Thirty Million Unemployed or Underemployed, Stagnating Real Wages, Theory and Reality of Economic History, Deflation and Unconventional Monetary Policy, American Taxpayer Relief Act of 2012 with United States Threatening Risk Premium on Government Debt, World Financial Turbulence and Economic Slowdown with Global Recession Risk: Part II

 

Thirty Million Unemployed or Underemployed, Stagnating Real Wages, Theory and Reality of Economic History, Deflation and Unconventional Monetary Policy, American Taxpayer Relief Act of 2012 with United States Threatening Risk Premium on Government Debt, World Financial Turbulence and Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012, 2013

Executive Summary

IA Thirty Million Unemployed or Underemployed

IA1 Summary of the Employment Situation

IA2 Number of People in Job Stress

IA3 Long-term and Cyclical Comparison of Employment

IA4 Job Creation

IA5 Stagnating Real Wages

IB Collapse of United States Dynamism of Income Growth and Employment Creation

IIA Theory and Reality of Economic History, Deflation and Unconventional Monetary Policy

IIB American Taxpayer Relief Act of 2012 and United States Threatening Risk Premium on Government Debt

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during

IIB American Taxpayer Relief Act of 2012 and United States Threatening Risk Premium on Government Debt. The United States Senate passed on Jan 1, 2013, H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf) subsequently passed in the United States House of Representatives and signed into law by the President. The Congressional Budget Office (CBO) analyzes the effects of the American Taxpayer Relief Act of 2012 (http://www.cbo.gov/publication/43829). The bulk of the effects originate in Title I—General Extensions. Table IIB-1 provides the estimates of effects of the General Extensions and the overall bill. The Treasury deficit of the United States increases by $3,971 billion from 2013 to 2022 or about $4 trillion. The alternative scenario of deficits and debts of CBO appears to be more relevant than the base scenario in which tax rates would increase and expenditures decline. The bulk of this section concentrates on United States unsustainable deficit/debt that may cause an increase in the risk premium of Treasury debt

Table IIB-1, Estimate by the Congressional Budget Office of Budget Effects of H.R.8, the American Taxpayer Relief Act of 2012, Passed by US Senate on January 1, 2013

	General Extensions	Total Changes in Revenues	Net Increase or (-) Decrease in Deficits
2013	-206,542	-279,840	329,644
2014	-266,004	-298,778	353,881
2015	-290,573	-274,707	311,008
2016	-315,761	-305,405	340,449
2017	-344,090	-336,613	371,139
2018	-372,728	-367,146	404,636
2019	-395,390	-393,146	415,743
2020	-425,716	-425,585	447,618
2021	-460,619	-460,509	482,553
2022	-496,647	-496,826	514,523
2013-2017	-1,422,970	-1,495,340	1,705,118
2013-2022	-3,575,062	-3,638,803	3,971,177

Source: Congressional Budget Office

http://www.cbo.gov/publication/43829

Table IIB-2 provides federal debt outstanding, held by government accounts and held by the public in millions of dollars for fiscal years from 2007 to 2012. Federal debt outstanding has increased 78.2 percent from fiscal year 2007 to fiscal year 2012 while federal debt held by the public has increased 122.8 percent and federal debt held by government accounts has increased 21.1 percent.

Table IIB-2, US, Federal Debt Outstanding, Held by Government Accounts and Held by the Public, Millions of Dollars

	Outstanding	Held by Government Accounts	Held by the Public
2012 Sep	16,090,640	4,791,850	11,298,790
Fiscal Years
2012	16,090,640	4,791,850	11,298,790
2011	14,815,328	4,658,307	10,157,021
2010	13,585,596	4,534,014	9,051,582
2009	11,933,031	4,355,291	7,577,739
2008	10,047,828	4,210,491	5,837,337
2007	9,030,612	3,958,417	5,072,195
∆% 2007-2012	78.2	21.1	122.8

Source: United States Treasury. 2012Dec. Treasury Bulletin. Washington, DC, Dec 2012. https://www.fms.treas.gov/bulletin/index.html

Table IIB-3 provides the maturity distribution and average length in months of marketable interest-bearing debt held by private investors from 2007 to Sep 2012. Total debt held by investors increased from $3635 billion in 2007 to $9040 billion in Sep 2012 or increase by 148.7 percent. There are two concerns with the maturity distribution of US debt. (1) Growth of debt is moving total debt to the point of saturation in investors’ portfolio. In a new environment of risk appetite and nonzero fed funds rates with economic growth at historical trend of around 3 percent, yields on risk financial assets are likely to increase. Placement of new debt may require increasing interest rates in an environment of continuing placement of debt by the US Treasury without strong fiscal constraints. (2) Refinancing of maturing debt is likely to occur in an environment of higher interest rates, exerting pressure on future fiscal budgets. In Sep 2012, $2897 billion or 32.1 percent of outstanding debt held by investors matures in less than a year and $3852 billion or 42.6 percent of total debt matures in one to five years. Debt maturing in five years or less adds to $6749 billion or 74.7 percent of total outstanding debt held by investors of $9040 billion. This historical episode may be remembered as one in which the US managed its government debt with short-dated instruments during record low long-dated yields and on the verge of fiscal pressures on all interest rates, which kind of maximizes over time interest payments on government debt by taxpayers that is precisely the opposite of the objective of sound debt management and taxpayer welfare.

Table IIB-3, Maturity Distribution and Average Length in Months of Marketable Interest-Bearing Public Debt Held by Private Investors, Billions of Dollars

End of Fiscal Year or Month	2007	2008	2009	2010	2011	2012	Sep     2012
Total*	3635	4745	6229	7676	7951	9040	9040
<1 Year	1176	2042	2605	2480	2504	2897	2897
1-5 Years	1310	1468	2075	2956	3085	3852	3852
5-10 Years	678	719	995	1529	1544	1488	1488
10-20 Years	292	352	351	341	309	271	271
>20 Years	178	163	204	371	510	533	533
Average Months	58	49	49	57	60	55	55

*Amount Outstanding Privately Held

Source: United States Treasury. 2012Dec. Treasury Bulletin. Washington, DC, Dec 2012. https://www.fms.treas.gov/bulletin/index.html

Table IIB-4 provides additional information required for understanding the deficit/debt situation of the United States. The table is divided into three parts: federal fiscal data for the years from 2009 to 2012; federal fiscal data for the years from 2005 to 2008; and Treasury debt held by the public from 2005 to 2012. Total revenues of the US from 2009 to 2012 accumulate to $9019 billion, or $9.0 trillion, while expenditures or outlays accumulate to $14,111 billion, or $14.1 trillion, with the deficit accumulating to $5092 billion, or $5.1 trillion. Revenues decreased 6.6 percent from $9653 billion in the four years from 2005 to 2008 to $9019 billion in the years from 2009 to 2012. Decreasing revenues were caused by the global recession from IVQ2007 (Dec) to IIQ2009 (Jun) and also by growth of only 2.2 percent on average in the cyclical expansion from IIIQ2009 to IIIQ2012, which is much lower than 6.2 percent on average in cyclical expansions since the 1950s (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). Weakness of growth and employment creation is analyzed in IB Collapse of United States Dynamism of Income Growth and Employment Creation. There are 29.5 million people without jobs or underemployed that is equivalent to 18.2 percent of the US effective labor force (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html) and hiring is significantly below the earlier cyclical expansion before 2007 (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In contrast with the decline of revenue, outlays or expenditures increased 30.2 percent from $10,839 billion, or $10.8 trillion, in the four years from 2005 to 2008, to $14,111 billion, or $14.1 trillion, in the four years from 2009 to 2012. Increase in expenditures by 30.2 percent while revenue declined by 6.6 percent caused the increase in the federal deficit from $1186 billion in 2005-2008 to $5092 billion in 2009-2012. Federal revenue was 15.4 percent of GDP on average in the years from 2009 to 2012, which is well below 18.0 percent of GDP on average from 1970 to 2010. Federal outlays were 24.1 percent of GDP on average from 2009 to 2012, which is well above 21.9 percent of GDP on average from 1970 to 2010. The lower part of Table IIB-4 shows that debt held by the public swelled from $5803 billion in 2008 to $11,280 billion in 2012, by $5477 billion or 94.3 percent. Debt held by the public as percent of GDP or economic activity jumped from 40.5 percent in 2008 to 72.6 percent in 2012, which is well above the average of 37.0 percent from 1970 to 2010. The United States faces tough adjustment because growth is unlikely to recover, creating limits on what can be obtained by increasing revenues, while continuing stress of social programs restricts what can be obtained by reducing expenditures.

Table IIB-4, US, Treasury Budget and Debt Held by the Public, Billions of Dollars and Percent of GDP 

	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
2012	2,449	3,538	-1,089
Fiscal Year 2011	2,302	3,599	-1,297
Fiscal Year 2010	2,163	3,456	-1,293
Fiscal Year 2009	2,105	3,518	-1,413
Total 2009-2012	9,019	14,111	-5,092
Average % GDP 2009-2012	15.4	24.1	-8.7
Fiscal Year 2008	2,524	2,983	-459
Fiscal Year 2007	2,568	2,729	-161
Fiscal Year 2006	2,407	2,655	-248
Fiscal Year 2005	2,154	2,472	-318
Total 2005-2008	9,653	10,839	-1,186
Average % GDP 2005-2008	17.9	20.1	-2.2
Debt Held by the Public	Billions of Dollars	Percent of GDP
2005	4,592	36.9
2006	4,829	36.6
2007	5,035	36.3
2008	5,803	40.5
2009	7,545	54.1
2010	9,019	62.8
2011	10,128	67.7
2012	11,280	72.6

Source: http://www.fms.treas.gov/mts/index.html CBO (2012NovMBR). CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan. CBO. 2012AugBEO. Budget and Economic Outlook. Washington, DC, Aug 22. CBO. 2012Jan31. Historical budget data. Washington, DC, Jan 31. CBO. 2012NovCDR. Choices for deficit reduction. Washington, DC. Nov.

The CBO (2012NovCDR, 4) uses different assumptions to calculate what would happen with the US budget and debt under an alternative fiscal scenario of no measures of fiscal tightening:

“The alternative fiscal scenario incorporates the assumptions that all expiring tax provisions (other than the payroll tax reduction), including those that expired at the end of December 2011, are instead extended; that the alternative minimum tax is indexed for inflation after 2011 (starting at the 2011 exemption amount); that Medicare’s payment rates for physicians’ services are held constant at their current level; and that the automatic enforcement procedures specified by the Budget Control Act of 2011 do not take effect. Outlays under that scenario also include the incremental interest costs associated with projected additional borrowing.”

Table IIB-5 provides the projections of the alternative fiscal scenario of the CBO under those assumptions. Debt as percent of GDP increases from 72.6 percent in 2012 to 89.7 percent in 2022.

Table IIB-5, US, Alternative Scenario CBO Projections of Federal Government Revenues, Outlays, Deficit and Debt as Percent of GDP

	Revenues % GDP	Outlays % GDP	Deficit % GDP	Debt GDP
2011	15.4	24.1	-8.7	67.7
2012	15.8	22.8	-7.0	72.6
2013	16.3	22.8	-6.5	78.6
2014	17.2	22.9	-5.6	82.3
2015	17.8	22.5	-4.6	82.5
2016	18.1	22.6	-4.5	82.5
2017	18.3	22.5	-4.2	82.5
2018	18.3	22.5	-4.2	82.9
2019	18.4	23.0	-4.6	84.1
2020	18.5	23.3	-4.8	85.7
2021	18.5	23.6	-5.1	87.5
2022	18.6	24.1	-5.5	89.7
Total 2013-2017	17.6	22.6	-5.0	NA
Total 2013-2022	18.1	23.0	-4.9	NA
Average 1971-2010	18.0	21.9	NA	37.0

Source: CBO (2012AugBEO). CBO (2012NovCDR).

The major hurdle in adjusting the fiscal situation of the US is shown in Table IIB-6 in terms of the rigid structure of revenues that can be increased and outlays that can be reduced. There is no painless adjustment of a debt exceeding 70 percent of GDP. On the side of revenues, taxes provide 90.9 percent of revenue in 2011 and are projected to provide 92.2 percent in the total revenues from 2013 to 2022 in the CBO projections. Thus, revenue measures are a misleading term for what are actually tax increases. The choices are especially difficult because of the risks of balancing inequity and disincentives to economic activity. Individual income taxes are projected to increase from 47.4 percent of federal government revenues in 2011 to 51.4 percent in total revenues projected by the CBO from 2013 to 2022. There are equally difficult conflicts in what the government gives away in a rigid structure of expenditures. Mandatory expenditures account for 56.3 percent of federal government outlays in 2011 and are projected to increase to 62.4 percent of the total projected by the CBO for the years 2013 to 2022. The total of Social Security plus Medicare and Medicaid accounts for 43.4 percent of federal government outlays in 2011 and is projected to increase to 51.5 percent in the total for 2013 to 2022. The inflexibility of what to cut is more evident in the first to the last row of Table IIB-6 with the aggregate of defense plus Social Security plus Medicare plus Medicaid accounting for 62.7 percent of expenditures in 2011, rising to 66.6 percent of the total outlays projected by the CBO from 2013 to 2022. The cuts are in discretionary spending that declines from 37.4 percent of the total in 2011 to 28.9 percent of total outlays in the CBO projection for 2013 to 2022.

Table IIB-6, Structure of Federal Government Revenues and Outlays, $ Billions and Percent

	2011 $ Billions	% Total	Total 2013-2022 $ Billions	% Total
Revenues	2,303	100.00	41,565	100.00
Individual Income Taxes	1,091	47.4	21,379	51.4
Social Insurance Taxes	819	35.6	12,476	30.0
Corporate Income Taxes	181	7.9	4,477	10.8
Other	212	9.2	3,232	7.8
Outlays	3,603	100.00	43,823	100.0
Mandatory	2,027	56.3	27,324	62.4
Social Security	725	20.1	10,545	24.1
Medicare	560	15.5	7,722	17.6
Medicaid	275	7.6	4,291	9.8
SS + Medicare + Medicaid	1,560	43.3	22,558	51.5
Discre- tionary	1,346	37.4	12,664	28.9
Defense	700	19.4	6,726	15.4
Non- defense	646	17.9	5,370	12.3
Net Interest	230	6.4	3,835	8.8
Defense + SS + Medicare + Medicaid	2,260	62.7	29,284	66.8
MEMO: GDP	15,076		217,200

Source: CBO (2012JanBEO), CBO (2012AugBeo).

Chart IIB-1 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury from Jan 3, 1977 to Jan 3, 2012. The yield stood at 7.67 percent on Feb 16, 1977. A peak was reached at 15.21 percent on Oct 26, 1981 during the inflation control effort by the Fed. There is a second local peak in Chart ESI-1 on May 3, 1984 at 13.94 percent followed by another local peak at 8.14 percent on Nov 21, 1994 during another inflation control effort (see Appendix I The Great Inflation). There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. Yields rose again to 4.89 percent on Jun 14, 2004 and 5.23 percent on Jul 5, 2006. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and collapsed to 1.92 percent on Jan 3, 2012, which is the last data point in Chart IIB-1. There has been a trend of decline of yields with oscillations. During periods of risk aversion investors seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 in the text is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart IIB-1, US, Ten-Year Treasury Constant Maturity Yield, Jan 3, 1977 to Jan 3, 2013

Note: US Recessions in Shaded Areas 

Source: Board of Governors of the Federal Reserve System

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

Chart IIB-2 of the Board of Governors of the Federal Reserve System provides securities held outright by Federal Reserve banks from 2002 to 2012. The first data point in Chart IIB-2 is the level for Dec 18, 2002 of $629,407 million and the final data point in Chart IIB-2 is level of $2,669,592 million on Jan 2, 2012.

Chart IIB-2, US, Securities Held Outright by Federal Reserve Banks, Wednesday Level, Dec 26, 2002 to Dec 26, 2012, USD Millions

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm

Chart IIB-3 of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields. The beginning yields in Chart IIB-3 for July 31, 2000, are 3.67 percent for one month, 3.79 percent for two years and 5.07 percent for ten years. On July 31, 2007, yields inverted with the one month at 5.13 percent, the two-year at 4.56 percent and the ten year at 5.13 percent. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart IIB-3 is for Jan 3, 2012, with the one-month yield at 0.06 percent, the two-year at 0.27 percent and the ten-year at 1.92 percent.

Chart IIB-3, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields Jul 31, 2001-Jan 3, 2013

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

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

Chart IIB-4 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jan 3, 1979, at 8.34 percent per year, to Jan 3, 2012, at 0.17 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1930s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html), the fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart IIB-4 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart IIB-4 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart IIB-4. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart IIB-4 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 0.17 percent on Jan 3, 2012. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. Current policy consists of forecast mandate of maintaining policy accommodation until the forecast of the rate of unemployment reaches 6.5 percent and the rate of personal consumption expenditures excluding food and energy reaches 2.5 percent (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm). It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 8.34 percent on Jan 3, 1979, at the beginning point in Chart IIB-4, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html). There is not a fiscal cliff ahead but rather free fall into a fiscal abyss. The combination of the fiscal abyss with zero interest rates could trigger the risk premium on Treasury debt or Himalayan hike in interest rates.

Chart IIB-4, US, Fed Funds Rate, Business Days, Jan 3, 1979 to Jan 3, 2013, Percent per Year

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h15/

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table IIB-7 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table IIB-7 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table IIB-7, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

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

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

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

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 IIB-8 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 IIB-8, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2000	2007	2008	2009	2010	2011
Goods & Services	-377	-697	-698	-379	-495	-559
Income	19	101	147	119	184	227
UT	-58	-115	-126	-122	-131	-133
Current Account	-416	-710	-677	-382	-442	-466
NGDP	9951	14028	14291	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 Goods Services Income	1425	2488	2657	2181	2519	2848
NIIP % Exports Goods Services Income	-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/

III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.

IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Dec 28 and daily values throughout the week ending on Jan 4 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Dec 28 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Dec 28, 2012”, first row “USD/EUR 1.3218 -0.2 %,” provides the information that the US dollar (USD) depreciated 0.2 percent to USD 1.3218/EUR in the week ending on Fri Dec 28 relative to the exchange rate on Fri Dec 21. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).

The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3218/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Dec 28, appreciating to USD 1.3185/EUR on Wed Jan 2, 2013, or by 0.1 percent. The dollar appreciated because fewer dollars, $1.3185, were required on Wed Jan 2 to buy one euro than $1.3218 on Dec 28. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3218/EUR on Dec 28; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Dec 28, to the last business day of the current week, in this case Fri Jan 4, such as appreciation by 1.1 percent to USD 1.3069/EUR by Jan 4; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 1.1 percent from the rate of USD 1.3218/EUR on Fri Dec 28 to the rate of USD 1.3069/EUR on Fri Jan 4 {[(1.3069/1.3218) – 1]100 = -1.1%} and depreciated (denoted by negative sign) by 0.2 percent from the rate of USD 1.3049 on Thu Jan 3 to USD 1.3069/EUR on Fri Jan 4 {[(1.3069/1.3049) -1]100 = 0.2%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.

Table III-I, Weekly Financial Risk Assets Dec 31, 2012 to Jan 4, 2013

Fri Dec 28, 2012	M 31	Tue 1	W 2	Thu 3	Fr 4
USD/EUR 1.3218 -0.2%	1.3195 0.2% 0.2%	1.3201 0.1% 0.0%	1.3185 0.2% 0.1%	1.3049 1.3% 1.0%	1.3069 1.1% -0.2%
JPY/  USD 85.97 -2.1%	86.74 -0.9% -0.9%	86.71 -0.9% 0.0%	87.34 -1.6% -0.7%	87.24 -1.5% 0.1%	88.17 -2.6% -1.1%
CHF/  USD 0.9135 0.2%	0.9152 -0.2% -0.2%	0.9155 -0.2% 0.0%	0.9179 -0.5% -0.2%	0.9268 -1.5% -1.0%	0.9247 -1.2% 0.2%
CHF/ EUR 1.2076 0.0%	1.2081 0.0% 0.0%	1.2082 0.0% 0.0%	1.2103 -0.2% -0.2%	1.2095 -0.2% 0.1%	1.2084 -0.1% 0.1%
USD/  AUD 1.0373 0.9640 -0.3%	1.0393 0.9622 0.2% 0.2%	1.0397 0.9618 0.2% 0.0%	1.0505 0.9519 1.3% 1.0%	1.0467 0.9554 0.9% 0.4%	1.0482 0.9540 1.0% 0.1%
10 Year  T Note 1.699	1.758	1.758	1.836	1.906	1.898
2 Year     T Note 0.252	0.253	0.253	0.261	0.265	0.262
German Bond 2Y -0.01 10Y 1.31	2Y -0.02 10Y 1.32	2Y -0.02 10Y 1.32	2Y 0.03 10Y 1.44	2Y 0.05 10Y 1.49	2Y 0.08 10Y 1.54
DJIA 12938.11 -1.9%	13104.14 1.3% 1.3%	13104.14 1.3% 1.3%	13412.55 3.7% 2.4%	13391.36 3.5% -0.2%	13435.21 3.8% 0.3%
DJ Global 1984.57 -0.7%	1995.96 0.6% 0.6%	1995.96 0.6% 0.6%	2043.63 3.0% 2.4%	2043.33 3.0% 0.0%	2051.22 3.4% 0.4%
DJ Asia Pacific 1316.58 1.1%	1314.28 -0.2% -0.2%	1314.28 -0.2% -0.2%	1327.86 0.9% 1.0%	1334.37 1.4% 0.5%	1339.98 1.8% 0.4%
Nikkei 10395.18 4.6%	10395.18 0.0% 0.0%	10395.18 0.0% 0.0%	10395.18 0.0% 0.0%	10395.18 0.0% 0.0%	10688.11 2.8% 2.8%
Shanghai 2233.25 3.7%	2269.13 1.6% 1.6%	2269.13 1.6% 1.6%	2269.13 1.6% 1.6%	2269.13 1.6% 1.6%	2276.99 1.9% 0.3%
DAX 7612.39 -0.3%	7612.39 0.0% 0.0%	7612.39 0.0% 0.0%	7778.78 2.2% 2.2%	7756.44 1.9% -0.3%	7776.37 2.2% 0.3%
DJ UBS Comm. 139.08 -0.1%	139.07 0.0% 0.0%	139.07 0.0% 0.0%	139.69 0.4% 0.4%	138.68 -0.3% -0.7%	137.73 -1.0% -0.7%
WTI $ B 90.71 2.0%	91.79 1.2% 1.2%	91.79 1.2% 1.2%	92.95 2.5% 1.3%	92.67 2.2% -0.3%	93.09 2.6% 0.5%
Brent    $/B 110.42 1.2%	111.11 0.6% 0.6%	111.11 0.6% 0.0%	112.36 1.8% 1.1%	112.14 1.6% -0.2%	111.31 0.8% -0.7%
Gold  $/OZ 1656.20 -0.1%	1675.60 1.2% 1.2%	1675.60 1.2% 0.0%	1687.40 1.9% 0.7%	1661.90 0.3% -1.5%	1657.90 0.1% -0.2%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources: http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States. An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):

“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”

Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.

The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN

), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.

First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:

“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”

Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.

There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity 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.”

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.

(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):

“6 September 2012 - Technical features of Outright Monetary Transactions

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

Conditionality

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

Coverage

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

Sterilisation

The liquidity created through Outright Monetary Transactions will be fully sterilised.

Transparency

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Securities Markets Programme

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”

Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.

Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”

Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).

Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24. On Aug 31, the yield of the 10-year sovereign bond of Italy rose to 5.787 percent and that of Spain to 6.832 percent. The announcement of the OMT of bond-buying by the ECB together with weak employment creation in the US created risk appetite with the yield of the ten-year government bond of Spain collapsing to 5.708 percent on Sep 7 and the yield of the ten-year government bond of Italy to 5.008 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The yield of the ten-year government bond of Spain traded at 5.770 percent on Sep 14 and at 5.739 percent on Sep 21 and ten-year government of Italy traded at 4.953 percent on Sep 14 and 4.982 on Sep 21. The imminence of a bailout of Spain drove the yield of the ten-year sovereign bond of Spain to 5.979 percent on Fri Sep 28 and that of Italy to 5.031 percent but both traded higher during the day. Sovereign yields continued to decline by Oct 5 with the yield of the ten-year sovereign bond of Spain trading at 5.663 percent and that of Italy at 4.922 percent. On Oct 12, 2012, the yield of the ten-year sovereign bond of Spain traded at 5.612 percent and that of Italy at 4.856 percent. Sovereign bonds continued to decline in the week of Oct 19 with the ten-year government bond Spain trading at 5.289 percent and that of Italy at 4.655 percent. On Oct 26, the yield of the ten-year government bond of Spain traded at 5.574 percent and that of Italy at 4.838 percent. On Nov 2, the ten-year government bond of Spain traded at 5.649 percent, increasing to 5.820 percent on Nov 9 while the ten-year bond of Italy traded at 4.879 percent on Nov 2, increasing o 4.898 percent on Nov 9 under renewed concerns about Greece. The ten-year bond of Italy traded at 4.816 percent on Nov 16 while the yield of the ten-year bond of Spain traded at 5.864 percent. The ten-year yield of the government of Spain traded at 5.603 percent on Nov 23 while the ten-year yield of the government of Italy traded at 4.696 percent. Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The major risk event during the week was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Doubts of repurchase of Greek sovereign bonds, turmoil in Italian politics and reduction of growth forecasts by the European Central Bank and the Deutsche Bundesbank contributed to increase of the yield of the ten-year sovereign bond of Spain to 5.454 percent on Dec 7, 2012 and of the ten-year sovereign bond of Italy to 4.471 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). On Fri Dec 14, the yield of the ten-year bond of Spain traded at 5.366 percent and that of Italy at 4.527 percent. The yield of the ten-year sovereign bond of Spain traded at 5.228 percent on Dec 21, 2012 and that of Italy at 4.424 percent. The yield of the ten-year sovereign bond of Spain traded at 5.235 percent on Dec 28 and that of the ten-year sovereign bond of Italy at 4.447 percent with further declines to 5.021 percent for the ten-year sovereign bond of Italy and 4.216 percent for the ten-year sovereign bond of Italy on Jan 4, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. Under increasing risk appetite, the yield of the ten-year Treasury rose to 1.544 on Jul 27, 2012 and 1.569 percent on Aug 3, 2012, while the yield of the ten-year Government bond of Germany rose to 1.40 percent on Jul 27 and 1.42 percent on Aug 3. Yields moved on an increasing trend with the US ten-year note at 1.814 percent on Aug 17 and the German ten-year bond at 1.50 percent with sharp decline on Aug 24 to 1.684 percent for the yield of the US ten-year note and 1.35 for the yield of the German ten-year bond. The trend was interrupted with decline of the yield of the ten-year Treasury note to 1.543 percent on Aug 31, 2012, and of the ten-year German bond to 1.33 percent. The US dollar strengthened significantly from USD 1.450/EUR on Aug 26, 2011, to USD 1.2158 on Jul 20, 2012, or by 16.2 percent, but depreciated to USD 1.2320/EUR on Jul 27, 2012 and 1.2387 on Aug 3, 2012 in expectation of massive support of highly indebted euro zone members. Doubts returned at the end of the week of Aug 10, 2012 with appreciation to USD 1.2290/EUR and decline of the yields of the two-year government bond of Germany to -0.07 percent and of the ten-year to 1.38 percent. On Aug 17, the US dollar depreciated by 0.4 percent to USD 1.2335/EUR and the ten-year bond of Germany yielded -0.04 percent. Risk appetite returned in the week of Aug 24 with depreciation by 1.4 percent to USD 1.2512/EUR and lower yield of the German two-year bond to -0.01 percent and of the US two-year note to 0.266 percent. Further risk aversion is captured by decline of yield of the two-year Treasury note to 0.225 percent on Aug 31, 2012, and to -0.03 percent for the two-year sovereign bond of Germany while the USD moved in opposite direction, depreciating to USD 1.2575/EUR. The almost simultaneous announcement of the bond-buying OMT of the ECB on Sep 6 and the weak employment report on Sep 7 suggesting further easing by the FOMC caused risk appetite shown by the increase in yields of government bonds of the US on Sep 7 to 1.668 percent for the ten-year note and 0.252 percent for the two-year while the two-year yield of Germany rose from -0.03 percent to 0.03 percent and the ten-year yield from 1.33 percent to 1.52 percent. Risk aversion retreated again on Sep 14, 2012 because of the open-ended monetary policy of the FOMC with the dollar devaluing to USD 1.3130 and the ten-year yield of the US Treasury note increasing to 1.863 percent (also in part because of bond buying by the Fed at shorter maturities) and the yield of the ten-year German bond increasing to 1.71 percent. Risk aversions returned because of weak flash purchasing managers indices with appreciation to USD1.2981 in the week of Sep 21 and declines of the yield of the ten-year Treasury note to 1.753 percent and of the yield of the ten-year government bond to 1.60 percent. Risk aversion because of the potential bailout of Spain drove down the US ten-year yield to 1.631 and the ten-year yield of Germany to 1.44 percent while the dollar appreciated to USD 1.2859/EUR. Increasing risk appetite drove the yield of the ten-year Treasury to 1.737 percent on Oct 5, 2012 and depreciated the dollar to USD 1.3036 with more muted response in the yield of the ten-year bond of Germany rising to 1.52 percent and the two-year yield to 0.06 percent. There is indication of some risk aversion in the week of Oct 12, 2012, with decline of the yield of the ten-year Treasury to 1.663 percent and that of Germany to 1.45 percent, stability of the two-year Treasury yield at 0.264 percent and marginal decline of the yield of the two-year German bond to 0.04 percent while the dollar appreciated to USD 1.2953/EUR. Risk aversion fluctuated in the week of Oct 19 but the week ended with the increase of the yield of the two-year note of the US to 0.296 percent and of the ten-year note to 1.766 percent; there was similar increase of the yield of the two-year government bond of Germany to 0.11 percent and of the ten-year yield to 1.59 percent; and the dollar depreciated 0.5 percent to USD 1.3023 percent. Mild risk aversion returned in the week of Oct 26, with the 10-year Treasury yield declining marginally to 1.748 percent and that of Germany to 1.54 percent while the dollar appreciated to USD 1.2942/EUR. Mild risk aversion continued in the week of Nov 2 with declines in the yield of the ten-year Treasury note to 1.715 percent and of the ten-year government bond of Germany to 1.45 percent while the dollar appreciated to USD 1.2838/EUR. Risk aversion deepened in the week of Nov 9 with the two-year Treasury trading at 0.256 percent and the ten-year at 1.614 percent while the two-year government bond of Germany traded at minus 0.03 percent and the ten-year at 1.35 percent while the dollar strengthened to USD 1.2711/EUR. There is continuing risk aversion in the week of Nov 16, with the yields of the two-year Treasury at 0.24 percent and of the ten-year Treasury at 1.584, the yield of the two-year government bond at minus 0.03 percent and of the ten-year German government bond at 1.33 percent and the rate of USD 1.2743/EUR. Expectations of an agreement on US fiscal affairs and Greece’s bailout improved risk appetite in the holiday week of Nov 23 with the US two-year yield rising to 0.273 percent and the ten-year yield to 1.691, less pronounced improvement with the two-year yield of Germany at 0.00 percent and ten-year yield at 1.44 percent but depreciation of the dollar to USD 1.2975/EUR while stock markets soared. While yields of sovereign bonds of Spain and Italy fell sharply in the week of Nov 30, yields of US and German bonds traded down to 0.248 for two years and 1.612 for ten years for the US and 0.01 percent for two years and 1.39 percent for ten years for Germany. The dollar remained almost unchanged at USD 1.2987/EUR. Reductions of growth forecasts by the European Central Bank and Deutsche Bundesbank together with doubts on sovereign bond repurchase by Greece and Italian political turmoil contributed to decrease of the yield of the two-year government bond of Germany to minus 0.008 on Dec 7, 2012, and of the ten-year yield to 1.39 while the dollar appreciated to USD 1.2026/EUR while risk aversion continued in the US with the two-year Treasury yield at 0.256 percent and the ten-year yield at 1.625 percent. Yields backed up to 1.704 for the ten-year US Treasury and 1.35 for the ten-year German bond in the week of Dec 14, 2012, while the dollar depreciated to USD 1.3162/EUR. Treasury yields continued to back up in the week of Dec 21, 2012, with the ten-year at 1.77 percent and the two-year at 0.272 with the two-year of Germany at minus 0.01 percent and the ten-year at 1.38 percent while the dollar depreciated to USD 1.3189/EUR. Return of risk aversion manifested in the week of Dec 28, 2912, with decline of the yield of the two-year Treasury to 2.52 percent and of the ten-year Treasury to 1.699 percent with the two-year bond of Germany at minus 0.01 percent and the ten-year at 1.31 percent while the dollar devalued slightly to USD 1.3218.EUR. Yields backed up in the week of Jan 4 with the two-year Treasury at 0.262 percent and the ten-year Treasury at 1.898 percent with the same increases of the two-year German bond to 0.08 percent and of the ten-year German bond to 1.54 percent while the dollar appreciated to USD 1.3069/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is below consumer price inflation of 1.8 percent in the 12 months ending in Nov (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.

Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate

	US 2Y	US 10Y	DE 2Y	DE 10Y	USD/ EUR
1/4/12	0.262	1.898	0.08	1.54	1.3069
12/28/12	0.252	1.699	-0.01	1.31	1.3218
12/21/12	0.272	1.77	-0.01	1.38	1.3189
12/14/12	0.232	1.704	-0.04	1.35	1.3162
12/7/12	0.256	1.625	-0.08	1.30	1.2926
11/30/12	0.248	1.612	0.01	1.39	1.2987
11/23/12	0.273	1.691	0.00	1.44	1.2975
11/16/12	0.24	1.584	-0.03	1.33	1.2743
11/9/12	0.256	1.614	-0.03	1.35	1.2711
11/2/12	0.274	1.715	0.01	1.45	1.2838
10/26/12	0.299	1.748	0.05	1.54	1.2942
10/19/12	0.296	1.766	0.11	1.59	1.3023
10/12/12	0.264	1.663	0.04	1.45	1.2953
10/5/12	0.26	1.737	0.06	1.52	1.3036
9/28/12	0.236	1.631	0.02	1.44	1.2859
9/21/12	0.26	1.753	0.04	1.60	1.2981
9/14/12	0.252	1.863	0.10	1.71	1.3130
9/7/12	0.252	1.668	0.03	1.52	1.2816
8/31/12	0.225	1.543	-0.03	1.33	1.2575
8/24/12	0.266	1.684	-0.01	1.35	1.2512
8/17/12	0.288	1.814	-0.04	1.50	1.2335
8/10/12	0.267	1.658	-0.07	1.38	1.2290
8/3/12	0.242	1.569	-0.02	1.42	1.2387
7/27/12	0.244	1.544	-0.03	1.40	1.2320
7/20/12	0.207	1.459	-0.07	1.17	1.2158
7/13/12	0.24	1.49	-0.04	1.26	1.2248
7/6/12	0.272	1.548	-0.01	1.33	1.2288
6/29/12	0.305	1.648	0.12	1.58	1.2661
6/22/12	0.309	1.676	0.14	1.58	1.2570
6/15/12	0.272	1.584	0.07	1.44	1.2640
6/8/12	0.268	1.635	0.04	1.33	1.2517
6/1/12	0.248	1.454	0.01	1.17	1.2435
5/25/12	0.291	1.738	0.05	1.37	1.2518
5/18/12	0.292	1.714	0.05	1.43	1.2780
5/11/12	0.248	1.845	0.09	1.52	1.2917
5/4/12	0.256	1.876	0.08	1.58	1.3084
4/6/12	0.31	2.058	0.14	1.74	1.3096
3/30/12	0.335	2.214	0.21	1.79	1.3340
3/2/12	0.29	1.977	0.16	1.80	1.3190
2/24/12	0.307	1.977	0.24	1.88	1.3449
1/6/12	0.256	1.957	0.17	1.85	1.2720
12/30/11	0.239	1.871	0.14	1.83	1.2944
8/26/11	0.20	2.202	0.65	2.16	1.450
8/19/11	0.192	2.066	0.65	2.11	1.4390
6/7/10	0.74	3.17	0.49	2.56	1.192
3/5/09	0.89	2.83	1.19	3.01	1.254
12/17/08	0.73	2.20	1.94	3.00	1.442
10/27/08	1.57	3.79	2.61	3.76	1.246
7/14/08	2.47	3.88	4.38	4.40	1.5914
6/26/03	1.41	3.55	NA	3.62	1.1423

Note: DE: Germany

Source:

http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

http://www.federalreserve.gov/releases/h15/data.htm

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/macro_economic_time_series_node.html?anker=GELDZINS

http://www.ecb.int/stats/money/long/html/index.en.html

Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields. The beginning yields in Chart III-1A for July 31, 2000, are 3.67 percent for one month, 3.79 percent for two years and 5.07 percent for ten years. On July 31, 2007, yields inverted with the one month at 5.13 percent, the two-year at 4.56 percent and the ten year at 5.13 percent. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Jan 3, 2013, with the one-month yield at 0.06 percent, the two-year at 0.27 percent and the ten-year at 1.92 percent.

Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields Jul 31, 2001-Jan 3, 2013

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

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

Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. 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 R_τ is expected revenue in the time horizon from τ =1 to T; C_τ 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

declines.

There was strong performance in equity indexes in Table III-1 in the week ending on Jan 4, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 0.3 percent on Jan 4, increasing 3.8 percent in the week. Germany’s Dax increased 0.3 percent on Fri Jan 4 and increased 2.2 percent in the week. Dow Global increased 0.4 percent on Jan 4 and increased 3.4 percent in the week. Japan’s Nikkei Average increased 2.8 percent on Fri Jan 4 and increased 2.8 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration. Dow Asia Pacific TSM increased 0.4 percent on Jan 4 and increased 1.8 percent in the week while Shanghai Composite increased 0.3 percent on Jan 4 and increased 1.9 percent in the week supported by a fourteen-month high of the HSBC flash manufacturing index, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2276.99 on Fri Jan 4. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.

Commodities were mixed in the week of Jan 4, 2013. The DJ UBS Commodities Index decreased 0.7 percent on Fri Jan 4 and decreased 1.0 percent in the week, as shown in Table III-1. WTI increased 2.6 percent in the week of Jan 4 while Brent increased 0.8 percent in the week even with conflicts in the Middle East. Gold decreased 0.2 percent on Fri Jan 4 and increased 0.1 percent in the week.

Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,122,338 million on Dec 21, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,707,554 million in the statement of Dec 21. There is high credit risk in these transactions with capital of only €85,552 million as analyzed by Cochrane (2012Aug31).

Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Dec 21, 2012
1 Gold and other Receivables	367,402	419,822	479,115
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	258,034
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	33,690
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	19,088
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,122,338
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	208,292
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	585,216
8 General Government Debt Denominated in Euro	34,954	33,928	32,008
9 Other Assets	278,719	336,574	275,419
TOTAL ASSETS	2,004, 432	2,733,235	3,011,200
Memo Items
Sum of 5 and  7	1,004,174	1,489,759	1,707,554
Capital and Reserves	78,143	85,748	85,552

Source: European Central Bank

http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html

http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html

http://www.ecb.int/press/pr/wfs/2012/html/fs121227.en.html

IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.5 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.9 percent in Jan-Oct 2012 relative to Jan-Oct 2011 while those to EMU are falling at 0.9 percent.

Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

Oct 2012	Exports % Share	∆% Jan-Oct 2012/ Jan-Oct 2011	Imports % Share	Imports ∆% Jan-Oct 2012/ Jan-Oct 2011
EU	56.0	0.2	53.7	-7.3
EMU 17	42.5	-0.9	43.3	-7.3
France	11.6	0.0	8.4	-5.9
Germany	13.1	0.1	15.5	-10.9
Spain	5.3	-8.1	4.5	-8.1
UK	4.7	10.2	2.7	-13.6
Non EU	44.0	9.9	46.3	-3.1
Europe non EU	13.3	9.7	12.5	-1.4
USA	6.1	18.8	3.2	2.2
China	2.7	-12.0	7.4	-16.3
OPEC	4.7	24.9	8.5	22.4
Total	100.0	4.4	100.0	-5.4

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €330 million with the 17 countries of the euro zone (EMU 17) in Oct 2012 and deficit of €1601 million in Jan-Oct 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €9,267 million in Jan-Oct with Europe non European Union and of €11,391 million with the US and in reducing the deficit with non European Union of €3106 million in Jan-Oct 2012. There is significant rigidity in the trade deficits in Jan-Oct of €14,168 million with China and €16,853 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.

Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro 

Regions and Countries	Trade Balance Oct 2012 Millions of Euro	Trade Balance Cumulative Jan-Oct 2012 Millions of Euro
EU	981	9,634
EMU 17	-330	-1,601
France	1,048	10,183
Germany	-375	-4,837
Spain	143	1,359
UK	916	7,993
Non EU	1,471	-3,106
Europe non EU	1,051	9,267
USA	1,268	11,391
China	-1,245	-14,168
OPEC	-1,128	-16,853
Total	2,452	6,528

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Oct 2012 relative to Jan-Oct 2011. Growth rates in 12 months of imports are negative with the exception of 9.3 percent for energy. The higher rate of growth of exports of 5.3 percent in Jan-Oct 2012/Jan-Oct 2011 relative to imports of minus 2.6 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.

Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Oct 2012/ Jan-Oct 2011	Imports Share %	Imports ∆% Jan-Oct 2012/ Jan-Oct 2011
Consumer Goods	28.9	5.3	25.0	-2.6
Durable	5.9	2.4	3.0	-5.9
Non Durable	23.0	6.0	22.0	-2.2
Capital Goods	32.3	2.5	21.1	-12.3
Inter- mediate Goods	34.2	3.3	34.3	-11.3
Energy	4.7	20.0	19.6	9.3
Total ex Energy	95.3	3.6	80.4	-8.9
Total	100.0	4.4	100.0	-5.4

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Table III-6 provides Italy’s trade balance by product categories in Oct 2012 and cumulative Jan-Oct 2012. Italy’s trade balance excluding energy generated surplus of €7613 million in Oct 2012 and €60,206 million in Jan-Oct 2012 but the energy trade balance created deficit of €5161 million in Oct 2012 and €53,677 million in Jan-Oct 2012. The overall surplus in Oct 2012 was €2452 million with surplus of €6528 million in Jan-Oct 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

Table III-6, Italy, Trade Balance by Product Categories, € Millions

	Oct 2012	Cumulative Jan-Oct 2012
Consumer Goods	1,834	13,406
Durable	1,089	9,371
Nondurable	745	4,035
Capital Goods	4,711	40,621
Intermediate Goods	1,067	6,179
Energy	-5,161	-53,677
Total ex Energy	7,613	60,206
Total	2,452	6,528

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77607

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table III-7, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2012 USD Billions	Primary Net Lending Borrowing % GDP 2012	General Government Net Debt % GDP 2012
World	71,277
Euro Zone	12,065	-0.5	73.4
Portugal	211	-0.7	110.9
Ireland	205	-4.4	103.0
Greece	255	-1.7	170.7
Spain	1,340	-4.5	78.6
Major Advanced Economies G7	33,769	-5.1	89.0
United States	15,653	-6.5	83.8
UK	2,434	-5.6	83.7
Germany	3,367	1.4	58.4
France	2,580	-2.2	83.7
Japan	5,984	-9.1	135.4
Canada	1,770	-3.2	35.8
Italy	1,980	2.6	103.1
China	8,250	-1.3*	22.2**

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,855.7
B Germany	1,996.3		$8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4%
C France	2,159.5
B+C	4,155.8	GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7%
D Italy	2,041.4
E Spain	1,053.2
F Portugal	234.0
G Greece	435.3
H Ireland	211.2
Subtotal D+E+F+G+H	3,975.1

Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO

There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Oct 2012. German exports to other European Union (EU) members are 57.3 percent of total exports in Oct 2012 and 57.2 percent in Jan-Oct 2012. Exports to the euro area are 37.6 percent in Oct and 37.6 percent in Jan-Oct. Exports to third countries are 42.7 percent of the total in Oct and 42.8 percent in Jan-Oct. There is similar distribution for imports. Exports to non-euro countries are decreasing 2.7 percent in Oct 2012 and increasing 4.4 percent in Jan-Oct 2012 while exports to the euro area are increasing 7.0 percent in Oct and decreasing 1.2 percent in Jan-Oct 2012. Exports to third countries, accounting for 42.7 percent of the total in Oct 2012, are increasing 1.8 percent, and 10.9 percent in Jan-Oct, accounting for 42.8 percent of the cumulative total in Jan-Oct 2012. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.

Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Oct 2012  € Billions	Oct 12-Month ∆%	Jan–Oct 2012 € Billions	Jan-Oct 2012/ Jan-Oct 2011 ∆%
Total Exports	98.5	10.6	924.4	4.8
A. EU Members	56.4 % 57.3	7.8	528.6 % 57.2	0.6
Euro Area	37.0 % 37.6	7.0	347.8 % 37.6	-1.2
Non-euro Area	19.3 % 19.7	-2.7	180.7 % 19.6	4.4
B. Third Countries	42.1 % 42.7	1.8	395.8 % 42.8	10.9
Total Imports	82.7	6.0	765.1	1.7
C. EU Members	51.9 % 62.8	5.4	484.4 % 63.3	1.7
Euro Area	35.5 % 42.9	-5.7	339.4 % 44.4	1.4
Non-euro Area	16.4 % 19.8	-2.8	145.0 % 18.9	2.5
D. Third Countries	30.8 % 37.2	6.9	280.7 % 36.7	1.7

Notes: Total Exports = A+B; Total Imports = C+D

Source:

Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/12/PE12_432_51.html;jsessionid=5B7D9B7A67D38989763779A0A5711A66.cae4

IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section  as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.6	1.8	1.5	7.7
Japan	0.5	-0.2	-0.9	4.1
China	7.4	2.0	-2.2
UK	0.0	2.7* RPI 3.0	2.2* output 1.4** input -0.3*	7.8
Euro Zone	-0.6	2.2	2.6	11.7
Germany	0.9	1.9	1.5	5.4
France	0.0	1.6	1.9	10.7
Nether-lands	-1.4	3.2	4.5	5.5
Finland	-1.1	3.2	2.8	7.7
Belgium	-0.3	2.2	4.5	7.5
Portugal	-3.4	1.9	4.6	16.3
Ireland	-0.5	1.6	3.0	14.7
Italy	-2.4	2.6	2.2	11.1
Greece	-7.2	0.4	4.1	NA
Spain	-1.6	3.0	3.5	26.2

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/november-2012/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-prices-indices/november-2012/index.html

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.6 percent in IIIQ2012 relative to IIIQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_3rd.pdf See I Mediocre and Decelerating United States Economic Growth at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). Japan’s GDP fell 0.2 percent in IVQ2011 relative to IVQ2010 and contracted 1.6 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 10.4 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, increasing at the SAAR of 5.7 percent in IQ2012 and decreasing at 0.1 percent in IIQ2012 but contracting at the SAAR of 3.5 percent in IIIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ); the UK grew at 0.9 percent in IIIQ2012 relative to IIQ2012 and GDP changed 0.0 percent in IIIQ2012 relative to IIIQ2011 (see Section VH at http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html); and the Euro Zone grew at minus 0.1 percent in IIIQ2012, IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.8 percent in the US but 18.2 percent for unemployment/underemployment or job stress of 29.5 million (see Table I-4 and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html), 4.2 percent for Japan (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2012/index.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.8 percent in the US, -0.2 percent for Japan, 2.0 percent for China, 2.2 percent for the Euro Zone and 2.7 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html), weak hiring with the loss of 10 million full-time jobs (see Section I at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.

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.”

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 1.7 percent per year that will perpetuate unemployment/underemployment (Section I at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.7 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 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.73 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.73 percent in IIIQ2012 annualizes to 1.7 percent in the first three quarters of 2012 {([(1.02)^1/4(1.013)^1/4(1.0173^1/4]^4/3 -1)100 = 1.7%}. 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.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“Release Date: December 12, 2012

For immediate release

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. 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 and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

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 Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

There are several important issues in this statement.

1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

2. Open-ended Quantitative Easing or QE_∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.”

3. Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “o 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.”

4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

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 that is actually a target of growth forecast. 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 2015 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 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; see Shultz et al 2012), 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 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.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Dec 12, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html) and the PCE inflation data from the report on personal income and outlays (Section IV at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The Bureau of Economic Analysis (BEA) provides the third estimate of IIIQ2012 GDP with the advance estimate of IVQ2012 and annual for 2012 to be released on Jan 30 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in sections IIA and IV in this blog for Nov 2012 at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for Dec will be released at 8:30 AM on Jan 31, 2012 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Nov report at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html; the Oct report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html; the Sep report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html; the Aug report is in Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Dec was released on Fri Jan 4, 2013 (http://www.bls.gov/ces/) and analyzed in this blog in Section I. “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).

It is instructive to focus on 2012 and 2013 as 2014, 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Dec 12, 2012 and the second row “PR” the projection of the Sep 13, 2012 meeting. There are three major changes in the view.

1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting and further to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and 1.7 to 1.8 percent at the Dec 12, 2012 meeting. GDP growth in 2013 has been increased to 2.5 to 3.0 percent at the meeting on Sep 13

2012 from 2.2 to 2.8 percent at the meeting on Jun 20, 2012 but reduced to 2.3 to 3.0 percent at the Dec 12, 2012 meeting.

2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting and did not change it at 8.0 to 8.2 at the meeting on Sep 13, 2012, lowering the projection to 7.8 to 7.9 percent at the Dec 12, 2012 meeting. The rate of unemployment for 2013 has been changed to 7.6 to 7.9 percent at the Sep 13 meeting compared with 7.5 to 8.0 percent at the Jun 20 meeting and reduced to 7.4 to 7.7 percent at the Dec 12 meeting.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting. The interval was increased to 1.7 to 1.8 percent at the Sep 13, 2012 meeting and 1.6 to 1.7 percent at the Dec 12, 2012 meeting.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting. The projection was virtually unchanged at 1.7 to 1.9 percent at the Sep 13 meeting. For 2013, the projection for core inflation was changed from 1.6 to 2.0 percent at the Jun 20, 2012 meeting to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and lowered to 1.7 to 1.9 percent at the Dec 12, 2012 meeting.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and Sep 2012 

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2012  Sep PR	1.7 to 1.8 1.7 to 2.0	7.8 to 7.9 8.0 to 8.2	1.6 to 1.7 1.7. to 1.8	1.6 to 1.7 1.7 to 1.9
2013  Sep PR	2.3 to 3.0 2.5 to 3.0	7.4 to 7.7 7.6 to 7.9	1.3 to 2.0 1.6 to 2.0	1.6 to 1.9 1.7 to 2.0
2014  Sep PR	3.0 to 3.5 3.0 to 3.8	6.8 to 7.3 6.7 to 7.3	1.5 to 2.0 1.6 to 2.0	1.6 to 2.0 1.8 to 2.0
2015 Sep	3.0 to 3.7 3.0 to 3.8	6.0 to 6.6 6.0 to 6.8	1.7 to 2.0 1.8 to 2.0	1.8 to 2.0 1.9 to 2.0
Longer Run Sep PR	2.3 to 2.5 2.3 to 2.5	5.2 to 6.0 5.2 to 6.0	2.0 2.0
Range
2012 Sep PR	1.6 to 2.0 1.6 to 2.0	7.7 to 8.0 8.0 to 8.3	1.6 to 1.8 1.5 to 1.9	1.6 to 1.8 1.6 to 2.0
2013 Sep PR	2.0 to 3.2 2.3 to 3.5	6.9 to 7.8 7.0 to 8.0	1.3 to 2.0 1.5 to 2.1	1.5 to 2.0 1.6 to 2.0
2014 Sep PR	2.8 to 4.0 2.7 to 4.1	6.1 to 7.4 6.3 to 7.5	1.4 to 2.2 1.6 to 2.2	1.5 to 2.0 1.6 to 2.2
2015 Sep PR	2.5 to 4.2 2.5 to 4.2	5.7 to 6.8 5.7 to 6.9	1.5 to 2.2 1.8 to 2.3	1.7 to 2.2 1.8 to 2.3
Longer Run Sep PR	2.2 to 3.0 2.2 to 3.0	5.0 to 6.0 5.0 to 6.3	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary.  However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). There are 19 participants expecting the rate to remain at 0 to ¼ percent in 2012 and none to be higher. Not much change is expected in 2013 either with 17 participants anticipating the rate at the current target of 0 to ¼ percent and only two expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 14 participants with three expecting the rate to be in the range of 1.0 to 2.0 percent, one participant expecting rates at 0.5 to 1.0 percent and one participant expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, nine participants expect rates to be below 1.0 percent while nine expect rates from 1.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

	0 to 0.25	0.5 to 1.0	1.0 to 1.5	1.0 to 2.0	2.0 to 3.0	3.0 to 4.5
2012	19
2013	17	1		1
2014	14	1		3	1
2015	1	8		6	1	3
Longer Run						19

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2012	1
2013	2
2014	3
2015	13
2016	1

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-5. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 was 3.7 percent. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion.

Table IV-5, Italy, Consumer Price Index

	Month	12 Months
Dec 2012	0.3	2.4
AE ∆% Dec	3.7
Nov 2012	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/78783

Consumer price inflation in Italy by segments in the estimate by ISTAT for Nov 2012 is provided in Table IV-6. Total consumer price inflation in Dec 2012 was 0.3 percent and 2.4 percent in 12 months. Inflation of goods was 0.0 percent in Dec and 2.7 percent in 12 months. Prices of durable goods increased 0.0 percent in Dec and decreased 0.2 percent in 12 months, as typical in most countries. Prices of energy decreased 0.3 percent in Dec and increased 9.3 percent in 12 months. Food prices increased 0.3 percent in Dec and increased 2.6 percent in 12 months. Prices of services increased 0.6 percent in Dec and rose 2.0 percent in 12 months. Transport prices, also influenced by commodity prices, increased 2.3 percent in Dec and increased 4.4 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html).

Table IV-6, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Dec 2012	Month ∆%	12-Month ∆%
General Index	0.3	2.4
I Goods	0.0	2.7
Food	0.3	2.6
Energy	-0.3	9.3
Durable	0.0	-0.2
Nondurable	0.2	0.5
II Services	0.6	2.0
Housing	0.2	2.8
Communications	0.0	-0.1
Transport	2.3	4.4

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/78783

Chart IV-15 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012.

Chart, IV-1, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

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

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/datamapper/index.php?db=WEO) to show GDP in dollars in 2011 and the growth rate of real GDP of the world and selected regional countries from 2012 to 2015. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.3 percent in 2012 but accelerating to 3.6 percent in 2013, 4.2 percent in 2014 and 4.4 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,697 billion of world output of $69,899 billion, or 48.2 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2012 to 2015 in contrast with 3.9 percent for the world as a whole. While the world would grow 16.4 percent in the four years from 2012 to 2015, the G7 as a whole would grow 7.8 percent. The difference in dollars of 2011 is rather high: growing by 16.4 percent would add $11.5 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,867 but growing by 7.8 percent would add $5.2 trillion of output to the world, or somewhat below the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,438 billion, or 36.4 percent of world output. The EMDEs would grow cumulatively 24.9 percent or at the average yearly rate of 5.7 percent, contributing $6.3 trillion from 2012 to 2015 or the equivalent of 86.8 percent of $7,298 billion of China in 2011. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,468 billion, or 19.3 percent of world output, which is equivalent to 39.9 percent of the combined output of the major advanced economies of the G7.

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

	GDP USD 2011	Real GDP ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World	69,899	3.3	3.6	4.2	4.4
G7	33,697	1.4	1.5	2.2	2.5
Canada	1,739	1.9	2.0	2.4	2.4
France	2,778	0.1	0.4	1.1	1.5
DE	3,607	0.9	0.9	1.4	1.4
Italy	2,199	-2.3	-0.7	0.5	1.2
Japan	5,867	2.2	1.2	1.1	1.2
UK	2,431	-0.4	1.1	2.2	2.6
US	15,076	2.2	2.1	2.9	3.4
Euro Area	13,114	-0.4	0.2	1.2	1.5
DE	3,607	0.9	0.9	1.4	1.4
France	2,778	0.1	0.4	1.1	1.5
Italy	2,199	-2.3	-0.7	0.5	1.2
POT	238	-3.0	-1.0	1.2	1.9
Ireland	221	0.4	1.4	2.5	2.9
Greece	299	-6.0	-4.0	0.0	2.8
Spain	1,480	-1.5	-1.3	1.0	1.6
EMDE	25,438	5.3	5.6	5.9	6.1
Brazil	2,493	1.5	3.9	4.2	4.2
Russia	1,850	3.7	3.8	3.9	3.9
India	1,827	4.9	6.0	6.4	6.7
China	7,298	7.8	8.2	8.5	8.5

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/datamapper/index.php?db=WEO). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table V-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. Estimated rates of unemployment for 2012 are particularly high for the countries with sovereign debt difficulties in Europe: 15.5 percent for Portugal (POT), 14.8 percent for Ireland, 23.8 percent for Greece, 24.9 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is estimated at 7.5 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

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

	% Labor Force 2011	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015
World	NA	NA	NA	NA	NA
G7	7.7	7.5	7.5	7.3	6.9
Canada	7.5	7.3	7.3	7.1	6.9
France	9.6	10.1	10.5	10.3	9.8
DE	6.0	5.2	5.3	5.2	5.2
Italy	8.4	10.6	11.1	11.3	11.0
Japan	4.6	4.5	4.4	4.5	4.4
UK	8.0	8.1	8.1	7.9	7.6
US	8.9	8.2	8.1	7.7	7.1
Euro Area	10.2	11.2	11.5	11.2	10.8
DE	6.0	5.2	5.3	5.2	5.2
France	9.6	10.1	10.5	10.3	9.8
Italy	8.4	10.6	11.1	11.3	11.0
POT	12.7	15.5	16.0	15.3	14.7
Ireland	14.4	14.8	14.4	13.7	13.1
Greece	17.3	23.8	25.4	24.5	22.4
Spain	21.7	24.9	25.1	24.1	23.2
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	6.5	6.0	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.1	4.1	4.1	4.1

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IIIQ2012 available now for all countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.4 percent in IQ2012 and 3.4 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP grew 0.0 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 0.1 percent, which is much lower than 5.7 percent in IQ2012. Growth of 3.9 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.5 percent and increased 0.5 percent relative to a year earlier. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. China grew at 2.2 percent in IIIQ2012, which annualizes at 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). China’s GDP grew 7.6 percent in IIQ2012 relative to IIQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier and 7.4 percent in IIIQ2012 relative to IIIQ2011. GDP was flat in the euro area in IQ2012 and fell 0.1 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.6 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.3 percent at SAAR and 2.1 percent relative to a year earlier. In IIIQ2012, GDP grew 0.8 percent, 3.1 percent at SAAR and 2.6 percent relative to IIIQ2011 (Section I http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) but with substantial unemployment and underemployment (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In IQ2012, UK GDP fell 0.3 percent, increasing 0.2 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and decreased 0.3 percent relative to a year earlier. UK GDP increased 0.9 percent in IIIQ2012 and fell 0.0 percent relative to a year earlier. Italy has experienced decline of GDP in five consecutive quarters from IIIQ2011 to IIIQ2012. Italy’s GDP fell 0.8 percent in IQ2012 and declined 1.4 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.4 percent relative to a year earlier. France’s GDP stagnated in IQ2012 and increased 0.2 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.1 percent and increased 0.0 percent relative to a year earlier.

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

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	QOQ: 0.5        SAAR: 2.0	2.4
Japan	QOQ: 1.4 SAAR: 5.7	3.4
China	1.8	8.1
Euro Area	0.0	-0.1
Germany	0.5	1.7
France	0.0	0.2
Italy	-0.8	-1.4
United Kingdom	-0.3	0.2
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3         SAAR: 1.3	2.1
Japan	QOQ: 0.0 SAAR: -0.1	3.9
China	1.8	7.6
Euro Area	-0.2	-0.5
Germany	0.3	0.5 1.0 CA
France	-0.1	0.1
Italy	-0.7	-2.4
United Kingdom	-0.4	-0.3
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.8  SAAR: 3.1	2.6
Japan	QOQ: –0.9 SAAR: –3.5	0.5
China	2.2	7.4
Euro Area	-0.1	-0.6
Germany	0.2	0.4
France	0.1	0.0
Italy	-0.2	-2.4
United Kingdom	0.9	0.0

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

Source: Country Statistical Agencies

http://www.bea.gov/national/index.htm#gdp

There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). Japan’s exports decreased 4.1 percent in the 12 months ending in Nov, 6.5 percent in the 12 months ending in Oct, 10.3 percent in the 12 months ending in Sep, 5.8 percent in the 12 months ending in Aug and 8.1 percent in 12 months ending in Jul while imports increased 0.8 percent in the 12 months ending in Nov, decreased 1.6 percent in the 12 months ending in Oct, increased 4.1 in the 12 months ending in Sep, decreased 5.4 percent in the 12 months ending in Aug and increased 2.1 percent in the 12 months ending in Jul. The second part of Table V-4 shows that net trade deducted 0.3 percentage points from Japan’s growth of GDP in IIQ2012 and deducted 2.9 percentage points from GDP growth in IIIQ2012. China’s exports fell 1.8 percent in the month of Jul and increased 1.0 percent in 12 months. In Aug 2012, China’s exports increased 0.6 percent and increased 2.7 percent in 12 months. Trade rebounded in China in Sep with growth of exports of 9.9 percent in the 12 months ending in Sep and 2.4 percent for imports. There was further growth in China’s exports of 11.6 percent in the 12 months ending in Oct while imports increased 2.4 percent. In Nov 2012, China’s exports increased 2.9 percent in 12 months and 7.3 percent in Jan-Nov 2012 while imports were unchanged in Nov 2012 and increased 4.1 percent in Jan-Nov 2012. Germany’s exports increased 0.3 percent in the month of Oct and increased 10.6 percent in the 12 months ending in Oct while imports increased 2.5 percent in the month of Oct and increased 6.0 percent in the 12 months ending in Oct. Net trade contributed 1.4 percentage points to growth of Germany’s GDP in IIQ2012 and contributed 1.4 percentage points in IIIQ2012. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, fell from 47.4 in Sep to 46.0 in Oct for the eighth consecutive month in contraction territory below 50.0 and much lower than the long-term average of the index of 52.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278). New export orders fell for sixteen consecutive months at the fastest rate of decline since Apr 2009. UK’s exports decreased 0.8 percent in Oct and decreased 2.7 percent in Aug-Oct 2012 relative to a year earlier while imports increased 1.9 percent in Oct and decreased 0.1 percent in Aug-Oct 2012 relative to a year earlier. Net trade deducted 0.9 percentage points from UK GDP growth in IIQ2012 and added 0.5 percentage points in IIIQ2012. France’s exports increased 0.7 percent in Oct while imports decreased 0.2 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012. US exports decreased 3.6 percent in Oct 2012 and goods exports increased 4.7 percent in Jan-Oct relative to a year earlier but net trade added 0.38 percentage points to GDP growth in IIIQ2012. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

In the six months ending in Nov 2012, United States national industrial production accumulated increase of 0.3 percent at the annual equivalent rate of 0.6 percent, which is much lower than 2.5 percent growth in 12 months. Capacity utilization for total industry in the United States fell increased 0.7 percentage points in Nov to 78.4 percent from 77.7 percent in Oct, which is 1.9 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 1.1 percent in Nov seasonally adjusted, increasing 2.5 percent not seasonally adjusted in 12 months, and increased 0.1 percent in the six months ending in Nov or at the annual equivalent rate of 0.2 percent (Section VA and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.

Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points

	Exports M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	-3.6 Oct	4.7 Jan-Oct	-2.1 Oct	3.8 Jan-Oct
Japan		Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1		Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1
China	-1.8 Jul 0.6 Aug 4.7 Sep -5.7 Oct	1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4 11.6 Oct 7.8 Jan-Oct 2.9 Nov 7.3 Jan-Nov	2.2 Jul -0.3 Aug 4.9 Sep -9.4 Oct	4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep 2.4 Oct 4.6 Jan-Oct 0.0 Nov 4.1 Jan-Nov
Euro Area	8.6 12-M Oct	8.6 Jan-Oct	7.0 12-M Oct	2.1 Jan-Oct
Germany	0.3 Oct CSA	10.6 Oct	2.5 Oct CSA	6.0 Oct
France Oct	0.7	4.9	-0.2	0.6
Italy Oct	0.0	12.0	0.8	0.9
UK	-0.8 Oct	-2.7 Aug-Oct 12/Aug-Oct 11	1.9 Oct	-0.1 Aug-Oct 12/Aug-Oct 11
Net Trade % Points GDP Growth	% Points
USA IIIQ2012	0.38
Japan	-0.3 IIQ2012 -2.9 IIIQ2012
Germany	1.4 IIQ2012 1.4 IIIQ2012
France	-0.4 IIQ2012   0.3 IIIQ2012
UK	-0.9 IIQ2012 0.5 IIIQ2012

Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm

http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html

http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp

http://www.insee.fr/en/

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

http://www.statistics.gov.uk/hub/index.html

The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Nov 2012. The share of Asia in Japan’s trade is more than one half, 54.8 percent of exports and 45.9 percent of imports. Within Asia, exports to China are 17.2 percent of total exports and imports from China 23.7 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 18.7 percent of total exports and share of imports from the US of 8.1 percent in total imports. Western Europe has share of 10.3 percent in Japan’s exports and of 11.4 percent in imports. Rates of growth of exports of Japan in Nov are sharply negative for all countries and regions with the exception of 5.3 percent for exports to the US, 11.0 percent for Mexico and 19.2 percent for the Middle East. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 4.1 percent in Nov 2012 while imports increased 0.8 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Nov are negative for some trading partners: minus 5.5 percent for the US, minus 4.5 percent for the Middle East and minus 14.2 percent for Australia. Imports from Asia increased 3.6 percent in the 12 months ending in Nov while imports from China increased 5.8 percent.

Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Nov 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	4,983,900	-4.1	5,937,332	0.8
Asia	2,729,189	-2.5	2,726,959	3.6
China	858,693	-14.5	1,406,156	5.8
USA	933,760	5.3	479,933	-5.5
Canada	59,616	-11.6	90,043	10.8
Brazil	33,595	-10.4	91,728	0.6
Mexico	74,434	11.0	31,446	20.9
Western Europe	513,037	-21.2	676,894	3.6
Germany	131,431	-14.1	190,133	7.7
France	37,419	-25.5	107,427	24.5
UK	89,427	-34.4	56,689	16.2
Middle East	183,230	19.2	1,034,102	-4.5
Australia	120,513	-1.5	338,643	-14.2

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm

Table V-6 of the World Trade Organization provides actual volume of world trade from 2008 to 2011 and projections of the World Trade Organization Secretariat for 2012 and 2013. Trade was weak during the global recession, increasing 2.3 percent in 2008 and decreasing 12.5 percent in 2009. Trade growth was 13.8 percent in 2010 and 5.0 percent in 2011. The World Trade Organization has reduced its projection of growth of world trade in 2012 to 2.5 percent.

Table V-6, World Trade Organization Projections of Growth of Volume of World Merchandise Trade and GDP, ∆%, 2008-2013

	2008	2009	2010	2011	2012*	2013*
World Trade Volume	2.3	-12.5	13.9	5.0	2.5	4.5
Exports
DE	0.9	-15.2	13.0	4.6	1.5	3.3
DINGE	4.3	-7.8	15.3	5.3	3.5	5.7
Imports
DE	-1.1	-14.4	11.0	2.9	0.4	3.4
DINGE	8.6	-10.5	18.3	8.3	5.4	6.1
Real GDP**	1.3	-2.4	3.8	2.4	2.1	2.4
DE	0.0	-3.8	2.7	1.5	1.2	1.5
DINGE	5.6	2.2	7.3	5.3	4.9	5.2

Notes: World Trade Volume: average of exports and imports; *Projections; **At market exchange rates; DE: Developed economies; DINGE: developing economies

Source: World Trade Organization Secretariat for trade, Consensus estimates of GDP forecasts

http://www.wto.org/english/news_e/pres12_e/pr676_e.htm

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, increased to 53.7 in Dec from 53.6 in Nov, indicating expansion at a moderate rate but at the fastest pace since IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). This index has remained above the contraction territory of 50.0 during 41 consecutive months. The index was driven by services with weaker expansion by manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). The employment index increased from 50.0 in Nov to 52.3 in Dec with continuing increases in input prices but at a marginally faster pace. David Hensley, Director of Global Economic Coordination at JP Morgan, finds encouraging signs in services while manufacturing vacillates but with sufficient overall strength that can continue in the first part of 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased to 50.2 in Dec from 48.6 in Nov, which is the first reading above 50 since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10543). New export business declined for the ninth consecutive month in Dec, but at the lowest rate of contraction since May 2012. David Hensley, Director of Global Economics Coordination at JP Morgan, finds improving global manufacturing at the end of the year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10543). The HSBC Brazil Composite Output Index, compiled by Markit, increased to 53.2 in Dec from 53.0 in Nov, indicating solid expansion at the fastest rate in nine months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). The HSBC Brazil Services Business Activity index, compiled by Markit, increased from 52.5 in Nov to 53.5 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). Andre Loes, Chief Economist, Brazil, at HSBC, finds improving expectations of economic activity in Brazil (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) decreased from 52.2 in Nov to 51.1 in Dec, indicating slower improvement of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10508). Andre Loes, Chief Economist, Brazil at HSBC, finds continuing expansion in Brazil’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10508).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).

New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465). The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) increased to 52.4 in Dec from 52.8 in Nov, which is the fastest growth rate since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10541). The index of new exports orders increased from 47.2 in Oct to 50.3 in Nov while total new orders increased from 51.1 in Oct to 53.6 in Nov. The index of new export orders increased from 50.3 in Nov to 52.6 in Dec, indicating expansion at a higher rate. Chris Williamson, Chief Economist at Markit, finds that manufacturing in the US is stronger at the end of the year and with expansion in countries such as Brazil and moderating sovereign debt crisis in Europe, US companies could benefit from stronger foreign demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10541). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® increased 1.2 percentage points from 49.5 in Nov to 50.7 Dec Nov, which is the third reading above 50.0 in seven months (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders was unchanged at 50.3 in Dec from 50.3 in Nov. The index of exports increased 4.5 percentage points from 47.0 in Nov to 51.5 in Dec, moving into expansion territory. The Non-Manufacturing ISM Report on Business^® PMI increased 1.4 percentage points from 54.7 in Nov to 56.1 in Dec, indicating growth during 41 consecutive months, while the index of new orders increased 1.2 percentage points from 58.1 in Nov to 59.3 in Dec (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.

Table USA, US Economic Indicators

Consumer Price Index	Nov 12 months NSA ∆%: 1.8; ex food and energy ∆%: 1.9 Nov month ∆%: -0.3; ex food and energy ∆%: 0.1 Blog12/16/12
Producer Price Index	Nov 12-month NSA ∆%: 1.5; ex food and energy ∆% 2.2 Nov month SA ∆% = -0.8; ex food and energy ∆%: 0.1 Blog 12/16/12
PCE Inflation	Nov 12-month NSA ∆%: headline 1.4; ex food and energy ∆% 1.5 Blog 12/23-24/12
Employment Situation	Household Survey: Nov Unemployment Rate SA 7.8% Blog calculation People in Job Stress Dec: 29.5 million NSA, 18.6% of Labor Force Establishment Survey: Nov Nonfarm Jobs +155,000; Private +161,000 jobs created  Nov 12-month Average Hourly Earnings Inflation Adjusted ∆%: 0.0 Blog 1/6/13
Nonfarm Hiring	Nonfarm Hiring fell from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million Private-Sector Hiring Oct 2012 4.352 million lower by 0.912 million than 5.264 million in Oct 2005 Blog 12/16/12
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2012 2.6 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 Blog 12/23-24/12
Real Private Fixed Investment	SAAR IIIQ2012 0.9 ∆% IVQ2007 to IIIQ2012: minus 12.6% Blog 12/23-24/12
Personal Income and Consumption	Nov month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.8 Real Personal Consumption Expenditures (RPCE): 0.6 12-month Nov NSA ∆%: RDPI: 2.5; RPCE ∆%: 2.1 Blog 12/23-24/2012
Quarterly Services Report	IIIQ12/IIIQ11 SA ∆%: Information 2.1 Professional 6.0 Administrative 3.9 Hospitals 7.4 Financial & Insurance 6.5 Blog 12/9/12
Employment Cost Index	Compensation Private IIIQ2012 SA ∆%: 0.5 Sep 12 months ∆%: 2.0 Blog 11/4/12
Industrial Production	Nov month SA ∆%: minus 1.1 Nov 12 months SA ∆%: 2.5 Manufacturing Nov SA ∆% 1.1 Nov 12 months SA ∆% 2.7, NSA 2.5 Capacity Utilization: 78.4 Blog 12/23-24/12
Productivity and Costs	Nonfarm Business Productivity IIIQ2012∆% SAAE 2.9; IIIQ2012/IIIQ2011 ∆% 1.7; Unit Labor Costs SAAE IIIQ2012 ∆% -1.9; IIIQ2012/IIIQ2011 ∆%: 0.1 Blog 12/9/2012
New York Fed Manufacturing Index	General Business Conditions From Nov -5.22 to Dec -8.10 New Orders: From Nov 3.08 to Dec -3.70 Blog 12/23-24/12
Philadelphia Fed Business Outlook Index	General Index from Nov -10.7 to Dec 8.1 New Orders from Nov minus 4.6 to Dec 10.7 Blog 12/23-24/12
Manufacturing Shipments and Orders	New Orders SA Nov ∆% 0.0 Ex Transport 0.2 Jan-Nov NSA New Orders 3.2 Ex transport 2.4 Blog 1/6/13
Durable Goods	Nov New Orders SA ∆%: 0.7; ex transport ∆%: 1.6 Jan-Nov New Orders NSA ∆%: 4.5; ex transport ∆% 2.8 Blog 12/23-24/12
Sales of New Motor Vehicles	Jan-Dec 2012 14,491,873; Jan-Dec 2011 12,777,939. Dec SAAR 15.37 million, Nov SAAR 15.54 million, Dec 2011 SAAR 13.61 million Blog 1/6/13
Sales of Merchant Wholesalers	Jan-Oct 2012/Jan-Oct 2011 NSA ∆%: Total 5.5; Durable Goods: 6.4; Nondurable Goods: 4.8 Blog 12/16/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Oct 12/Oct 11 NSA ∆%: Sales Total Business 6.3; Manufacturers 5.4 Retailers 5.4; Merchant Wholesalers 8.2 Blog 12/16/12
Sales for Retail and Food Services	Jan-Nov 2012/Jan-Nov 2011 ∆%: Retail and Food Services 5.5; Retail ∆% 5.2 Blog 12/16/12
Value of Construction Put in Place	Nov SAAR month SA ∆%: -0.3 Nov 12-month NSA: 7.9 Jan-Nov 2012 ∆% 9.2 Blog 1/6/13
Case-Shiller Home Prices	Oct 2012/Oct 2011 ∆% NSA: 10 Cities 3.4; 20 Cities: 4.3 ∆% Oct SA: 0.6 10 Cities 0.4 ; 20 Cities: 0.7 Blog 12/30/12
FHFA House Price Index Purchases Only	Oct SA ∆% 0.5; 12 month NSA ∆%: 5.6 Blog 12/30/12
New House Sales	Nov 2012 month SAAR ∆%: 4.4 Jan-Nov 2012/Jan-Nov 2011 NSA ∆%: 20.1 Blog 12/30/12
Housing Starts and Permits	Nov Starts month SA ∆%: -3.0 ; Permits ∆%: 3.6 Jan-Nov 2012/Jan-Nov 2011 NSA ∆% Starts 27.1; Permits  ∆% 32.8 Blog 12/23-24/12
Trade Balance	Balance Oct SA -$44240 million versus Sep -$40277 million Exports Oct SA ∆%: -3.6 Imports Oct SA ∆%: -2.1 Goods Exports Jan-Oct 2012/2011 NSA ∆%: 4.7 Goods Imports Jan-Oct 2012/2011 NSA ∆%: 3.8 Blog 12/16/12
Export and Import Prices	Nov 12-month NSA ∆%: Imports -1.6; Exports 0.7 Blog 12/16/12
Consumer Credit	Oct ∆% annual rate: 6.2 Blog 12/9/12
Net Foreign Purchases of Long-term Treasury Securities	Oct Net Foreign Purchases of Long-term Treasury Securities: $1.3 billion Major Holders of Treasury Securities: China $1161 billion; Japan $1135 billion; Total Foreign US Treasury Holdings Oct $5482 billion Blog 12/23-24/12
Treasury Budget	Fiscal Year 2013/2012 ∆% Nov: Receipts 9.7; Outlays 15.8; Individual Income Taxes 12.5 Deficit Fiscal Year 2011 $1,297 billion Deficit Fiscal Year 2012 $1,089,353 million Blog 12/16/2012
CBO Budget and Economic Outlook	2012 Deficit $1128 B 7.3% GDP Debt 11,318 B 72.8% GDP 2013 Deficit $614 B, Debt 12,064 B 76.1% GDP Blog 8/26/12 11/18/12
Commercial Banks Assets and Liabilities	Nov 2012 SAAR ∆%: Securities 0.9 Loans -2.7 Cash Assets 55.6 Deposits 5.5 Blog 12/30/12
Flow of Funds	IIIQ2012 ∆ since 2007 Assets -$2059B Real estate -$4035B Financial +$1529 MM Net Worth -$1232B Blog 12/9/12
Current Account Balance of Payments	IIIQ2012 -$128 B %GDP 3.3 Blog 12/23-24/12

Links to blog comments in Table USA:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html

11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

Motor vehicle sales and production in the US have been in long-term structural change. Table VA-1 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan-Dec 2012, light vehicle sales accumulated to 14,491,873, which is higher by 13.4 percent relative to 12,777,939 a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 15.37 million in Dec 2012, lower than 15.54 million in Nov 2012 and higher than 13.61 million in Dec 2011 (http://motorintelligence.com/m_frameset.html).

Table VA-1, US, New Motor Vehicle Sales and Car Production, Thousand Units

	New Motor Vehicle Sales	New Car Sales and Leases	New Truck Sales and Leases	Domestic Car Production
1990	14,137	9,300	4,837	6,231
1991	12,725	8,589	4,136	5,454
1992	13,093	8,215	4,878	5,979
1993	14,172	8,518	5,654	5,979
1994	15,397	8,990	6,407	6,614
1995	15,106	8,536	6,470	6,340
1996	15,449	8,527	6,922	6,081
1997	15,490	8,273	7,218	5,934
1998	15,958	8,142	7,816	5,554
1999	17,401	8,697	8,704	5,638
2000	17,806	8,852	8,954	5,542
2001	17,468	8,422	9,046	4,878
2002	17,144	8,109	9,036	5,019
2003	16,968	7,611	9,357	4,510
2004	17,298	7,545	9,753	4,230
2005	17,445	7,720	9,725	4,321
2006	17,049	7,821	9,228	4,367
2007	16,460	7,618	8,683	3,924
2008	13,494	6,814	6.680	3,777
2009	10,601	5,456	5,154	2,247
2010	11,772	5,729	6,044	2,840

Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Chart VA-1 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2012. Output has stagnated since the late 1990s.

Chart VA-1, US, Motor Vehicles and Parts Output, 1972-2012

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/G17/Current/default.htm

Manufacturers’ shipments increased 0.4 percent in Nov 2012 after increasing 0.3 percent in Oct 2012 and increasing 0.7 percent in Sep 2012. New orders increased 0.0 percent in Nov following increase by 0.8 percent in Oct and 4.5 percent in Sep, as shown in Table VA-2. These data are very volatile. Volatility is illustrated by increase of 2642.2 percent of new orders of nondefense aircraft in Sep 2012 following decline by 97.2 percent in Aug. New orders excluding transportation equipment increased 0.2 percent in Nov. Capital goods new orders, indicating investment, decreased 2.7 percent in Nov after increasing 1.4 percent in Oct and 24.2 percent in Sep but decreasing 25.8 percent in Aug. New orders of nondefense capital goods decreased 2.9 percent in Nov after increasing 2.6 percent in Oct and 22.8 percent in Sep but falling 23.9 percent in Aug. Excluding more volatile aircraft, capital goods orders increased 2.6 percent in Nov and 3.0 percent in Oct.

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Nov 2012 ∆%	Oct 2012  ∆%	Sep 2012  ∆%
Total
S	0.4	0.3	0.7
NO	0.0	0.8	4.5
Excluding Transport
S	0.1	0.4	0.7
NO	0.2	1.0	1.2
Excluding Defense
S	0.4	0.3	0.7
NO	0.1	0.8	4.1
Durable Goods
S	1.6	0.0	0.5
NO	0.8	1.1	9.1
Machinery
S	3.3	1.2	-0.8
NO	3.0	3.5	7.8
Computers & Electronic Products
S	-1.4	-0.4	2.3
NO	0.5	1.8	-0.5
Computers
S	13.5	-23.2	15.1
NO	21.5	-20.4	11.5
Transport Equipment
S	2.2	-0.3	0.8
NO	-1.0	-0.6	29.7
Automobiles
S	8.2	2.7	3.3
Motor Vehicles
S	1.9	2.3	-0.9
NO	2.8	3.5	-2.4
Nondefense Aircraft
S	0.2	0.5	13.6
NO	-13.8	0.2	2642.2
Capital Goods
S	1.5	-0.1	1.8
NO	-2.7	1.4	24.2
Nondefense Capital Goods
S	1.4	0.2	1.4
NO	-2.9	2.6	22.8
Capital Goods ex Aircraft
S	2.0	0.4	-0.3
NO	2.6	3.0	-0.5
Nondurable Goods
S	-0.6	0.5	0.9
NO	-0.6	0.5	0.9

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

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

Chart VA-2 of the US Census Bureau provides new orders of manufacturers from Dec 2011 to Nov 2012. There is significant volatility that prevents discerning clear trends.

Chart VA-2, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr022.html

Chart VA-3 of the US Census Bureau provides total value of manufacturers’ new orders, seasonally adjusted, from 1992 to 2012. Seasonal adjustment reduces sharp oscillations. The series dropped nearly vertically during the global recession but rose along a path even steeper than in the high-growth period before the recession. The final segment suggests deceleration but similar segments are found in earlier periods followed with continuing growth interrupted by the 5.1 percent drop in Aug but recovery of 4.5 percent in Sep and 0.8 percent in Oct with no growth in Nov.

Chart VA-3, US, Value of Total Manufacturers’ New Orders, Seasonally Adjusted, 1992-2012

Source: US Census Bureau

http://www.census.gov/manufacturing/m3/

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-3. Values are cumulative millions of dollars in Jan-Nov 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Nov 2012 total $5262.1 billion and new orders total $5183.2 billion, growing respectively by 4.5 percent and 3.2 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 3.6 percent and new orders increased 2.4 percent. Excluding defense, shipments grew 4.7 percent and new orders grew 3.6 percent. Durable goods shipments reached $2468.2 billion in Jan-Nov 2012, or 46.9 percent of the total, growing by 7.3 percent, and new orders $2389.3 billion, or 46.1 percent of the total, growing by 4.5 percent. Important information in Table VA-3 is the large share of nondurable goods: with shipments of $2793.9 billion or 53.1 percent of the total, growing by 2.2 percent. Capital goods have relatively high value of $856.1 billion for shipments, growing 5.8 percent, and new orders $861.8 billion, growing 0.0 percent, which could be an indicator of future investment. Excluding aircraft, capital goods shipments reached $696.4 billion, growing 5.3 percent, and new orders $692.3 billion, growing 0.1 percent. There is no suggestion in these data that the US economy is close to recession but manufacturing accounts for 11.1 percent of US national income in IIIQ2012.

Table VA-3, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Nov 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/ 2011
Total	5,262,055	4.5	5,183,153	3.2
Excluding Transport	4,556,898	3.6	4,468,164	2.4
Excluding Defense	5,144,104	4.7	5,070,221	3.6
Durable Goods	2,468,153	7.3	2,389,251	4.5
Machinery	355,290	9.6	342,897	-3.1
Computers & Electronic Products	308,209	-0.7	233,320	-0.3
Computers	12,252	-27.6	12,472	-25.9
Transport Equipment	705,157	11.2	714,989	8.9
Automobiles	98,198	25.6
Motor Vehicles	208,784	5.4	207,470	4.8
Nondefense Aircraft	103,624	21.9	122,724	13.7
Capital Goods	856,120	5.8	861,753	0.0
Nondefense Capital Goods	764,674	7.4	776,252	1.9
Capital Goods ex Aircraft	696,402	5.3	692,280	0.1
Nondurable Goods	2,793,902	2.2	2,793,902	2.2
Food Products	668,055	2.6
Petroleum Refineries	756,370	5.1
Chemical Products	694,211	-1.4

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

Chart VA-4 of the US Census Bureau provides value of manufacturer’s new orders not seasonally adjusted from Jan 1992 to Nov 2012. Fluctuations are evident, which are smoothed by seasonal adjustment in the earlier Chart VA-3. The series drops nearly vertically during the global contraction and then resumes growth in a steep upward trend, flattening recently.

Chart VA-4, US, Value of Total Manufacturers’ New Orders, Not Seasonally Adjusted, 1992-2012

Source: US Census Bureau

http://www.census.gov/manufacturing/m3/

Construction spending at seasonally-adjusted annualized rate (SAAR) reached $865.9 billion in Nov, which was lower by 0.3 percent than in the prior month of Oct, as shown in Table VA-4. Residential investment, with $301.9 billion accounting for 34.9 percent of total value of construction, increased 0.4 percent in Nov and nonresidential investment, with $564.1 billion accounting for 65.1 percent of the total, decreased 0.6 percent. Public construction decreased 0.4 percent while private construction decreased 0.2 percent. Data in Table VA-4 show that nonresidential construction at $564.1 billion is much higher in value than residential construction at $301.9 billion while total private construction at $589.8 billion is much higher than public construction at $276.2 billion, all in SAAR. Residential and nonresidential construction contributed positively to growth of GDP in the US in IQ2012 and IIQ2012 but nonresidential investment deducted 0.19 percentage points from GDP growth in IIIQ2012 (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html).

Table VA-4, US, Value of Construction Put in Place in the United States Seasonally Adjusted Annual Rate Billion Dollars and Month and 12-Month ∆%  

	Nov 2012   SAAR  $ Millions	Month ∆%	12-Month ∆%
Total	865,989	-0.3	7.7
Residential	301,868	0.4	18.0
Nonresidential	564,121	-0.6	2.9
Total Private	589,770	-0.2	13.3
Private Residential	295,313	0.4	19.0
New Single Family	143,333	1.3	29.4
New Multi-Family	23,873	0.5	45.9
Private Nonresidential	294,458	-0.7	8.2
Total Public	276,218	-0.4	-2.6
Public Residential	6,555	1.5	-14.2
Public Nonresidential	269,663	-0.5	-2.3

SAAR: seasonally adjusted annual rate; B: billions

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Further information on construction spending is provided in Table VA-5. The original monthly estimates not-seasonally adjusted (NSA) and their 12-month rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011 but another bump in early 2012. On a monthly basis, construction fell three consecutive months from Dec 2010 to Feb 2011, increasing in ten of the eleven months from Mar 2011 to Jan 2012, with sole decline of 3.0 percent in Jul 2011. Improvement was interrupted in 2012 with decline of 0.5 percent in Feb 2012, further decline of 0.3 percent in Mar and recovery of 0.9 percent in Apr, 1.7 percent in May and 0.8 percent in Jun with strong 1.1 percent in Aug and 1.4 percent in Oct 2012. The 12 months rates of change improved from minus 8.6 percent in Apr 2011 to the first positive 12-month percentage change of 0.7 percent in Nov and further improvement with 10.8 percent in Oct 2012.

Table VA-5, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%

	Value NSA Month $ Millions	12-Month ∆% NSA	Value SAAR $ Millions	Month ∆% SA*
Nov 2012	73,911	7.9	865,989	-0.3
Oct	80,681	10.1	868,215	0.7
Sep	79,357	7.9	862,220	0.7
Aug	81,457	8.5	855,916	1.1
Jul	78,070	11.6	846,645	0.2
Jun	76,491	7.3	845,072	0.8
May	71,635	8.8	838,778	1.7
Apr	66,201	9.1	825,133	0.9
Mar	60,939	8.6	817,842	-0.3
Feb	56,108	11.8	820,677	-0.5
Jan	56,535	10.9	824,687	0.5
Dec 2011	62,825	4.4	820,614	2.1
Nov	68,476	0.7	804,046	1.0
Oct	73,282	-0.3	795,733	0.7
Sep	73,515	-1.7	790,294	0.5
Aug	75,101	-1.0	786,308	3.0
Jul	69,929	-4.3	763,468	-3.0
Jun	71,297	-3.7	786,784	1.4
May	65,845	-4.4	775,837	2.7
Apr	60,682	-8.6	755,420	0.3
Mar	56,130	-6.8	753,433	1.0
Feb	50,184	-7.1	746,056	-0.9
Jan	50,971	-8.3	752,638	-3.5
Dec 2010	60,202	-6.1	779,895	-2.3

SAAR: Seasonally-adjusted Annual Rate

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

The sharp contraction of the value of construction in the US is revealed by Table VA-6. Construction spending in Jan-Nov 2012, not seasonally adjusted, reached $781.4 billion, which is higher by 9.2 percent than $715.4 billion in the same period in 2011. The depth of the contraction is shown by the decline of construction spending from $1,103.9 billion in Jan-Nov 2006 to only $781.4 billion in the same period in 2012, or decline by minus 29.2 percent. The comparable decline from Jan-Nov 2005 to Jan-Nov 2012 is minus 25.8 percent. Construction spending in Jan-Nov 2012 fell by 7.5 percent relative to the same period in 2003. Construction spending is lower by 7.3 percent in Jan-Nov 2012 relative to the same period in 2009. Construction has been weaker than the economy as a whole.

Table VA-6, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Millions and ∆%

Jan-Nov 2012 $ MM	781,387
Jan-Nov 2011 $ MM	715,412
∆% to 2012	9.2
Jan-Nov 2010 $ MM	743,555
∆% to 2012	5.1
Jan-Nov 2009 $MM	843,070
∆% to 2012	-7.3
Jan-Nov 2006 $ MM	1,103,891
∆% to 2012	-29.2
Jan-Nov 2005 $ MM	1,053,350
∆% to 2012	-25.8
Jan-Nov 2003 $ MM	844,296
∆% to 2012	-7.5

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Chart VA-5 of the US Census Bureau provides value of construction spending in the US not seasonally adjusted from 2002 to 2012. There are wide oscillations requiring seasonal adjustment to compare adjacent data. There was sharp decline during the global recession followed in recent periods by a stationary series that may be moving upward again.

Chart VA-5, Value of Construction Spending not Seasonally Adjusted, Millions of Dollars, 2002-2012

Source: US Census Bureau

http://www.census.gov/construction/c30/c30index.html

Monthly construction spending in the US in the seven months Apr-Sep not seasonally adjusted is shown in Table VA-7 for the years between 2002 and 2012. The values of $73.9 billion in Nov 2012, $68.5 billion in Nov 2011 and $68.0 billion in Nov 2010 are lower than $77.9 billion in Nov 2003 and also lower than $71.4 billion in Nov 2002 with only marginally higher value for Nov 2012. Construction fell by 24.4 percent from the peak of $97.8 billion Nov 2005 to $73.9 billion in Nov 2012. The data are not adjusted for inflation or changes in quality.

Table VA-7, US, Value of Construction Spending Not Seasonally Adjusted, Millions of Dollars

Year	Jul	Aug	Sep	Oct	Nov
2002	78,863	79,460	76,542	75,710	71,362
2003	82,971	85,191	83,841	83,133	77,915
2004	93,614	96,164	92,538	90,582	86,394
2005	103,158	106,706	103,269	102,339	97,549
2006	108,423	110,434	104,191	101,582	95,339
2007	107,090	110,430	105,150	103,847	94,822
2008	98,483	99,786	96,755	95,612	86,067
2009	83,379	84,368	81,213	79,949	71,906
2010	73,077	75,834	74,764	73,470	68,019
2011	69,929	75,101	73,515	73,282	68,476
2012	78,070	81,457	79,357	80,681	73,911

Source: US Census Bureau

http://www.census.gov/construction/c30/c30index.html

Chart VA-6 of the US Census Bureau shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages defaulted with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession. Chart VA-6 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained.

Chart VA-6, US, Construction Expenditures SAAR 1993-2012

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr050.html

Construction spending at SAARs in the four months Aug to Nov is shown in Table VA-8 for the years between 2002 and 2012. There is a peak in 2006 to 2007 with subsequent collapse of SAARs and rebound in 2012.

Table VA-8, US, Value of Construction Spending SAAR Millions of Dollars

Year	Aug	Sep	Oct	Nov
2002	839,008	832,134	839,690	844,697
2003	901,839	911,589	925,732	925,985
2004	1,013,724	1,012,290	1,015,562	1,023,210
2005	1,119,782	1,131,739	1,145,663	1,156,977
2006	1,158,193	1,151,104	1,139,292	1,137,488
2007	1,160,593	1,165,162	1,152,511	1,127,558
2008	1,057,459	1,056,666	1,050,690	1,029,211
2009	889,643	880,259	869,374	850,732
2010	791,653	798,916	800,266	798,328
2011	786,308	790,294	795,733	804,046
2012	855,916	862,220	868,215	865,989

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Chart VA-9 of the US Census Bureau provides SAARs of value of construction from 2002 to 2012. There is clear acceleration after 2003 when fed funds rates were fixed in at 1.0 percent in Jun 2003 until Jun 2004. Construction peaked in 2005-2006, stabilizing in 2007 at a lower level and then collapsed in a nearly vertical drop until 2011 with increases into 2012.

Chart VA-7, US, Construction Expenditures SAAR 2002-2012

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Annual available data for the value of construction put in place in the US between 1993 and 2011 are provided in Table VA-9. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 60.3 percent between 1993 and 2011 but most of the growth, 65.3 percent, was concentrated in 1993 to 2000 with decline of 3.1 percent between 2000 and 2011. Total value of construction fell 8.2 percent between 2002 and 2011 with value of nonresidential construction increasing 19.4 percent while value of residential construction fell 38.9 percent. Value of total construction fell 31.7 percent between 2005 and 2011, with value of residential construction declining 60.2 percent while value of nonresidential construction rose 9.4 percent. Value of total construction fell 33.3 percent between 2006 and 2011, with value of nonresidential construction decreasing 2.7 percent while value of residential construction fell 60.4 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2011, the share of nonresidential construction in total value rose to 68.4 percent while that of residential construction fell to 31.6 percent.

Table VA-9, Annual Value of Construction Put in Place 1993-2011, Millions of Dollars and ∆% 

	Total	Private Nonresidential	Private Residential
1993	485,548	150,006	208,180
1994	531,892	160,438	241,033
1995	548,666	180,534	228,121
1996	599,693	195,523	257,495
1997	631,853	213,720	264,696
1998	688,515	237,394	296,343
1999	744,551	249,167	326,302
2000	802,756	275,293	346,138
2001	840,249	273,922	364,414
	Total	Total Nonresidential	Total Private Residential
2002	847,874	445,914	401,960
2003	891,497	440,246	451,251
2004	991,356	452,948	538,408
2005	1,140,136	486,629	617,507
2006	1,167,222	547,408	619,814
2007	1,152,351	651,883	500,468
2008	1,067,564	709,818	357,746
2009	903,201	649,273	253,928
2010	804,561	555,449	249,112
2011	778,238	532,552	245,686
∆% 1993-2011	60.3
∆% 1993-2000	65.3
∆% 2000-2011	-3.1
∆% 2002-2011	-8.2	19.4	-38.9
∆% 2005-2011	-31.7	9.4	-60.2
∆% 2006-2011	-33.3	-2.7	-60.4

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Chart VA-8 shows sharp growth of residential construction spending in the US from 2002 to 2012. The value of construction spending dropped sharply during the global recession and has remained at a low plateau with an apparent increase in the final segment.

Chart, VA-8, US, Residential Construction, Not Seasonally Adjusted, Millions of Dollars, 2002-2012

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

Nonresidential construction has been more resilient. Chart VA-9 provides the value of nonresidential construction not seasonally adjusted. There was more moderate growth of nonresidential construction with more prudent business management and fewer subsidies. Nonresidential construction also declined during the global recession but less sharply than residential construction and has remained at a lower plateau.

Chart, VA-9, US, Nonresidential Construction, Not Seasonally Adjusted, Millions of Dollars, 2002-2012

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf). For fiscal 2013, the forecast is of growth of GDP between 1.3 and 1.8 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.1 to 0.7 percent and the all items CPI less fresh food of 0.2 to 0.6 percent. These forecasts are biannual in Apr and Oct.

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

Fiscal Year Date of Forecast	Real GDP	Domestic CGPI	CPI All Items Less Fresh Food
2011
Apr 2012	-0.2 to –0.2 [-0.2]	+1.7	0.0
Jan 2012	-0.4 to –0.3 [-0.4]	+1.8 to +1.9 [+1.8]	-0.1 to 0.0 [-0.1]
2012
Oct 2012	+1.4 to +1.6 [+1.5]	-1.2 to -0.9 [-1.1]	-0.1 to -0.1 [-0.1]
Jul 2012	+2.2 to +2.4 [+2.2]	-0.3 to 0.0 [-0.2]	+0.1 to +0.3 [+0.2]
Apr 2012	+2.1 to +2.4 [+2.3]	+0.4 to +0.7 [+0.6]	+0.1 to +0.4 [+0.3]
Jan 2012	+1.8 to +2.1 [+2.0]	-0.1 to +0.2 [+0.1]	0.0 to +0.2 [+0.1]
2013
Oct 2012	+1.3 to +1.8 [+1.6]	+0.1 to +0.7 [+0.5]	+0.2 to +0.6 [+0.4]
Jul 2012	+1.6 to +1.8 [+1.7]	+0.6 to +0.8 [+0.6]	+0.5 to +0.7 [+0.7]
Apr 2012	+1.6 to +1.8 [+1.7]	+0.7 to +0.9 [+0.8]	+0.5 to +0.7 [+0.7]
Jan 2012	+1.4 to +1.7 [+1.6]	+0.6 to 1.0 [+0.8]	+0.4 to +0.5 [+0.5]
2014
Oct 2012	+0.2 to +0.7] [+0.6]	+3.7 to +4.4 [+4.2]	+2.4 to +3.0 [+2.8]

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

Source: Policy Board, Bank of Japan

http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf

Private-sector activity in Japan contracted at a marginal rate with the Markit Composite Output PMI^™ Index decreasing from 49.9 in Nov to 49.3 in Dec, which is marginally lower than 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10549). Paul Smith, economist at Markit and author of the report, finds that growth in services suggests strength but with weakness in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10549). The Markit Business Activity Index of Services increased marginally from 51.4 in Nov to 51.5 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10394). The Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, decreased from 46.5 in Nov to 45.0 in Dec for the lowest reading in 44 months and the seventh consecutive month of contraction below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10470). Foreign orders fell for the ninth consecutive month with weakness in markets in Europe and China. Paul Smith, economist at Markit and author of the report, finds weakness in foreign and domestic demand with marked decline of output and particularly in new orders for capital goods (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10470).Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 8/9/11 Table 26
Corporate Goods Prices	Nov ∆% 0.0 12 months ∆% minus 0.9 Blog 12/16/12
Consumer Price Index	Nov NSA ∆% -0.4; Nov 12 months NSA ∆% -0.2 Blog 12/30/12
Real GDP Growth	IIIQ2012 ∆%: minus 0.9 on IIQ2012;  IIIQ2012 SAAR minus 3.5; ∆% from quarter a year earlier: 0.5 % Blog 12/16/12
Employment Report	Nov Unemployed 2.60 million Change in unemployed since last year: minus 210 thousand Unemployment rate: 4.1% Blog 12/30/12
All Industry Indices	Oct month SA ∆% 0.2 12-month NSA ∆% 0.1 Blog 12/23-24/12
Industrial Production	Nov SA month ∆%: -1.7 12-month NSA ∆% -5.8 Blog 12/30/12
Machine Orders	Total Oct ∆% -1.6 Private ∆%: -10.7 Oct ∆% Excluding Volatile Orders 2.8 Blog 12/16/12
Tertiary Index	Oct month SA ∆% minus 0.1 Oct 12 months NSA ∆% 1.1 Blog 12/16/12
Wholesale and Retail Sales	Nov 12 months: Total ∆%: -0.8 Wholesale ∆%: -1.5 Retail ∆%: 1.3 Blog 12/30/12
Family Income and Expenditure Survey	Nov 12-month ∆% total nominal consumption 0.1, real 0.2 Blog 12/30/12
Trade Balance	Exports Nov 12 months ∆%: minus 4.1 Imports Nov 12 months ∆% 0.8 Blog 12/23-24/12

Links to blog comments in Table JPY:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

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

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Table CIPMNM provides this index and components from Jan to No 2012. The index fell from 58.0 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug and 53.7 in Sep but rebounded to 55.5 in Oct and 55.6 in Nov 2012.

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

2012	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Nov	55.6	53.2	52.5	48.4	64.6
Oct	55.5	51.6	58.1	50.5	63.4
Sep	53.7	51.8	57.5	51.3	60.9
Aug	56.3	52.7	57.6	51.2	63.2
Jul	55.6	53.2	49.7	48.7	63.9
Jun	56.7	53.7	52.1	48.6	65.5
May	55.2	52.5	53.6	48.5	65.4
Apr	56.1	52.7	57.9	50.3	66.1
Mar	58.0	53.5	60.2	52.0	66.6
Feb	57.3	52.7	59.0	51.2	63.8
Jan	55.7	52.2	58.2	51.1	65.3

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Nov 2011 to Nov 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 2012 and sharper drop to 53.7 in Sep 2012, rebounding to 55.5 in Oct 2012 and 55.6 in Nov 2012.

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Table CIPMMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul and to the contraction zone at 49.2 in Aug and 49.8 in Sep, climbing above 50.0 to 50.2 in Oct and 50.6 in Nov. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug, climbing above 50.0 to 51.2 in Nov 2012. The index of employment also fell from 51.0 in Apr to 49.1 in Aug and further down to 48.7 in Nov 2012.

Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted

2012	IPM	PI	NOI	INV	EMP	SDEL
Nov	50.6	52.5	51.2	47.9	48.7	49.9
Oct	50.2	52.1	50.4	47.3	49.2	50.1
Sep	49.8	51.3	49.8	47.0	48.9	49.5
Aug	49.2	50.9	48.7	45.1	49.1	50.0
Jul	50.1	51.8	49.0	48.5	49.5	49.0
Jun	50.2	52.0	49.2	48.2	49.7	49.1
May	50.4	52.9	49.8	45.1	50.5	49.0
Apr	53.3	57.2	54.5	48.5	51.0	49.6
Mar	53.1	55.2	55.1	49.5	51.0	48.9
Feb	51.0	53.8	51.0	48.8	49.5	50.3
Jan	50.5	53.6	50.4	49.7	47.1	49.7

IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Chart CIPMMFG provides the manufacturing index of purchasing managers from Nov 2011 to Nov 2012. There is deceleration from 51.2 in Sep 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011. The index then fell to contraction at 49.2 in Aug 2012 and improved to 49.8 in Sep with movement to 50.2 in Oct 2012 and 50.6 in Nov 2012 above the neutral zone of 50.0.

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Cumulative growth in the first three quarters of 2012 relative to the same period in 2011 was 7.7 percent. Secondary industry accounts for 46.8 percent of GDP of which industry alone for 40.1 percent and construction with the remaining 6.7 percent. Tertiary industry accounts for 43.8 percent of GDP and primary industry for 9.4 percent. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-GDP provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012 and 9.1 percent in IIIQ2012.

Table VC-GDP, China, Cumulative and Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%

Cumulative GDP	Value Current CNY 100 Million	Cumulative Three First Quarters of 2012 Relative to Cumulative Three First Quarters of 2012 ∆% Inflation Adjusted
GDP	353,480.0	7.7
Primary Industry	33,088.0	4.2
Farming	33,088.0	4.2
Secondary Industry	165,428.5	8.1
Industry	141,641.5	7.9
Construction	23,787.0	9.2
Tertiary Industry	154,963.5	7.9
Transport, Storage, Post	18,941.0	6.7
Wholesale, Retail Trades	31,651.2	11.8
Hotel & Catering Services	7,015.6	7.6
Financial Intermediation	22,465.2	9.5
Real Estate	20,789.6	2.7
Other	54,101.0	7.7
Growth in Quarter Relative to Prior Quarter	∆% on Prior Quarter	∆% Annual Equivalent
2012
IIIQ2012	2.2	9.1
IIQ2012	2.0	8.2
IQ2012	1.5	6.1
2011
IVQ2011	1.7	7.0
IIIQ2011	2.4	9.9
IIQ2011	2.5	10.4
IQ2011	2.2	9.1

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Table VD-GDPb provides growth of GDP in China relative to a year earlier and relative to prior quarter. Growth of GDP relative to a year earlier decelerated from 12.1 percent in IQ2010 to 7.4 percent in IIIQ2012. Growth of secondary industry decelerated from 14.5 percent in IQ2010 to 7.9 percent in IIIQ2012.

Table VC-GDPb, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter

	IQ 2011	IIQ 2011	IIIQ 2011	IVQ 2011	IQ     2012	IIQ 2012	IIIQ 2012
GDP	9.7	9.5	9.1	8.9	8.1	7.6	7.4
Primary Industry	3.5	3.2	3.8	4.5	3.8	4.3	4.2
Secondary Industry	11.1	11.0	10.8	10.6	9.1	8.3	8.1
Tertiary Industry	9.1	9.2	9.0	8.9	7.5	7.7	7.9
GDP ∆% Relative to a Prior Quarter	2.2	2.3	2.4	1.9	1.8	1.8	2.2
	IQ 2010	IIQ 2010	IIIQ 2010	IVQ 2010
GDP	12.1	11.2	10.7	12.1
Primary Industry	3.8	3.6	4.0	3.8
Secondary Industry	14.5	13.3	12.6	14.5
Tertiary Industry	10.5	9.9	9.7	10.5

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/enGliSH

The HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit ((http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10452) is improving. The overall Flash China Manufacturing PMI^™ increased marginally from 50.5 in Nov to 50.9 in Dec for a fourteen-month high while the Flash China Manufacturing Output Index decreased from 51.3 in Nov to 50.5 in Dec, both in expansion territory above 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China is improving because of internal demand while still requiring further easing policy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10452).The HSBC China Services PMI^™, compiled by Markit, shows marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 51.6 in Nov to 51.8 in Dec for the fourth consecutive month of increasing output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10556). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that combined manufacturing and services data suggest growth of 8 percent in IVQ2012 GDP relative to a year earlier (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10556). The HSBC Business Activity index decreased from 52.1 in Nov to 51.7 in Dec with continuing growth in services at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10556). Hongbin Ku, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds strength in services from new orders and growth of employment (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10556). The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, increased to 51.5 in Dec from 50.5 in Nov, indicating moderate activity, which is the highest reading since May 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10489). Weak export orders were attributed to weakness in Europe, Japan and the US. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds gradual improvement of the economy of China with reduction of stocks and continuing government stimulus that is consistent with probable growth of GDP at 8.6 percent in 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10489).

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

Table CNY, China, Economic Indicators

Price Indexes for Industry	Nov 12-month ∆%: minus 2.2 Nov month ∆%: minus 0.1 Blog 12/16/12
Consumer Price Index	Nov month ∆%: 0.1 Nov 12 months ∆%: 2.0 Blog 12/16/12
Value Added of Industry	Nov month ∆%: 0.86 Jan-Nov 2012/Jan-Nov 2011 ∆%: 10.0 Blog 12/16/12
GDP Growth Rate	Year IIIQ2012 ∆%: 7.4 Quarter IIQ2012 ∆%: 2.2 Blog 10/21/12
Investment in Fixed Assets	Nov month ∆%: 1.26 Total Jan-Nov 2012 ∆%: 20.7 Real estate development: 16.7 Blog 12/16/12
Retail Sales	Nov month ∆%: 1.47 Nov 12 month ∆%: 14.9 Jan-Nov ∆%: 14.2 Blog 12/16/12
Trade Balance	Nov balance $19.6 billion Exports ∆% 2.9 Imports ∆% 0.0 Cumulative Nov: $199.54 billion Blog 12/16/12

Links to blog comments in Table CNY:

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

10/21/12 http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html

VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.4 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.4 percent in 2012 and 0.1 percent in 2013 but 1.4 percent in 2014.

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

Year	HICP ∆%	Unemployment %	GDP ∆%
1999	1.2	9.6	2.9
2000	2.2	8.7	3.8
2001	2.4	8.1	2.0
2002	2.3	8.5	0.9
2003	2.1	9.0	0.7
2004	2.2	9.3	2.2
2005	2.2	9.2	1.7
2006	2.2	8.5	3.2
2007	2.1	7.6	3.0
2008	3.3	7.6	0.4
2009	0.3	9.6	-4.4
2010	1.6	10.1	2.0
2011	2.7	10.1	1.4
2012*			-0.4
2013*			0.1
2014*			1.4

*EUROSTAT forecast Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, increased from 46.5 in Nov to 47.3 in Dec, for eleven consecutive declines and fifteen drops in sixteen months, with Oct registering the lowest reading since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10458). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index is consistent with GDP declining even by more than contraction of 0.1 percent in IIIQ2012 but improving outlook for return to growth next year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10458). The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.5 in Nov to 47.2 in Dec, which is the eleventh consecutive contraction; contraction spread in manufacturing and services throughout France, Italy and Spain but with growth in Germany (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10527). Chris Williamson, Chief Economist at Markit, finds that the data are consistent with sharper contraction in IVQ2012 but easing in all four of the largest economies (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10527). The Markit Eurozone Services Business Activity Index increased from 46.7 in Nov to 47.8 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10527). The Markit Eurozone Manufacturing PMI^® decreased marginally to 46.1 in Dec from 46.2 in Nov, which indicates contraction in seventeen consecutive months of deterioration of manufacturing business in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10479). New export orders declined in Dec for the eighteenth consecutive month with contracting demand within the euro area and deteriorating global markets. Chris Williamson, Chief Economist at Markit, finds that the survey data are consistent with decline of output at a quarterly rate of 1 percent in IVQ2012 but milder than in the autumn (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10479). Table EUR provides the regional data table for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2012 ∆% 0.1; IIIQ2012/IIIQ2011 ∆% 0.0 Blog 12/30/12
Unemployment	Oct 2012: 11.7% unemployment rate Oct 2012: 18.703 million unemployed Blog 12/2/12
HICP	Nov month ∆%: -0.2 12 months Nov ∆%: 2.2 Blog 12/16/12
Producer Prices	Euro Zone industrial producer prices Oct ∆%: 0.1 Oct 12-month ∆%: 2.6 Blog 12/9/12
Industrial Production	Oct month ∆%: -1.4; Oct 12 months ∆%: -3.6 Blog 12/16/12
Retail Sales	Oct month ∆%: minus 1.2 Oct 12 months ∆%: minus 1.6 Blog 12/9/12
Confidence and Economic Sentiment Indicator	Sentiment 85.7 Nov 2012 Consumer minus 26.9 Nov 2012 Blog 12/2/12
Trade	Jan-Oct 2012/Jan-Oct 2011 Exports ∆%: 8.6 Imports ∆%: 2.1 Oct 2012 12-month Exports ∆% 14.3 Imports ∆% 7.0 Blog 12/23-24/12

Links to blog comments in Table EUR:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html

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

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

Table VE-DE, Germany, GDP Annual ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	4.2	4.0
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1

The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, increased from 49.2 in Nov to 50.5 in Dec, which is the highest reading in eight months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10456). The pace of decline of new export orders for manufacturing was at the lowest in nine months, with some respondents finding enhanced demand in Asia and the US but continuing weakness in Europe. Tim Moore, Senior Economist at Markit and author of the report, finds growth in services compensating decline in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10560). The Markit Germany Composite Output Index of the Markit Germany Services PMI^®, combining manufacturing and services with close association with Germany’s GDP, increased from 49.2 in Nov to 50.3 in Dec, indicating a level above the neutral zone of 50.0 after seven consecutive months below 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10560). Tim Moore, Senior Economist at Markit and author of the report, finds that the composite index of manufacturing and services indicates four months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10383). The Germany Services Business Activity Index increased from 49.7 in Nov to 52.0 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10560). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing conditions, decreased from 46.8 in Nov to 46.0 in Dec for the tenth consecutive month in contraction territory below 50.0 and lower than the average of 46.7 for 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10538). New export orders fell for eighteen consecutive months with weak demand from internal and external clients. Tim Moore, Senior Economist at Markit and author of the report, finds continuing weakness in Germany’s manufacturing that cannot maintain strong performance in the beginning of the cyclical expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10538).Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIIQ2012 0.2 ∆%; III/Q2012/IIIQ2011 ∆% 0.4 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12 11/25/12
Consumer Price Index	Nov month NSA ∆%: -0.1 Nov 12-month NSA ∆%: 1.9 Blog 12/16/12
Producer Price Index	Nov month ∆%: 0.1 CSA, -0.1 NSA 12-month NSA ∆%: 1.4 Blog 12/23-24/12
Industrial Production	Mfg Oct month CSA ∆%: -2.4 12-month NSA: 2.7 Blog 12/9/12
Machine Orders	MFG Oct month ∆%: 3.9 Oct 12-month ∆%: 3.4 Blog 12/9/12
Retail Sales	Nov Month ∆% 1.2 12-Month ∆% -1.0 Blog 1/6/13
Employment Report	Unemployment Rate Nov 5.3% Blog 1/6/13
Trade Balance	Exports Oct 12-month NSA ∆%: 10.6 Imports Oct 12 months NSA ∆%: 6.0 Exports Oct month CSA ∆%: 0.3; Imports Oct month SA 2.5 Blog 12/16/12

Links to blog comments in Table DE:

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

11/25/12 http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real.html

8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html

Germany’s labor market continues to show strength not found in most of the advanced economies, as shown in Table VE-1. The number unemployed, not seasonally adjusted, decreased from 2.34 million in Nov 2011 to 2.26 million in Nov 2012, or 3.4 percent, while the unemployment rate decreased from 5.5 percent in Nov 2011 to 5.3 percent in Nov 2012. The number of persons in employment, not seasonally adjusted, increased from 40.18 million in Nov 2011 to 40.55 million in Nov 2012, or 0.9 percent, while the employment rate increased from 63.7 percent in Nov 2011 to 64.4 percent in Nov 2012. The number unemployed, seasonally adjusted, fell from 2.30 million in Oct 2012 to 2.28 million in Nov 2012, while the unemployment rate was unchanged from 5.4 percent in Oct 2012 to 5.4 percent in Nov 2012. The number of persons in employment, seasonally adjusted, increased from 40.18 million in Oct 2012 to 40.24 million in Nov 2012, or 0.1 percent.

Table VE-1, Germany, Unemployment Labor Force Survey

	Nov 2012	Oct 2012	Nov 2011
NSA
Number Unemployed Millions	2.26 ∆% Nov 2012/Oct 2012: 0.9 ∆% Nov 2012/Oct 2011: Nov -3.4	2.24	2.34
% Rate Unemployed	5.3	5.3	5.5
Persons in Employment Millions	40.55 ∆% Nov 2012/Oct 2012: 0.7 ∆% Nov 2012/Nov 2011: 0.9	40.28	40.18
Employment Rate	64.4	64.0	63.7
SA
Number Unemployed Millions	2.28 ∆% Nov 2012/Oct  2012: -0.9 ∆% Nov 2012/Nov 2011: –4.2	2.30	2.38
% Rate Unemployed	5.4	5.4	5.6
Persons in Employment Millions	40.24 ∆% Nov 2012/Oct 2012: 0.1 ∆% Nov  2012/Nov 2011: 1.1	40.18	39.82

NSA: not seasonally adjusted; SA: seasonally adjusted

Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/01/PE13_002_132.html;jsessionid=9AA39691E2C7E1737E47BA77EB484134.cae3

The unemployment rate in Germany as percent of the labor force in Table VE-2 stood at 6.5 percent in Sep, Oct and Nov 2012, increasing to 6.7 percent in Dec 2012 The rate is much lower than 11.1 percent in 2005 and 9.6 percent in 2006.

Table VE-2, Germany, Unemployment Rate in Percent of Labor Force

	Percent of Labor Force
Dec 2012	6.7
Nov	6.5
Oct	6.5
Sep	6.5
Aug	6.8
Jul	6.8
Jun	6.6
May	6.7
Apr	7.0
Mar	7.2
Feb	7.4
Jan	7.3
Dec 2011	6.6
Nov	6.4
Oct	6.5
Sep	6.6
Aug	7.0
Jul	7.0
Jun	6.9
May	7.0
Apr	7.3
Mar	7.6
Feb	7.9
Jan	7.9
Dec 2010	7.1
Dec 2009	7.8
Dec 2008	7.4
Dec 2007	8.1
Dec 2006	9.6
Dec 2005	11.1

Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/01/PE13_002_132.html;jsessionid=9AA39691E2C7E1737E47BA77EB484134.cae3

Chart VE-1 of Statistisches Bundesamt Deutschland, or Federal Statistical Office of Germany, shows the long-term decline of the rate of unemployment in Germany from more than 12 percent in early 2005 to 6.6 percent in Dec 2011, 6.6 percent in Jun 2012, 6.8 percent in Jul and Aug 2012 and 6.5 percent from Sep to Nov 2012, increasing to 6.7 percent in Dec 2012.

Chart VE-1, Germany, Unemployment Rate, Unadjusted, Percent

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Retail sales in Germany adjusted for inflation are provided in Table VE-3. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales decreased 1.3 percent in Oct 2012 and increased 0.1 percent in Sep after declines in multiple months in 2012, rebounding by 1.2 percent in Nov 2012. The 12-month percentage change is minus 1.0 percent in Nov 2012.

Table VE-3, Retail Sales in Germany Adjusted for Inflation

	12-Month ∆% NSA	Month ∆% SA and Calendar Adjusted
Nov 2012	-1.0	1.2
Oct	0.2	-1.3
Sep	-3.7	0.1
Aug	-0.9	-0.5
Jul	-1.2	-0.8
Jun	4.4	0.6
May	-0.8	-0.1
Apr	-4.6	-0.9
Mar	4.1	1.5
Feb	2.3	-0.3
Jan	1.8	-1.0
Dec 2011	0.9	0.5
Nov	1.1	-0.4
Oct	-0.4	0.4
Sep	1.5	0.1
Aug	3.7	-0.9
Jul	-2.1	1.0
Jun	-2.1	2.9
May	4.6	-2.6
Apr	4.8	0.8
Mar	-2.8	-2.3
Feb	2.8	0.7
Jan	3.1	0.8
Dec 2010	0.6	0.9
Dec 2009	-2.2
Dec 2008	3.3
Dec 2007	-6.2
Dec 2006	1.3

Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart VE-2 of the Statistisches Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at constant prices from 2007 to 2012. There appear to be fluctuations without trend.

Chart VE-2, Germany, Turnover in Retail Trade at Constant Prices 2005=100

Source: Statistisches Bundesamt Deutschland (Destatis), Federal Statistical Office of Germany

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart VE-3 of the Statistisches Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at current prices from 2007 to 2011. There are also sharp fluctuations but without trend.

Chart VE-3, Germany, Turnover in Retail Sales at Current Prices, Original Values, 2005=100

Source: Statistisches Bundesamt Deutschland (Destatis), Federal Statistical Office of Germany

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIIQ1949 to IIIQ2012 is quite high at 3.2 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.9 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using third quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.

Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012

Period	Average ∆%
1949-2012*	3.2
2000-2012*	1.1
2000-2011	1.1
2000-2007	1.7
1990-1999	1.9
1980-1989	2.6
1970-1979	3.8
1960-1969	5.7
1950-1959	4.2

*Third Quarter on Third Quarter

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20121228

The Markit Flash France Composite Output Index increased marginally from 44.3 in Nov to 45.0 in Dec for the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10453). Jack Kennedy, Senior Economist at Markit and author of the report, finds that the data suggest the weakest quarter in output in four years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10453).

The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased marginally from 44.3 in Nov to 44.6 in Dec, indicating significant contraction of private sector activity for a tenth consecutive month at slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10552). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds that the economy performed in IVQ2012 at the slowest pace since IQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10552). The Markit France Services Activity index decreased from 45.8 in Nov to 45.2 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10552). The Markit France Manufacturing Purchasing Managers’ Index^® increased marginally to 44.6 in Dec from 44.5 in Nov, remaining deeply below the neutral level of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10535). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing weakness in manufacturing with new orders because of weakness in both foreign and domestic demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10535). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Nov month ∆% -0.2 12 months ∆%: 1.4 12/16/12
PPI	Nov month ∆%: -0.5 Nov 12 months ∆%: 1.9 Blog 12/30/12
GDP Growth	IIIQ2012/IIQ2012 ∆%: 0.1 IIIQ2012/IIIQ2011 ∆%: 0.0 Blog 12/30/12
Industrial Production	Oct ∆%: Manufacturing minus 0.9 12-Month ∆%: Manufacturing minus 4.0 Blog 12/16/12
Consumer Spending	Nov Manufactured Goods ∆%: -0.2 Nov 12-Month Manufactured Goods ∆%: -1.0 Blog 12/30/12
Employment	IIIQ2012 Unemployed 2.826 million Unemployment Rate: 9.9% Employment Rate: 63.9% Blog 12/16/12
Trade Balance	Oct Exports ∆%: month 0.7, 12 months 4.9 Oct Imports ∆%: month -0.2, 12 months 0.6 Blog 12/23-24/12
Confidence Indicators	Historical averages 100 Dec Mfg Business Climate 89 Blog 12/30/12

Links to blog comments in Table FR:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

VG Italy. Table VG-IT provides percentage changes in a quarter relative to the same quarter of Italy’s expenditure components in chained volume measures. GDP has been declining at sharper rates from minus 0.5 percent in IQ2012 to minus 2.4 percent in IIIQ2012. The aggregate demand components of consumption and gross fixed capital formation (GFCF) have been declining at faster rates.

Table VG-IT, Italy, GDP and Expenditure Components, Chained Volume Measures, Quarter ∆% on Same Quarter Year Earlier

	GDP	Imports	Consumption	GFCF	Exports
2012
IIIQ	-2.4	-7.8	-3.7	-9.8	1.6
IIQ	-2.3	-7.6	-3.5	-9.6	2.5
IQ	-1.3	-9.0	-2.8	-7.9	1.9
2011
IVQ	-0.5	-6.8	-1.6	-3.7	3.3
IIIQ	0.4	0.3	-0.5	-2.2	5.9
IIQ	1.0	3.4	0.6	-0.2	7.1
IQ	1.3	8.9	0.9	0.7	10.9
2010
IVQ	2.2	15.4	0.8	2.3	13.3
IIIQ	1.9	13.0	1.0	4.3	12.2
IIQ	1.9	13.2	0.5	2.3	12.0
IQ	1.1	7.3	0.5	-0.8	7.3
2009
IVQ	-3.5	-6.4	-0.1	-7.5	-9.3
IIIQ	-5.0	-12.1	-0.9	-12.6	-16.3
IIQ	-6.6	-17.8	-1.3	-13.7	-21.4
IQ	-6.9	-17.2	-1.6	-12.7	-22.9
2008
IVQ	-3.0	-8.2	-0.9	-8.3	-10.3
IIIQ	-1.9	-5.0	-0.8	-4.5	-3.9
IIQ	-0.2	-0.1	-0.3	-1.5	0.4
IQ	0.5	1.7	0.1	-1.0	2.9

GFCF: Gross Fixed Capital Formation

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/77009

The Markit/ADACI Business Activity Index increased from 44.6 in Nov to 45.6 in Dec, indicating significant contraction of output of Italy’s services at a marginally lower rate for contraction during a year and a half (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10555). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that new business fell at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10555). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), increased from 45.1 in Nov to 46.7 in Dec for 17 consecutive months of contraction of Italy’s manufacturing but the highest reading in nine months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10494). Weak internal demand contributed more to contraction than foreign demand that declined only marginally. Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds a more encouraging reading with softer declines in output and new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10494). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Dec month ∆%: 0.3 Dec 12-month ∆%: 2.4 Blog 1/6/13
Producer Price Index	Nov month ∆%: -0.1 Nov 12-month ∆%: 2.2 Blog 12/30/12
GDP Growth	IIIQ2012/IIQ2012 SA ∆%: minus 0.2 IIIQ2012/IIIQ2011 NSA ∆%: minus 2.4 Blog 12/16/12
Labor Report	Oct 2012 Participation rate 64.0% Employment ratio 56.9% Unemployment rate 11.1% Blog 12/2/12
Industrial Production	Oct month ∆%: minus 1.1 12 months ∆%: minus 6.2 Blog 12/16/12
Retail Sales	Oct month ∆%: -1.0 Sep 12-month ∆%: -3.8 Blog 12/23-24/12
Business Confidence	Mfg Dec 88.9, Aug 87.5 Construction Dec 79.5, Jul 81.6 Blog 12/30/12
Trade Balance	Balance Oct SA €1321 million versus Sep €1541 Exports Sep month SA ∆%: minus 0.0; Imports Sep month minus ∆%: 0.8 Exports 12 months Sep NSA ∆%: 12.0 Imports 12 months NSA ∆%: 0.9 Blog 12/23-24/12

Links to blog comments in Table IT:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html

12/2/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html

VH United Kingdom. Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.9 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.

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

	∆% on Prior Year
1998	3.5
1999	3.2
2000	4.2
2001	2.9
2002	2.4
2003	3.8
2004	2.9
2005	2.8
2006	2.6
2007	3.6
2008	-1.0
2009	-4.0
2010	1.8
2011	0.9
Average ∆% per Year
1948-2011	2.7
1948-1959	2.9
1960-1969	3.3
1970-1979	2.5
1980-1989	3.2
1990-1999	2.6
2000-2011	1.7
2000-2007	3.0
2009-2011	1.3

Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2012/index.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® decreased from 50.2 in Nov to 48.9 in Dec with interruption of growth by marginal contraction for the first time since Dec 2010 during inclement snow weather (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10559). Chris Williamson, Chief Economist at Markit, finds that combined services, manufacturing and construction survey data suggests possible contraction of UK GDP of 0.2 percent in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10559). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased from 49.1 in Nov to 51.4 in Dec with the first reading above 50 after seven consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10539). The PMI registered average 49.5 in IVQ2012, which is higher than 48.1 in IIIQ2012 and higher than the average of 49.2 for 2012. New export orders continued to fall as in all months in 2012 with weakness in the euro area that is the United Kingdom’s major export destination. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that conditions improved in Dec but contraction in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10539). Table UK provides the economic indicators for the United Kingdom.

Table UK, UK Economic Indicators

CPI	Nov month ∆%: 0.2 Nov 12-month ∆%: 2.7 Blog 12/23-24/12
Output/Input Prices	Output Prices: Nov 12-month NSA ∆%: 2.2; excluding food, petroleum ∆%: 1.4 Input Prices: Nov 12-month NSA ∆%: -0.3 Excluding ∆%: -0.1 Blog 12/23-24/12
GDP Growth	IIIQ2012 prior quarter ∆% 0.9; year earlier same quarter ∆%: 0.0 Blog 12/30/12
Industrial Production	Oct 2012/Oct 2011 ∆%: Production Industries minus 3.0; Manufacturing minus 2.1 Blog 12/9/12
Retail Sales	Nov month ∆%: 0.0 Oct 12-month ∆%: 0.9 Blog 12/23-24/12
Labor Market	Aug-Oct Unemployment Rate: 7.8%; Claimant Count 4.8%; Earnings Growth 1.8% Blog 12/23-24/12
Trade Balance	Balance Oct minus ₤3644 million Exports Oct ∆%: -0.8; Aug-Oct ∆%: -2.7 Imports Oct ∆%: 1.9 Aug-Oct ∆%: -0.1 Blog 12/9/12

Links to blog comments in Table UK:

12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html

12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html

12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html

© Carlos M. Pelaez, 2010, 2011, 2012, 2013