2009.
Chart IIE2-4, US, Prices of Total US Imports, 12-Month Percentage Changes, 1982-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-5 provides the index of US export prices from 2001 to 2012. Import and export prices have been driven by impulses of unconventional monetary policy in massive doses. The most recent segment in Chart IIE2-5 shows declining trend resulting from a combination of the world economic slowdown and the decline of commodity prices as carry trade exposures are unwound because of risk aversion to the sovereign debt crisis in Europe.
Chart IIE2-5, US, Prices of Total US Exports, 2001=100, 2001-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-6 provides prices of US total exports from 1982 to 2012. The rise before the global recession from 2003 to 2008, driven by carry trades, is also unique in the series and is followed by another steep increase after risk aversion moderated in IQ2009.
Chart IIE2-6, US, Prices of Total US Exports, 2001=100, 1982-2012
Source: http://www.bls.gov/mxp/data.htm
Chart IIE2-7 provides 12-month percentage changes of total US exports from 1982 to 2012. The uniqueness of the oscillations around the global recession of IVQ2007 to IIQ2009 is clearly revealed.
Chart IIE2-7, US, Prices of Total US Exports, 12-Month Percentage Changes, 1982-2012
Source: http://www.bls.gov/mxp/data.htm
Twelve-month percentage changes of US prices of exports and imports are provided in Table IIE2-1. Import prices have been driven since 2003 by unconventional monetary policy of near zero interest rates influencing commodity prices according to moods of risk aversion. In a global recession without risk aversion until the panic of Sep 2008 with flight to government obligations, import prices increased 21.4 percent in the 12 months ending in Jul 2012, 18.1 percent in the 12 months ending in Aug 2012, 13.1 percent in the 12 months ending in Sep 2012, 4.9 percent in the twelve months ending in Oct 2008 and fell 5.9 percent in the 12 months ending in Nov 2009 when risk aversion developed in 2008 until mid 2009. Import prices rose again sharply in Nov 2010 by 4.1 percent and in Nov 2011 by 10.1 percent in the presence of zero interest rates with relaxed mood of risk aversion until carry trades were unwound in May 2011 and following months as shown by decrease of import prices by 1.6 percent in the 12 months ending in Nov 2012 and increase of 0.7 percent in exports. Fluctuations are much sharper in imports because of the high content of oil that as all commodities futures contracts increases sharply with zero interest rates and risk appetite, contracting under risk aversion. There is similar behavior of prices of imports ex fuels, exports and exports ex agricultural goods but less pronounced than for commodity-rich prices dominated by carry trades from zero interest rates. A critical event resulting from unconventional monetary policy driving higher commodity prices by carry trades is the deterioration of the terms of trade, or export prices relative to import prices, that has adversely affected US real income growth relative to what it would have been in the absence of unconventional monetary policy. Europe, Japan and other advanced economies have experienced similar deterioration of their terms of trade. Because of unwinding carry trades of commodity futures as a result of risk aversion, import prices decreased 1.6 percent in the 12 months ending in Oct 2012, export prices increased 0.7 percent and prices of nonagricultural exports decreased 0.4 percent. Imports excluding fuel increased only 0.2 percent in the 12 months ending in Nov 2012. At the margin, prices in world exports and imports are decreasing or increasing moderately because of unwinding carry trades in a temporary mood of risk aversion.
Table IIE2-1, US, Twelve-Month Percentage Rates of Change of Prices of Exports and Imports
| Imports | Imports Ex Fuels | Exports | Exports Non-Ag | |
| Nov 2012 | -1.6 | 0.2 | 0.7 | -0.4 |
| Nov 2011 | 10.1 | 3.7 | 4.8 | 4.8 |
| Nov 2010 | 4.1 | 3.0 | 6.5 | 5.1 |
| Nov 2009 | 3.4 | -1.1 | 0.4 | 0.3 |
| Nov 2008 | -5.9 | 2.6 | -0.3 | 0.0 |
| Nov 2007 | 12.0 | 3.0 | 6.2 | 4.7 |
| Nov 2006 | 1.3 | 2.8 | 3.9 | 3.4 |
| Nov 2005 | 6.4 | 1.4 | 2.8 | 2.6 |
| Nov 2004 | 9.0 | 2.6 | 4.2 | 5.2 |
| Nov 2003 | 2.3 | 1.0 | 1.7 | 0.8 |
| Nov 2002 | 2.5 | NA | 1.0 | 0.3 |
| Nov 2001 | -8.8 | NA | -2.5 | -2.5 |
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIE2-8 shows the US monthly import price index of all commodities excluding fuels from 2001 to 2012. All curves of nominal values follow the same behavior under the influence of unconventional monetary policy. Zero interest rates without risk aversion result in jumps of nominal values while under strong risk aversion even with zero interest rates there are declines of nominal values.
Chart IIE2-8, US, Import Price Index All Commodities Excluding Fuels, 2001=100, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-9 provides 12-month percentage changes of the US import price index excluding fuels between 2001 and 2012. There is the same behavior of carry trades driving up without risk aversion and down with risk aversion prices of raw materials, commodities and food in international trade during the global recession of IVQ2007 to IIQ2009 and in previous and subsequent periods.
Chart IIE2-9, US, Import Price Index All Commodities Excluding Fuels, 12-Month Percentage Changes, 2002-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-10 provides the monthly US import price index ex petroleum from 2001 to 2012. Prices including or excluding commodities follow the same fluctuations and trends originating in impulses of unconventional monetary policy of zero interest rates.
Chart IIE2-10, US, Import Price Index ex Petroleum, 2001=100, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-11 provides the US import price index ex petroleum from 1982 to 2012. There is the same unique hump in 2008 caused by carry trades from zero interest rates to prices of commodities and raw materials.
Chart IIE2-11, US, Import Price Index ex Petroleum, 2001=100, 1982-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-12 provides 12-month percentage changes of the import price index ex petroleum from 1986 to 2012. The oscillations caused by the carry trade in increasing prices of commodities and raw materials without risk aversion and subsequently decreasing them during risk aversion are quite unique.
Chart IIE2-12, US, Import Price Index ex Petroleum, 12-Month Percentage Changes, 1986-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-13 of the US Energy Information Administration provides the price of the crude oil futures contract from 1985 to 2012. There is the same hump in 2008 as in all charts caused by the common factor of carry trades from zero interest rates to commodity futures positions with risk appetite and subsequent decline when carry trades were unwound during shocks of risk aversion.
Chart IIE2-13, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
The price index of US imports of petroleum and petroleum products in shown in Chart IIE2-14. There is similar behavior of the curves all driven by the same impulses of monetary policy.
Chart IIE2-14, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-15 provides the price index of petroleum and petroleum products from 1982 to 2012. The rise in prices during the global recession in 2008 and the decline after the flight to government obligations is unique in the history of the series. Increases in prices of trade in petroleum and petroleum products were induced by carry trades and declines by unwinding carry trades in flight to government obligations.
Chart IIE2-15, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 1982-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-16 provides 12-month percentage changes of the price index of US imports of petroleum and petroleum products from 1982 to 2012. There were wider oscillations in this index from 1999 to 2001 (see Barsky and Killian 2004 for an explanation).
Chart IIE2-16, US, Import Price Index of Petroleum and Petroleum Products, 12-Month Percentage Changes, 1982-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
The price index of US exports of agricultural commodities is in Chart IIE2-17 from 2001 to 2012. There are similar fluctuations and trends as in all other price index originating in unconventional monetary policy repeated over a decade. The most recent segment in 2011 has declining trend in a new flight from risk resulting from the sovereign debt crisis in Europe followed by declines in Jun 2012 and Nov 2012.
Chart IIE2-17, US, Exports Price Index of Agricultural Commodities, 2001=100, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-18 provides the price index of US exports of agricultural commodities from 1982 to 2012. The increase in 2008 in the middle of deep, protracted contraction was induced by unconventional monetary policy. The decline from 2008 into 2009 was caused by unwinding carry trades in a flight to government obligations. The increase into 2011 and current pause were also induced by unconventional monetary policy in waves of increases during relaxed risk aversion and declines during unwinding of positions because of aversion to financial risk.
Chart IIE2-18, US, Exports Price Index of Agricultural Commodities, 2001=100, 1982-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-19 provides 12-month percentage changes of the index of US exports of agricultural commodities from 1986 to 2012. The wide swings in 2008, 2009 and 2011 are only explained by unconventional monetary policy inducing carry trades from zero interest rates to commodity futures and reversals during risk aversion.
Chart IIE2-19, US, Exports Price Index of Agricultural Commodities, 12-Month Percentage Changes, 1986-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE-20 shows the export price index of nonagricultural commodities from 2001 to 2012. Unconventional monetary policy of zero interest rates drove price behavior during the past decade. Policy has been based on the myth of stimulating the economy by climbing the negative slope of an imaginary short-term Phillips curve.
Chart IIE2-20, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 2001-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIE2-21 provides a longer perspective of the price index of US nonagricultural commodities from 1982 to 2012. Increases and decreases around the global contraction after 2007 were caused by carry trade induced by unconventional monetary policy.
Chart IIE2-21, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 1982-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Finally, Chart IIE-22 provides 12-month percentage changes of the price index of US exports of nonagricultural commodities from 1986 to 2012. The wide swings before, during and after the global recession beginning in 2007 were caused by carry trades induced by unconventional monetary policy.
Chart IIE2-22, US, Exports Price Index of Nonagricultural Commodities, 12-Month Percentage Changes, 1986-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
© Carlos M. Pelaez, 2010, 2011, 2012
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