Duration Dumping and Peaking Valuations of Risk Financial Assets, World Inflation Waves, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Exodus of Foreign Financing of US Fiscal and Balance of Payments Deficits, United States Industrial Production, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
Executive Summary
I World Inflation Waves
IA Appendix: Transmission of Unconventional Monetary Policy
IA1 Theory
IA2 Policy
IA3 Evidence
IA4 Unwinding Strategy
IB United States Inflation
IC Long-term US Inflation
ID Current US Inflation
IE Theory and Reality of Economic History and Monetary Policy Based on Fear of Deflation
II United States Industrial Production
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
II United States Industrial Production. Industrial production changed 0.0 percent in Jul 2013 after increasing 0.2 percent in Jun 2013 and changing 0.0 percent in May 2013, as shown in Table II-1, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):
“Industrial production was unchanged in July after having gained 0.2 percent in June. In July, manufacturing production declined 0.1 percent. The output of mines advanced 2.1 percent, its fourth consecutive monthly increase, and the production of utilities fell 2.1 percent, its fourth consecutive monthly decrease. At 98.9 percent of its 2007 average, total industrial production in July was 1.4 percent above its year-earlier level.”
In the six months ending in Jul 2013, United States national industrial production accumulated increase of 0.7 percent at the annual equivalent rate of 1.4 percent, which is equal to growth of 1.4 percent in 12 months. Excluding growth of 0.7 in Feb 2013, growth in the remaining five months from Mar 2012 to Jul 2013 accumulated to 0.0 percent or 0.0 percent annual equivalent. Industrial production stagnated in two of the past six months and fell in one. Business equipment accumulated growth of 2.0 percent in the six months from Feb to Jul 2013 at the annual equivalent rate of 1.8 percent, which is much higher than growth of 2.1 percent in 12 months. Growth of business equipment accumulated 0.1 percent from Mar to July 2013 at the annual equivalent rate of 0.2 percent. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent in July, a rate 0.3 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972-2012) average.” United States industry is apparently decelerating.
Table II-1, US, Industrial Production and Capacity Utilization, SA, ∆%
| 2012-2013 | Jul 13 | Jun 13 | May 13 | Apr 13 | Mar 13 | Feb 13 | Jun 13/ Jun 12 |
| Total | 0.0 | 0.2 | 0.0 | -0.4 | 0.2 | 0.7 | 1.4 |
| Market | |||||||
| Final Products | -0.3 | 0.5 | -0.2 | -0.5 | 0.5 | 1.0 | 1.3 |
| Consumer Goods | -0.5 | 0.6 | -0.2 | -0.6 | 0.8 | 0.8 | 1.3 |
| Business Equipment | 0.0 | 0.4 | -0.1 | -0.2 | 0.0 | 1.9 | 2.1 |
| Non | -0.3 | 0.0 | -0.1 | -0.7 | 0.0 | 0.8 | 0.9 |
| Construction | 0.5 | 0.5 | -0.6 | -1.3 | -1.2 | 2.3 | 4.4 |
| Materials | 0.4 | 0.0 | 0.3 | -0.2 | 0.0 | 0.3 | 1.7 |
| Industry Groups | |||||||
| Manufacturing | -0.1 | 0.2 | 0.3 | -0.4 | -0.3 | 0.6 | 1.3 |
| Mining | 2.1 | 1.0 | 0.1 | 0.8 | -0.3 | 0.9 | 5.7 |
| Utilities | -2.1 | -0.8 | -1.8 | -1.6 | 5.0 | 0.9 | -3.7 |
| Capacity | 77.6 | 77.7 | 77.7 | 77.8 | 78.2 | 78.1 | 1.8 |
Sources: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Manufacturing decreased 0.1 percent in Jul 2013 after increasing 0.2 percent in Jun 2013 and 0.3 percent in May 2013 seasonally adjusted, increasing 1.4 percent not seasonally adjusted in 12 months ending in Jul 2013, as shown in Table II-2. Manufacturing grew cumulatively 0.3 percent in the six months ending in Jul 2013 or at the annual equivalent rate of 0.6 percent. Excluding the increase of 0.6 percent in Feb 2012, manufacturing accumulated growth of minus 0.3 percent from Mar 2013 to Jul 2013 or at the annual equivalent rate of minus 0.7 percent. Table II-2 provides a longer perspective of manufacturing in the US. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 into more recent months as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.2 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steadily in the past six months with some weakness at the margin. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 22, 2013 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):
“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization. Measured from fourth quarter to fourth quarter, total IP is now reported to have increased 0.7 percentage point less in 2011 than was previously published. The revisions to IP for other years were smaller: Compared to the previous estimates, industrial production fell slightly less in 2008 and 2009 and increased slightly less in 2010 and 2012. At 97.7 percent of its 2007 average, the index in the fourth quarter of 2012 now stands 0.4 percent below its previous estimate. With these revisions, IP is still estimated to have advanced about 6 percent in 2010, the first full year following the trough in June 2009 of the most recent recession, but it is now estimated to have risen about 3 percent both in 2011 and in 2012. Since the trough of the recession, total IP has reversed about 90 percent of its peak-to-trough decline.”
The bottom part of Table II-2 shows decline of manufacturing by 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 16.8 percent from the trough in Apr 2009 to Dec 2012. Manufacturing grew 21.8 percent from the trough in Apr 2009 to Jun 2013. Manufacturing output in Jul 2013 is 8.7 percent below the peak in Jun 2007.
Table II-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%
| Month SA ∆% | 12-Month NSA ∆% | |
| Jul 2013 | -0.1 | 1.4 |
| Jun | 0.2 | 1.4 |
| May | 0.3 | 1.7 |
| Apr | -0.4 | 2.0 |
| Mar | -0.3 | 1.7 |
| Feb | 0.6 | 1.9 |
| Jan | -0.1 | 2.4 |
| Dec 2012 | 0.9 | 3.0 |
| Nov | 1.4 | 3.3 |
| Oct | -0.4 | 2.1 |
| Sep | 0.1 | 3.1 |
| Aug | -0.7 | 3.5 |
| Jul | 0.2 | 4.0 |
| Jun | 0.3 | 5.0 |
| May | -0.3 | 4.8 |
| Apr | 0.6 | 5.1 |
| Mar | -0.5 | 3.9 |
| Feb | 0.6 | 5.3 |
| Jan | 1.0 | 4.2 |
| Dec 2011 | 1.0 | 3.8 |
| Nov | 0.0 | 3.2 |
| Oct | 0.6 | 3.1 |
| Sep | 0.4 | 3.0 |
| Aug | 0.4 | 2.4 |
| Jul | 0.7 | 2.5 |
| Jun | 0.1 | 2.1 |
| May | 0.3 | 1.9 |
| Apr | -0.7 | 3.1 |
| Mar | 0.7 | 4.9 |
| Feb | 0.0 | 5.4 |
| Jan | 0.2 | 5.6 |
| Dec 2010 | 0.6 | 6.2 |
| Nov | 0.2 | 5.3 |
| Oct | 0.1 | 6.6 |
| Sep | 0.1 | 7.0 |
| Aug | 0.1 | 7.4 |
| Jul | 0.7 | 7.8 |
| Jun | 0.0 | 9.3 |
| May | 1.4 | 8.9 |
| Apr | 0.9 | 7.1 |
| Mar | 1.3 | 4.9 |
| Feb | 0.0 | 1.3 |
| Jan | 1.0 | 1.2 |
| Dec 2009 | 0.0 | -3.1 |
| Nov | 1.1 | -6.1 |
| Oct | 0.1 | -9.1 |
| Sep | 0.8 | -10.6 |
| Aug | 1.1 | -13.6 |
| Jul | 1.2 | -15.2 |
| Jun | -0.3 | -17.6 |
| May | -1.1 | -17.6 |
| Apr | -0.8 | -18.2 |
| Mar | -1.9 | -17.3 |
| Feb | -0.2 | -16.1 |
| Jan | -2.9 | -16.4 |
| Dec 2008 | -3.4 | -14.0 |
| Nov | -2.2 | -11.3 |
| Oct | -0.6 | -9.0 |
| Sep | -3.4 | -8.6 |
| Aug | -1.3 | -5.1 |
| Jul | -1.1 | -3.5 |
| Jun | -0.5 | -3.1 |
| May | -0.5 | -2.4 |
| Apr | -1.1 | -1.1 |
| Mar | -0.3 | -0.5 |
| Feb | -0.6 | 0.9 |
| Jan | -0.4 | 2.3 |
| Dec 2007 | 0.2 | 2.0 |
| Nov | 0.5 | 3.4 |
| Oct | -0.4 | 2.8 |
| Sep | 0.5 | 3.0 |
| Aug | -0.4 | 2.6 |
| Jul | 0.1 | 3.4 |
| Jun | 0.3 | 2.9 |
| May | -0.1 | 3.1 |
| Apr | 0.7 | 3.6 |
| Mar | 0.7 | 2.4 |
| Feb | 0.4 | 1.6 |
| Jan | -0.5 | 1.3 |
| Dec 2006 | 2.7 | |
| Dec 2005 | 3.4 | |
| Dec 2004 | 4.0 | |
| Dec 2003 | 1.7 | |
| Dec 2002 | 2.4 | |
| Dec 2001 | -5.5 | |
| Dec 2000 | 0.4 | |
| Dec 1999 | 5.4 | |
| Average ∆% Dec 1986-Dec 2012 | 2.3 | |
| Average ∆% Dec 1986-Dec 1999 | 4.3 | |
| Average ∆% Dec 1999-Dec 2006 | 1.3 | |
| Average ∆% Dec 1999-Dec 2012 | 0.4 | |
| ∆% Peak 103.0005 in 06/2007 to 93.9456 in 12/2012 | -8.8 | |
| ∆% Peak 103.0005 on 06/2007 to Trough 80.4617 in 4/2009 | -21.9 | |
| ∆% Trough 80.4617 in 04/2009 to 93.9456 in 12/2012 | 16.8 | |
| ∆% Trough 80.4617 in 04/2009 to 94.0248 in 7/2013 | 16.9 | |
| ∆% Peak 103.0005 on 06/2007 to Trough 94.0248 in 7/2013 | -8.7 |
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Chart II-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.
Chart II-1, US, Industrial Production, Capacity and Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg1.gif
The modern industrial revolution of Jensen (1993) is captured in Chart II-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart II-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). The bottom left-hand part of Chart II-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.
Chart II-2, US, Industrial Production, Capacity and Utilization of High Technology Industries
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg3.gif
Additional detail on industrial production and capacity utilization is provided in Chart II-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.
Chart II-3, US, Industrial Production and Capacity Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/ipg2.gif
United States manufacturing output from 1919 to 2012 on a monthly basis is in Chart II-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is losing momentum at the margin.
Chart II-4, US, Manufacturing Output, 1919-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Manufacturing jobs increased 6,000 in Jul 2013 relative to Jun 2013, seasonally adjusted (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html). Manufacturing jobs not seasonally adjusted increased 16,000 from Jul 2012 to Jul 2013 or at the average monthly rate of 1,333. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Jun 2013, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than growth of 2.0 percent in 12 months. Excluding growth of 0.7 in Feb 2013, growth in the remaining five months from Jan 2012 to Jun 2013 accumulated to 0.2 percent or 0.5 percent annual equivalent. Industrial production stagnated in two of the past six months and fell in one. Business equipment accumulated growth of 0.9 percent in the six months from Dec 2012 to May 2013 at the annual equivalent rate of 1.8 percent, which is much lower than growth of 2.2 percent in 12 months. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972–2012) average.” United States industry is apparently decelerating.
Manufacturing increased 0.3 percent in Jun 2013 after increasing 0.2 percent in May 2013 and decreasing 0.3 percent in Apr 2013 seasonally adjusted, increasing 1.7 percent not seasonally adjusted in 12 months ending in Jun 2013, as shown in Table II-2. Manufacturing grew cumulatively 0.5 percent in the six months ending in Jun 2013 or at the annual equivalent rate of 1.0 percent. Excluding the increase of 0.7 percent in Feb 2012, manufacturing accumulated growth of minus 0.2 percent from Jan 2013 to Jun 2013 or at the annual equivalent rate of minus 0.5 percent. Manufacturing output fell by 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 16.8 percent from the trough in Apr 2009 to Dec 2012. Manufacturing grew 21.8 percent from the trough in Apr 2009 to Jun 2013. Manufacturing output in Jun 2013 is 4.8 percent below the peak in Jun 2007. Data do suggest that world trade slowdown is accompanying world economic slowdown.
Table I-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IVQ2012 and 86.6 percent in IQ2013. Most of US national income is in the form of services. In Jul 2013, there were 135.664 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 115.081 million NSA in Jul 2013 accounted for 84.8 percent of total nonfarm jobs of 135.664 million, of which 12.045 million, or 10.5 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 96.093 million NSA in Jul 2013, or 70.8 percent of total nonfarm jobs and 83.5 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IQ2013, as shown in Table I-3. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table I-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR | % Total | SAAR IQ2013 | % Total | |
| National Income WCCA | 14,251.4 | 100.0 | 14,343.1 | 100.0 |
| Domestic Industries | 13,994.4 | 98.2 | 14,105.7 | 98.3 |
| Private Industries | 12,303.9 | 86.3 | 12,421.4 | 86.6 |
| Agriculture | 159.8 | 1.1 | 226.4 | 1.6 |
| Mining | 261.4 | 1.8 | 247.8 | 1.7 |
| Utilities | 199.6 | 1.4 | 209.1 | 1.5 |
| Construction | 604.4 | 4.2 | 622.9 | 4.3 |
| Manufacturing | 1574.8 | 11.1 | 1570.9 | 11.0 |
| Durable Goods | 882.8 | 6.2 | 882.2 | 6.2 |
| Nondurable Goods | 692.0 | 4.9 | 688.8 | 4.8 |
| Wholesale Trade | 874.3 | 6.1 | 870.8 | 6.1 |
| Retail Trade | 977.9 | 6.9 | 970.2 | 6.8 |
| Transportation & WH | 421.8 | 2.9 | 434.2 | 3.0 |
| Information | 476.2 | 3.3 | 495.5 | 3.5 |
| Finance, Insurance, RE | 2366.3 | 16.6 | 2416.3 | 16.8 |
| Professional, BS | 2006.8 | 14.1 | 1962.4 | 13.7 |
| Education, Health Care | 1413.1 | 9.9 | 1418.7 | 9.9 |
| Arts, Entertainment | 562.6 | 3.9 | 570.6 | 4.0 |
| Other Services | 404.8 | 2.8 | 405.7 | 2.8 |
| Government | 1690.5 | 11.9 | 1684.3 | 11.7 |
| Rest of the World | 257.0 | 1.8 | 237.4 | 1.7 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Motor vehicle sales and production in the US have been in long-term structural change. Table VA-2 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-Jul 2013, light vehicle sales accumulated to 9,144,335, which is higher by 8.5 percent relative to 8,425,842 a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally adjusted annual rate of light vehicle sales in the US reached 15.80 million in Jul 2013, slightly lower than 15.88 million in Jun 2013 and higher than 14.21 million in Jul 2012 (http://motorintelligence.com/m_frameset.html).
Table VA-2, 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 II-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2013. Output has stagnated since the late 1990s.
Chart II-5, US, Motor Vehicles and Parts Output, 1972-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Chart II-6 of the Board of Governors of the Federal Reserve System provides output of computers and electronic products in the United States from 1972 to 2013. Output accelerated sharply in the 1990s and 2000s and has surpassed the level before the global recession beginning in IVQ2007.
Chart II-6, US, Output of Computers and Electronic Products, 1972-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Chart II-7 of the Board of Governors of the Federal Reserve System shows that output of durable manufacturing accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.
Chart II-7, US, Output of Durable Manufacturing, 1972-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Chart II-8 of the Board of Governors of the Federal Reserve System provides output of aerospace and miscellaneous transportation equipment from 1972 to 2013. There is long-term upward trend with oscillations around the trend and cycles of large amplitude.
Chart II-8, US, Output of Aerospace and Miscellaneous Transportation Equipment, 1972-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
The Empire State Manufacturing Survey Index in Table II-5 provides continuing deterioration that started in Jun 2012 well before Hurricane Sandy in Oct 2012. The current general index has been in negative contraction territory from minus 3.78 in Aug 2012 to minus 7.78 in Jan 2012 and minus 1.43 in May 2013. The current general index improved to 8.24 in Aug 2013, which is again in expansion territory. The index of current orders has also been in negative contraction territory from minus 4.63 in Aug 2012 to minus 7.18 in Jan 2013 and minus 6.69 in Jun 2013. The index of current new orders increased to 3.77 in Jul 2013, falling to 0.27 in Aug 2013. Number of workers and hours worked have registered negative or declining readings since Sep 2012 with moderate expansion at 10.84 for number of workers in Aug 2013 and recovery from contraction in the average workweek to 4.82 in Aug 2013. There is marginal expansion in the general index for the next six months at 3.61 in Aug 2013 and strengthening new orders at 30.02 in Aug 2013.
Table II-5, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA
| General | New Orders | Shipments | # Workers | Average Work-week | |
| Current | |||||
| Aug 2013 | 8.24 | 0.27 | 1.47 | 10.84 | 4.82 |
| Jul | 9.46 | 3.77 | 8.96 | 3.26 | -7.61 |
| Jun | 7.84 | -6.69 | -11.77 | 0.00 | -11.29 |
| May | -1.43 | -1.17 | -0.02 | 5.68 | -1.14 |
| Apr | 3.05 | 2.20 | 0.75 | 6.82 | 5.68 |
| Mar | 9.24 | 8.18 | 7.76 | 3.23 | 0.00 |
| Feb | 10.04 | 13.31 | 13.08 | 8.08 | -4.04 |
| Jan | -7.78 | -7.18 | -3.08 | -4.30 | -5.38 |
| Dec 2012 | -7.30 | -3.44 | 11.93 | -9.68 | -10.75 |
| Nov | -4.31 | 2.93 | 14.18 | -14.61 | -7.87 |
| Oct | -6.75 | -7.21 | -6.48 | -1.08 | -4.30 |
| Sep | -7.54 | -10.60 | 7.30 | 4.26 | -1.06 |
| Aug | -3.78 | -4.63 | 6.37 | 16.47 | 3.53 |
| Jul | 7.08 | -2.27 | 11.52 | 18.52 | 0.00 |
| Jun | 4.15 | 2.28 | 6.34 | 12.37 | 3.09 |
| May | 14.52 | 8.99 | 23.11 | 20.48 | 12.05 |
| Apr | 6.40 | 4.81 | 4.51 | 19.28 | 6.02 |
| Mar | 18.00 | 6.55 | 15.97 | 13.58 | 18.52 |
| Feb | 18.31 | 7.93 | 19.90 | 11.76 | 7.06 |
| Jan | 12.12 | 11.21 | 18.94 | 12.09 | 6.59 |
| Dec 2011 | 9.60 | 6.35 | 23.77 | 2.33 | -2.33 |
| Nov | 1.82 | -0.97 | 11.34 | -3.66 | 2.44 |
| Oct | -7.39 | 1.51 | 2.46 | 3.37 | -4.49 |
| Sep | -4.75 | -4.31 | -4.48 | -5.43 | -2.17 |
| Six Months | |||||
| Aug 2013 | 3.61 | 30.01 | 30.02 | 8.43 | -6.02 |
| Jul | 1.09 | 31.12 | 34.44 | 1.09 | -1.09 |
| Jun | 11.29 | 19.77 | 20.21 | 1.61 | -9.68 |
| May | 4.55 | 28.84 | 25.18 | 11.36 | 1.14 |
| Apr 2013 | 5.68 | 36.23 | 39.28 | 25.00 | 7.95 |
| Mar | 2.15 | 34.94 | 41.60 | 19.35 | 2.15 |
| Feb | 8.08 | 29.11 | 26.82 | 15.15 | 11.11 |
| Jan | 10.75 | 25.11 | 23.86 | 7.53 | 3.23 |
| Dec 2012 | 1.08 | 17.19 | 22.46 | 10.75 | 5.38 |
| Nov | 5.62 | 15.96 | 25.67 | -1.12 | 0.00 |
| Oct | 4.30 | 22.79 | 17.39 | 0.00 | -11.83 |
| Sep | 5.32 | 27.85 | 23.35 | 8.51 | 2.13 |
| Aug | 2.35 | 14.34 | 21.16 | 3.53 | -8.24 |
| Jul | 3.70 | 19.85 | 21.60 | 6.17 | -4.94 |
| Jun | 1.03 | 26.02 | 22.18 | 16.49 | 2.06 |
| May | 12.05 | 31.26 | 26.00 | 12.05 | 8.43 |
| Apr | 19.28 | 38.95 | 40.75 | 27.71 | 10.84 |
| Mar | 13.58 | 39.18 | 41.64 | 32.10 | 20.99 |
| Feb | 15.29 | 39.25 | 40.92 | 29.41 | 18.82 |
| Jan | 23.08 | 45.70 | 44.12 | 28.57 | 17.58 |
| Dec 2011 | 3.49 | 42.20 | 40.36 | 24.42 | 22.09 |
| Nov | 6.10 | 30.89 | 33.01 | 14.63 | 8.54 |
| Oct | 4.49 | 19.71 | 22.65 | 6.74 | -2.25 |
| Sep | 8.70 | 23.52 | 22.89 | 0.00 | -6.52 |
Source:
http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
The Business Outlook Survey Diffusion Index of the Federal Reserve Bank of Philadelphia in Table II-6 also shows improvement after prior deterioration. The general index moved out contraction to 9.3 in Aug 2013 together with renewed expansion at 5.3 for new orders. Employment segments show mixed improvement in Aug 2013: 3.5 for number of workers but minus 2.6 for hours worked. Expectations for the next six months are brighter with the general index at 39.5 in Aug 2013 and the index of new orders at 40.1.
Table II-6, FRB of Philadelphia Business Outlook Survey Diffusion Index
| General Index | New Orders | Shipments | # Workers | Hours Worked | |
| 11-Jan | 15 | 19.1 | 11.1 | 13.9 | 8.00 |
| 11-Feb | 25.6 | 15.7 | 24 | 19.6 | 6.9 |
| 11-Mar | 36.1 | 33.2 | 28.1 | 16.1 | 7.3 |
| 11-Apr | 13.7 | 12.6 | 23 | 9.9 | 15.1 |
| 11-May | 4 | 6.8 | 5.4 | 22.2 | 2.8 |
| 11-Jun | -1.1 | -1.2 | 5.7 | 3.4 | 3.7 |
| 11-Jul | 9.4 | 4.7 | 9 | 12.6 | -0.8 |
| 11-Aug | -19 | -18.6 | -4.7 | -0.5 | -7.6 |
| 11-Sep | -10 | -4.5 | -7.4 | 9.4 | -2.8 |
| 11-Oct | 9.7 | 8.8 | 11.2 | 7.8 | 5.2 |
| 11-Nov | 5 | 3.6 | 6.9 | 10.9 | 6.8 |
| 11-Dec | 4.2 | 5.9 | 6.2 | 8 | -0.3 |
| 12-Jan | 4.7 | 9 | 4.4 | 9.6 | 3.9 |
| 12-Feb | 5 | 5.3 | 8.6 | 0.9 | 5.7 |
| 12-Mar | 8.6 | -0.7 | 0.2 | 5.9 | -0.6 |
| 12-Apr | 6.5 | -0.8 | 0.5 | 13.4 | -3.4 |
| 12-May | -4.9 | -0.6 | 2.7 | -0.2 | -6.4 |
| 12-Jun | -12.8 | -13.1 | -13.8 | 2.3 | -16.9 |
| 12-Jul | -9.1 | -2.1 | -7.5 | -4.7 | -13.9 |
| 12-Aug | -1.7 | -0.8 | -5.9 | -7.6 | -9.9 |
| 12-Sep | 1.4 | 2.5 | -10.4 | -4.9 | -2.9 |
| 12-Oct | 4.2 | -0.5 | -3.5 | -7.6 | -6.5 |
| 12-Nov | -8.9 | -4.7 | -6.3 | -6.9 | -7.4 |
| 12-Dec | 4.6 | 4.9 | 14.7 | -0.2 | 0.4 |
| 13-Jan | -5.8 | -4.3 | 0.4 | -5.2 | -8.3 |
| 13-Feb | -12.5 | -7.8 | 2.4 | 0.9 | -1.6 |
| 13-Mar | 2 | 0.5 | 3.5 | 2.7 | -12.9 |
| 13-Apr | 1.3 | -1 | 9.1 | -6.8 | -2.1 |
| 13-May | -5.2 | -7.9 | -8.5 | -8.7 | -12.4 |
| 13-Jun | 12.5 | 16.6 | 4.1 | -5.4 | 0.8 |
| 13-Jul | 19.8 | 10.2 | 14.3 | 7.7 | 6.6 |
| 13-Aug | 9.3 | 5.3 | -0.9 | 3.5 | -2.6 |
| Future | General Index | New Orders | Shipments | # Workers | Hours Worked |
| 10-Dec | 42.1 | 41.9 | 14.5 | 28 | 22 |
| 11-Jan | 35.9 | 39.8 | 10.3 | 29.1 | 19.6 |
| 11-Feb | 38.6 | 42.7 | 14.2 | 22.6 | 11.8 |
| 11-Mar | 53.6 | 52.3 | 12.6 | 25.2 | 13 |
| 11-Apr | 26.6 | 33.5 | 8.8 | 32.3 | 15.9 |
| 11-May | 22.4 | 26.1 | 3.8 | 20.9 | 12.5 |
| 11-Jun | 9.6 | 7.7 | -4.7 | 7.2 | 4.2 |
| 11-Jul | 35 | 31 | 8 | 16.2 | 6.6 |
| 11-Aug | 26.4 | 22.8 | 3.5 | 13.9 | 2.4 |
| 11-Sep | 26.6 | 27 | 6 | 13.4 | 5.7 |
| 11-Oct | 29.8 | 31 | 5.3 | 17.5 | 8.2 |
| 11-Nov | 36.2 | 34 | 8.9 | 27.9 | 4.5 |
| 11-Dec | 37.7 | 31.6 | 4.4 | 7.9 | 2 |
| 12-Jan | 43.9 | 46.1 | 13 | 17.8 | 6.8 |
| 12-Feb | 32.2 | 26.3 | 5.7 | 20.2 | 8.7 |
| 12-Mar | 34.4 | 28.6 | 6 | 19.2 | 8 |
| 12-Apr | 34.8 | 29.6 | 5.6 | 23.6 | 6.9 |
| 12-May | 30.2 | 26 | 10.1 | 11.8 | 1.2 |
| 12-Jun | 35.5 | 35.6 | 6 | 19.1 | 5 |
| 12-Jul | 30.8 | 24.7 | 6.5 | 15.3 | 14.6 |
| 12-Aug | 25.3 | 17.3 | 4.8 | 14.5 | 8.8 |
| 12-Sep | 52 | 42.8 | 12.6 | 21.2 | 13.8 |
| 12-Oct | 22.6 | 22.7 | 8.6 | 9.8 | 10.5 |
| 12-Nov | 23.2 | 24.9 | 2.7 | 7 | 8.2 |
| 12-Dec | 28.3 | 28 | 2.7 | 11.2 | 14.4 |
| 13-Jan | 32.5 | 38.9 | 2.9 | 10.7 | 8.9 |
| 13-Feb | 38 | 30.3 | 4.3 | 14.9 | 6.5 |
| 13-Mar | 34.5 | 31.2 | 6.6 | 8.1 | 3.4 |
| 13-Apr | 24.3 | 26.5 | -2.1 | 8.2 | 6.6 |
| 13-May | 34.5 | 31.7 | 16.9 | 10 | 14.1 |
| 13-Jun | 41.5 | 37.6 | 17.8 | 27.3 | 7.5 |
| 13-Jul | 58.8 | 51.2 | 25.8 | 36.2 | 14.6 |
| 13-Aug | 39.5 | 40.1 | 12.3 | 22.3 | 15 |
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Chart II-9 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jun 2013. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully appeared as renewed strength from late 2011 into Jan 2012 with decline to negative territory of the current activity index in Nov 2012 and return to positive territory in Dec 2012 with decline of current conditions into contraction in Jan-Feb 2013 and rebound to mild expansion in Mar-Apr 2013. The index of current activity moved into expansion in Jun-Aug 2013.
Chart II-9, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
The index of current new orders of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia in Chart II-10 illustrates the weakness of the cyclical expansion. The index weakened in 2006 and 2007 and then fell sharply into contraction during the global recession. There have been twelve readings into contraction from Jan 2012 to May 2013 and generally weak readings with some exceptions. The index of new orders moved into expansion in Jun-Aug 2013.
Chart II-10, Federal Reserve Bank of Philadelphia Current New Orders Diffusion Index
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
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 5.2 percent adjusted for inflation while growing 651.8 percent adjusted for inflation from IVQ1945 to IVQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (4) 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 debt crisis of the euro area. 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. Financial turbulence, attaining unusual magnitude in recent months, characterized the expansion from the global recession since IIIQ2009. Table III-1, updated with every comment in this blog, provides beginning values on Fri Aug 9 and daily values throughout the week ending on Aug 16, 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 Aug 9 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Aug 9, 2013”, first row “USD/EUR 1.3342 -0.5 %,” provides the information that the US dollar (USD) depreciated 0.5 percent to USD 1.3342/EUR in the week ending on Fri Aug 9 relative to the exchange rate on Fri Aug 2. 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 1.3342/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Aug 9, appreciating to USD 1.3300/EUR on Mon Aug 12, 2013, or by 0.3 percent. The dollar appreciated because fewer dollars, $1.3300, were required on Mon Aug 12 to buy one euro than $1.3342 on Aug 9. 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 1.3342/EUR on Aug 9; 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 Aug 9, to the last business day of the current week, in this case Fri Aug 16, such as appreciation by 0.1 percent to USD 1.3328/EUR by Aug 16; 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 0.1 percent from the rate of USD 1.3342/EUR on Fri Aug 9 to the rate of USD 1.3328/EUR on Fri Aug 16 {[(1.3328/1.3342) – 1]100 = -0.1%} and appreciated (denoted by positive sign) by 0.1 percent from the rate of USD 1.3346 on Thu Aug 15 to USD 1.3328/EUR on Fri Aug 16 {[(1.3328/1.3346) -1]100 = -0.1%}. 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 assets to the safety of dollar-denominated assets during risk aversion and return to higher yielding risk assets during risk appetite.
III-I, Weekly Financial Risk Assets Aug 12 to Aug 16, 2013
| Fri Aug 9, 2013 | M 12 | Tue 13 | Wed 14 | Thu 15 | Fri 16 |
| USD/EUR 1.3342 -0.5% | 1.3300 0.3% 0.3% | 1.3262 0.6% 0.3% | 1.3256 0.6% 0.0% | 1.3346 0.0% -0.7% | 1.3328 0.1% 0.1% |
| JPY/ USD 96.23 2.7% | 96.91 -0.7% -0.7% | 98.21 -2.1% -1.3% | 98.13 -2.0% 0.1% | 97.38 -1.2% 0.8% | 97.53 -1.4% -0.2% |
| CHF/ USD 0.9223 0.8% | 0.9257 -0.4% -0.4% | 0.9330 -1.2% -0.8% | 0.9355 -1.4% -0.3% | 0.9262 -0.4% 1.0% | 0.9265 -0.5% 0.0% |
| CHF/ EUR 1.2304 0.3% | 1.2310 0.0% 0.0% | 1.2373 -0.6% -0.5% | 1.2399 -0.8% -0.2% | 1.2361 -0.5% 0.3% | 1.2349 -0.4% 0.1% |
| USD/ AUD 0.9196 1.0874 3.2% | 0.9148 1.0931 -0.5% -0.5% | 0.9112 1.0975 -0.9% -0.4% | 0.9124 1.0960 -0.8% 0.1% | 0.9143 1.0937 -0.6% 0.2% | 0.9185 1.0887 -0.1% 0.5% |
| 10 Year T Note 2.579 | 2.619 | 2.717 | 2.71 | 2.76 | 2.829 |
| 2 Year T Note 0.30 | 0.308 | 0.336 | 0.324 | 0.34 | 0.341 |
| German Bond 2Y 0.16 10Y 1.68 | 2Y 0.16 10Y 1.70 | 2Y 0.22 10Y 1.81 | 2Y 0.21 10Y 2.61 | 2Y 0.23 10Y 1.88 | 2Y 0.22 10Y 1.88 |
| DJIA 15425.51 -1.5% | 15419.68 0.0% 0.0% | 15451.01 0.2% 0.2% | 15337.66 -0.6% -0.7% | 15112.19 -2.0% -1.5% | 15081.47 -2.2% -0.2% |
| DJ Global 2268.48 -0.4% | 2268.50 0.0% 0.0% | 2272.89 0.2% 0.2% | 2275.57 0.3% 0.1% | 2251.05 -0.8% -1.1% | 2252.09 -0.7% 0.1% |
| DJ Asia Pacific 1371.84 -1.0% | 1372.66 0.1% 0.1% | 1381.82 0.7% 0.7% | 1390.86 1.4% 0.7% | 1379.15 0.5% -0.8% | 1374.56 0.2% -0.3% |
| Nikkei 13615.19 -5.9% | 13519.43 -0.7% -0.7% | 13867.00 2.6% | 14050.16 3.2% 1.3% | 13752.94 1.0% -2.1% | 13650.11 0.3% -0.7% |
| Shanghai 2052.23 1.1% | 2101.28 2.4% 2.4% | 2106.16 2.6% 0.2% | 2100.14 2.3% -0.3% | 2081.88 1.4% -0.9% | 2068.45 0.8% -0.6% |
| DAX 8338.31 -0.8% | 8359.25 0.3% 0.3% | 8415.76 0.9% 0.7% | 8438.12 1.2% 0.3% | 8376.29 0.5% -0.7% | 8391.94 0.6% 0.2% |
| DJ UBS Comm. 125.57 -0.1% | 127.24 1.3% 1.3% | 127.06 1.2% -0.1% | 128.00 1.9% 0.7% | 129.53 3.2% 1.2% | 129.61 3.2% 0.1% |
| WTI $ B 106.08 -0.7% | 106.12 0.0% 0.0% | 106.54 0.4% 0.4% | 107.00 0.9% 0.4% | 107.19 1.0% 0.2% | 107.76 1.6% 0.5% |
| Brent $/B 108.90 1.6% | 109.10 0.2% 0.2% | 109.58 0.6% 0.4% | 110.32 1.3% 0.7% | 111.11 2.0% 0.7% | 110.66 1.6% -0.4% |
| Gold $/OZ 1313.5 0.1% | 1307.1 -0.5% -0.5% | 1321.1 0.6% 1.1% | 1334.8 1.6% 1.0% | 1363.3 3.8% 2.1% | 1373.8 4.6% 0.8% |
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
There is initial discussion of current and recent risk-determining events followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate.
First, risk determining events. Prior risk determining events are in an appendix below following Table III-1A. Current focus is on “tapering” quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “tapering” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Jul 31, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130731a.htm):
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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. 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.” (emphasis added).
In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:
“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”
Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σy and prices σp. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).
The President of the European Central Bank (ECB) Mario Draghi explained the indefinite period of low policy rates during the press conference following the meeting on Jul 4, 2013 (http://www.ecb.int/press/pressconf/2013/html/is130704.en.html):
“Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney [Governor of the Bank of England] said in London is just a coincidence.”
The statement of the meeting of the Monetary Policy Committee of the Bank of England on Jul 4, 2013, may be leading toward the same forward guidance (http://www.bankofengland.co.uk/publications/Pages/news/2013/007.aspx):
“At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”
A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 15,081.47
on Fri Aug 16, 2013, which is higher by 6.5 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 6.2 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs.
The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. There are high costs and risks of this policy because indefinite financial repression induces carry trades with high leverage, risks and illiquidity.
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 4.351 percent on Aug 16, 2013, and that of the ten-year sovereign bond of Italy at 4.192 percent (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. In the week of Aug 16, 2013, the yield of the two-year Treasury increased to 0.341 percent and that of the ten-year Treasury decreased to 2.829 percent while the two-year bond of Germany increased to 0.22 percent and the ten-year increased to 1.88 percent; and the dollar appreciated marginally to USD 1.3328/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, induce carry trades that 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 of 2.829 is higher than consumer price inflation of 2.0 percent in the 12 months ending in Jul 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html) and the expectation of higher inflation if risk aversion diminishes. The one-year Treasury yield of 0.119 percent is well below the 12-month consumer price inflation of 2.0 percent. 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 | |
| 8/16/13 | 0.341 | 2.829 | 0.22 | 1.88 | 1.3328 |
| 8/9/13 | 0.30 | 2.579 | 0.16 | 1.68 | 1.3342 |
| 8/2/13 | 0.299 | 2.597 | 0.15 | 1.65 | 1.3281 |
| 7/26/13 | 0.315 | 2.565 | 0.15 | 1.66 | 1.3279 |
| 7/19/13 | 0.300 | 2.480 | 0.08 | 1.52 | 1.3141 |
| 7/12/13 | 0.345 | 2.585 | 0.10 | 1.56 | 1.3068 |
| 7/5/13 | 0.397 | 2.734 | 0.11 | 1.72 | 1.2832 |
| 6/28/13 | 0.357 | 2.486 | 0.19 | 1.73 | 1.3010 |
| 6/21/13 | 0.366 | 2.542 | 0.26 | 1.72 | 1.3122 |
| 6/14/13 | 0.276 | 2.125 | 0.12 | 1.51 | 1.3345 |
| 6/7/13 | 0.304 | 2.174 | 0.18 | 1.54 | 1.3219 |
| 5/31/13 | 0.299 | 2.132 | 0.06 | 1.50 | 1.2996 |
| 5/24/13 | 0.249 | 2.009 | 0.00 | 1.43 | 1.2932 |
| 5/17/13 | 0.248 | 1.952 | -0.03 | 1.32 | 1.2837 |
| 5/10/13 | 0.239 | 1.896 | 0.05 | 1.38 | 1.2992 |
| 5/3/13 | 0.22 | 1.742 | 0.00 | 1.24 | 1.3115 |
| 4/26/13 | 0.209 | 1.663 | 0.00 | 1.21 | 1.3028 |
| 4/19/13 | 0.232 | 1.702 | 0.02 | 1.25 | 1.3052 |
| 4/12/13 | 0.228 | 1.719 | 0.02 | 1.26 | 1.3111 |
| 4/5/13 | 0.228 | 1.706 | 0.01 | 1.21 | 1.2995 |
| 3/29/13 | 0.244 | 1.847 | -0.02 | 1.29 | 1.2818 |
| 3/22/13 | 0.242 | 1.931 | 0.03 | 1.38 | 1.2988 |
| 3/15/13 | 0.246 | 1.992 | 0.05 | 1.46 | 1.3076 |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 3/1/13 | 0.236 | 1.842 | 0.03 | 1.41 | 1.3020 |
| 2/22/13 | 0.252 | 1.967 | 0.13 | 1.57 | 1.3190 |
| 2/15/13 | 0.268 | 2.007 | 0.19 | 1.65 | 1.3362 |
| 2/8/13 | 0.252 | 1.949 | 0.18 | 1.61 | 1.3365 |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 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
Appendix: Prior Risk Determining Events. Current risk analysis concentrates on deciphering what the Federal Open Market Committee (FOMC) may decide on quantitative easing. The week of May 24 was dominated by the testimony of Chairman Bernanke to the Joint Economic Committee of the US Congress on May 22, 2013 (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm), followed by questions and answers and the release on May 22, 2013 of the minutes of the meeting of the Federal Open Market Committee (FOMC) from Apr 30 to May 1, 2013 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm). Monetary policy emphasizes communication of policy intentions to avoid that expectations reverse outcomes in reality (Kydland and Prescott 1977). Jon Hilsenrath, writing on “In bid for clarity, Fed delivers opacity,” on May 23, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath), analyzes discrepancies in communication by the Fed. The annotated chart of values of the Dow Jones Industrial Average (DJIA) during trading on May 23, 2013 provided by Hinselrath, links the prepared testimony of Chairman Bernanke at 10:AM, following questions and answers and the release of the minutes of the FOMC at 2PM. Financial markets strengthened between 10 and 10:30AM on May 23, 2013, perhaps because of the statement by Chairman Bernanke in prepared testimony (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm):
“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.”
In that testimony, Chairman Bernanke (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm) also analyzes current weakness of labor markets:
“Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.”
Hilsenrath (op. cit. http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath) analyzes the subsequent decline of the market from 10:30AM to 10:40AM as Chairman Bernanke responded questions with the statement that withdrawal of stimulus would be determined by data but that it could begin in one of the “next few meetings.” The DJIA recovered part of the losses between 10:40AM and 2PM. The minutes of the FOMC released at 2PM on May 23, 2013, contained a phrase that troubled market participants (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm): “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.” The DJIA closed at 15,387.58 on May 21, 2013 and fell to 15,307.17 at the close on May 22, 2013, with the loss of 0.5 percent occurring after release of the minutes of the FOMC at 2PM when the DJIA stood at around 15,400. The concern about exist of the Fed from stimulus affected markets worldwide as shown in declines of equity indexes in Table III-1 with delays because of differences in trading hours. This behavior shows the trap of unconventional monetary policy with no exit from zero interest rates without risking financial crash and likely adverse repercussions on economic activity.
Financial markets worldwide were affected by the reduction of policy rates of the European Central Bank (ECB) on May 2, 2013. (http://www.ecb.int/press/pr/date/2013/html/pr130502.en.html):
“2 May 2013 - Monetary policy decisions
At today’s meeting, which was held in Bratislava, the Governing Council of the ECB took the following monetary policy decisions:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.50%, starting from the operation to be settled on 8 May 2013.
- The interest rate on the marginal lending facility will be decreased by 50 basis points to 1.00%, with effect from 8 May 2013.
- The interest rate on the deposit facility will remain unchanged at 0.00%.”
Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:
- Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
- Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.
The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Alkman Granitsas, writing on “Central bank details losses at Bank of Cyprus,” on Mar 30, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324000704578392502889560768.html), analyzes the impact of the agreement with the €10 billion agreement with IMF and the European Union on the banks of Cyprus. The recapitalization plan provides for immediate conversion of 37.5 percent of all deposits in excess of €100,000 to shares of special class of the bank. An additional 22.5 percent will be frozen without interest until the plan is completed. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans.
Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
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).
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 together with the overnight fed funds rate, and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. 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 yield 1.64 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 Aug 15, 2013, with the one-month yield at 0.05 percent, the two-year at 0.36 percent, the ten-year at 2.77 percent, the fed funds rate at 0.08 percent and the corporate Baa bond at 5.47 percent. There is an evident increase in the yields of the 10-year Treasury constant maturity and the Moody’s Baa corporate bond
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Aug 15, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
Alexandra Scaggs, writing on “Tepid profits, roaring stocks,” on May 16, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323398204578487460105747412.html), analyzes stabilization of earnings growth: 70 percent of 458 reporting companies in the S&P 500 stock index reported earnings above forecasts but sales fell 0.2 percent relative to forecasts of increase of 0.5 percent. Paul Vigna, writing on “Earnings are a margin story but for how long,” on May 17, 2013, published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2013/05/17/earnings-are-a-margin-story-but-for-how-long/), analyzes that corporate profits increase with stagnating sales while companies manage costs tightly. More than 90 percent of S&P components reported moderate increase of earnings of 3.7 percent in IQ2013 relative to IQ2012 with decline of sales of 0.2 percent. Earnings and sales have been in declining trend. In IVQ2009, growth of earnings reached 104 percent and sales jumped 13 percent. Net margins reached 8.92 percent in IQ2013, which is almost the same at 8.95 percent in IIIQ2006. Operating margins are 9.58 percent. There is concern by market participants that reversion of margins to the mean could exert pressure on earnings unless there is more accelerated growth of sales. Vigna (op. cit.) finds sales growth limited by weak economic growth. 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. Future company cash flows derive from investment projects. Real private fixed investment fell from $2,111.5 billion in IVQ2007 to $1920.4 billion in IQ2013 or by 9.1 percent compared with growth of 24.1 percent of gross private domestic investment from IQ1980 to IVQ1985 (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Undistributed profits of US corporations swelled 306.9 percent from $118.0 billion IQ2007 to $480.2 billion in IQ2013 and changed signs from minus $22.1 billion in IVQ2007 (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Corporate profits with inventory valuation and capital consumption adjustment fell $27.8 billion relative to IVQ2012 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp1q13_3rd.pdf), from $2013.0 billion in IVQ2012 to $1985.2 billion in IQ2013 at the quarterly rate of minus 1.4 percent. Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. The investment decision of US business is fractured. 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:
![clip_image001[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1g1uYzFq2gm25QZ4rhkuIkIt4ztCqaMcj7_xkAcGQjg3v6RtDA41ubnj-Pg2MUHFCdMpbfRIO53E9tshMKZvr73KNfEzElR9UV_VRC7swsgCONRNKWlqDD8hzKt7nFEvd0gUyxvanR9TQ/s1600-h/clip_image001%25255B1%25255D%25255B2%25255D.gif "clip_image001[1]"){kind=small}
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
declines.
There was mixed performance in equity indexes with several indexes in Table III-1 increasing in the week ending on Aug 16, 2013, after wide swings caused by reallocations of investment portfolios worldwide. Stagnating revenues, corporate cash hoarding and declining investment 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 decreased 0.2 percent on Aug 16, decreasing 2.2 percent in the week. Germany’s Dax increased 0.2 percent on Fri Aug 16 and increased 0.6 percent in the week. Dow Global increased 0.1 percent on Aug 16 and decreased 0.7 percent in the week. Japan’s Nikkei Average decreased 0.7 percent on Fri Aug 16 and increased 0.3 percent in the week as the yen continues oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM decreased 0.3 percent on Aug 16 and increased 0.2 percent in the week. Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2068.45 on Fri Aug 16 for decrease of 0.6 percent and increase of 0.8 percent in the week of Aug 16. There is 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 strong in the week of Aug 16, 2013. The DJ UBS Commodities Index increased 0.5 percent on Fri Aug 16 and increased 1.6 percent in the week, as shown in Table III-1. WTI increased 1.6 percent in the week of Aug 16 while Brent increased 1.6 percent in the week. Gold increased 0.8 percent on Fri Aug 16 and increased 4.6 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 €793,600 million on Aug 9, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has reached €2,379,322 million in the statement of Aug 9, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €90,418 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Aug 9, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 319,968 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 250,097 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 24,230 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 20,846 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 793,600 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 84,322 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 602,661 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 28,356 |
| 9 Other Assets | 278,719 | 336,574 | 255,242 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,379,322 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,396,261 |
| Capital and Reserves | 78,143 | 81,481 | 90,419 |
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.europa.eu/press/pr/wfs/2013/html/fs130813.en.html
IIIE Appendix Euro Zone Survival Risk. Resolution of the European sovereign debt 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 to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surpluses that ensure creditworthiness. 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. Growth of the Italian economy would ensure that success. 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 surpluses 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 40.5 percent of the total in Jan-Jun 2013. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 3.0 percent in Jan-Jun 2013 relative to Jan-Jun 2012 while those to EMU are growing at minus 4.1 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Jun 2013 | Exports | ∆% Jan-Jun 2013/ Jan-Jun 2012 | Imports | ∆% Jan-Jun 2013/ Jan-Jun 2012 |
| EU | 53.7 | -3.1 | 52.9 | -3.0 |
| EMU 17 | 40.5 | -4.1 | 42.7 | -3.1 |
| France | 11.1 | -3.1 | 8.3 | -6.2 |
| Germany | 12.5 | -4.5 | 14.6 | -7.4 |
| Spain | 4.7 | -8.0 | 4.4 | -3.0 |
| UK | 4.9 | 1.0 | 2.5 | -1.4 |
| Non EU | 46.3 | 3.0 | 47.1 | -11.3 |
| Europe non EU | 13.9 | 0.0 | 11.3 | 6.9 |
| USA | 6.8 | -2.3 | 3.3 | -18.6 |
| China | 2.3 | 6.7 | 6.5 | -10.4 |
| OPEC | 5.7 | 10.5 | 10.8 | -27.4 |
| Total | 100.0 | -0.4 | 100.0 | -7.0 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €356 million with the 17 countries of the euro zone (EMU 17) in Jun 2013 and cumulative deficit of €2393 million in Jan-Jun 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of 3752 million in Jan-Jun 2013 with Europe non European Union, the trade surplus of €7593 million with the US and trade surplus with non-European Union of €8020 million in Jan-Jun 2013. There is significant rigidity in the trade deficits in Jan-Jun 2013 of €6726 million with China and €3998 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 Jun 2013 Millions of Euro | Trade Balance Cumulative Jan-Jun 2013 Millions of Euro |
| EU | 1,124 | 4,268 |
| EMU 17 | -356 | -2,393 |
| France | 1,080 | 6,207 |
| Germany | -391 | -2,437 |
| Spain | 22 | 391 |
| UK | 1,070 | 4,671 |
| Non EU | 2,494 | 8,020 |
| Europe non EU | 1,066 | 3,752 |
| USA | 1,333 | 7,593 |
| China | -906 | -6,726 |
| OPEC | -315 | -3,998 |
| Total | 3,618 | 12,288 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574
Growth rates of Italy’s trade and major products are in Table III-5 for the period Jan-Jun 2013 relative to Jan-Jun 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 17.4 percent and minus 11.3 percent for durable goods. The higher rate of growth of exports of minus 0.4 percent in Jan-Jun 2013/Jan-Jun 2012 relative to imports of minus 7.0 percent may reflect weak demand in Italy with GDP declining during eight consecutive quarters from IIIQ2011 through IIQ2013 together with softening commodity prices.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 29.3 | 6.2 | 25.6 | 0.1 |
| Durable | 5.8 | 0.8 | 2.9 | -11.3 |
| Non-Durable | 23.5 | 7.5 | 22.7 | 1.6 |
| Capital Goods | 31.6 | 0.7 | 19.5 | -7.7 |
| Inter- | 33.6 | -3.9 | 32.6 | -4.7 |
| Energy | 5.5 | -18.7 | 22.3 | -17.4 |
| Total ex Energy | 94.5 | 0.6 | 77.7 | -4.0 |
| Total | 100.0 | -0.4 | 100.0 | -7.0 |
Note: % Share for 2012 total trade.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574
Table III-6 provides Italy’s trade balance by product categories in Jun 2013 and cumulative Jan-Jun 2013. Italy’s trade balance excluding energy generated surplus of €8285 million in Jun 2013 and €39,687 million cumulative in Jan-Jun 2013 but the energy trade balance created deficit of €4667 million in Jun 2013 and cumulative €27,399 million in Jan-Jun 2013. The overall surplus in Jun 2013 was €3618 million with cumulative surplus of €12,288 million in Jan-Jun 2013. 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
| Jun 2013 | Cumulative Jan-Jun 2013 | |
| Consumer Goods | 2,017 | 10,262 |
| Durable | 1,155 | 6,323 |
| Nondurable | 862 | 3,939 |
| Capital Goods | 5,419 | 26,173 |
| Intermediate Goods | 849 | 3,252 |
| Energy | -4,667 | -27,399 |
| Total ex Energy | 8,285 | 39,687 |
| Total | 3,618 | 12,288 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574
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, 2011, 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 exceeding 100 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/pubs/ft/weo/2013/01/weodata/index.aspx) 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 2013.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2013 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 74,172 | ||
| Euro Zone | 12,752 | -0.04 | 73.9 |
| Portugal | 218 | -1.4 | 115.0 |
| Ireland | 222 | -3.2 | 106.2 |
| Greece | 244 | -- | 155.4 |
| Spain | 1,388 | -3.5 | 79.1 |
| Major Advanced Economies G7 | 34,068 | -3.8 | 91.5 |
| United States | 16,238 | -4.6 | 89.0 |
| UK | 2,423 | -5.0 | 86.1 |
| Germany | 3,598 | 1.8 | 54.1 |
| France | 2,739 | -1.4 | 86.5 |
| Japan | 5,150 | -9.0 | 143.4 |
| Canada | 1,844 | -2.4 | 35.9 |
| Italy | 2,076 | 2.7 | 102.3 |
| China | 9,020 | -2.1* | 21.3** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx
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 2013” to the column “GDP USD Billions.” The total debt of France and Germany in 2013 is $4315.7 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 $4087.3 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 $8403.0 billion, which would be equivalent to 132.6 percent of their combined GDP in 2013. 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 233.5 percent if including debt of France and 167.7 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 | 9,423.7 | ||
| B Germany | 1,946.5 | $8403.0 as % of $3598 =233.5% $6033.8 as % of $3598 =167.7% | |
| C France | 2,369.2 | ||
| B+C | 4,315.7 | GDP $6,337.0 Total Debt $8403.0 Debt/GDP: 132.6% | |
| D Italy | 2,123.7 | ||
| E Spain | 1,097.9 | ||
| F Portugal | 250.7 | ||
| G Greece | 379.2 | ||
| H Ireland | 235.8 | ||
| Subtotal D+E+F+G+H | 4,087.3 |
Source: calculation with IMF data IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx
There is extremely important information in Table VE-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 Jun 2013. German exports to other European Union (EU) members are 57.8 percent of total exports in Jun 2013 and 57.3 percent in cumulative Jan-Jun 2013. Exports to the euro area are 37.7 percent in Jun and 37.4 percent cumulative in Jan-Jun. Exports to third countries are 42.2 percent of the total in Jun and 42.7 percent cumulative in Jan-Jun. There is similar distribution for imports. Exports to non-euro countries are increasing 2.2 percent in the 12 months ending in Jun 2013, increasing 1.1 percent cumulative in Jan-Jun 2013 while exports to the euro area are decreasing 1.4 percent in the 12 months ending in Jun 2013 and decreasing 3.1 percent cumulative in Jan-Jun 2013. Exports to third countries, accounting for 42.2 percent of the total in Jun 2013, are decreasing 4.6 percent in the 12 months ending in Jun 2013 and increasing 1.0 percent cumulative in Jan-Jun 2013, accounting for 42.7 percent of the cumulative total in Jan-Jun 2013. 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 ∆%
| Jun 2013 | Jun 12-Month | Cumulative Jan-Jun 2012 € Billions | Cumulative Jan-Jun 2013/ | |
| Total | 92.8 | -2.1 | 547.4 | -0.6 |
| A. EU | 53.6 % 57.8 | -0.1 | 313.7 % 57.3 | -1.7 |
| Euro Area | 35.0 % 37.7 | -1.4 | 205.0 % 37.4 | -3.1 |
| Non-euro Area | 18.6 % 20.0 | 2.2 | 108.7 % 19.9 | 1.1 |
| B. Third Countries | 39.2 % 42.2 | -4.6 | 233.7 % 42.7 | 1.0 |
| Total Imports | 75.9 | -1.2 | 449.7 | -1.6 |
| C. EU Members | 49.1 % 64.7 | -0.3 | 291.0 % 64.7 | 0.1 |
| Euro Area | 34.8 % 45.8 | -0.5 | 203.5 % 45.3 | -0.8 |
| Non-euro Area | 14.3 % 18.8 | 0.0 | 87.4 % 19.4 | 2.1 |
| D. Third Countries | 26.7 % 35.2 | -2.7 | 158.7 % 35.3 | -4.6 |
Notes: Total Exports = A+B; Total Imports = C+D
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2013/08/PE13_262_
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:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (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 | 1.6 | 2.0 | 2.1 | 7.6 |
| Japan | 0.4 | 0.2 | 2.2 | 3.9 |
| China | 7.5 | 2.7 | -2.3 | |
| UK | 1.4 | 2.8* CPIH 2.5 | 2.1 output | 7.8 |
| Euro Zone | -0.7 | 1.6 | 0.3 | 12.1 |
| Germany | 0.5 | 1.9 | 0.6 | 5.3 |
| France | 0.3 | 1.2 | 0.2 | 10.4 |
| Nether-lands | -1.8 | 3.1 | -0.2 | 6.6 |
| Finland | 0.0 | 2.5 | 1.7 | 8.4 |
| Belgium | -0.1 | 1.6 | 0.9 | 8.6 |
| Portugal | -2.0 | 0.8 | 1.4 | 17.6 |
| Ireland | NA | 0.7 | 1.8 | 13.6 |
| Italy | -2.0 | 1.2 | -0.7 | 12.2 |
| Greece | -4.6 | -0.5 | 0.8 | NA |
| Spain | -1.7 | 1.9 | 1.3 | 26.9 |
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/july-2013/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.4 percent in IIQ2013 relative to IIQ2012 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Japan’s GDP grew 0.6 percent in IIQ2013 relative to IQ2013 and 0.9 percent relative to a year earlier. Japan’s grew at the seasonally adjusted annual rate (SAAR) of 2.6 percent in IIQQ2013 (Section VB and earlier http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html). The UK grew at 0.6 percent in IIQ2013 relative to IQ2013 and GDP increased 1.4 percent in IIQ2013 relative to IIQ2012 (http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html). The Euro Zone grew at 0.3 percent in IIQ2013 and minus 0.7 percent in IIQ2013 relative to IIQ2012 (Section VD and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.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: 7.4 percent in the US but 17.4 percent for unemployment/underemployment or job stress of 28.3 million (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html), 3.9 percent for Japan (http://cmpassocregulationblog.blogspot.com/2013/08/recovery-without-hiring-loss-of-full.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html), 7.8 percent for the UK with high rates of unemployment for young people (Section VH and earlier http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 2.00 percent in the US, 0.2 percent for Japan, 2.7 percent for China, 1.6 percent for the Euro Zone and 2.8 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/2013/08/recovery-without-hiring-loss-of-full.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 (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/08/recovery-without-hiring-loss-of-full.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html); (4) The timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html 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.”
Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
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 around 1.8 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 US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 15 quarters from IIIQ2009 to IIQ2013. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html). Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, the average number of nonfarm jobs created in Jan-Jul 2012 was 185,571 while the average number of nonfarm jobs created in Jan-Jul 2013 was 192,429, or increase by 3.7 percent. The average number of private jobs created in the US in Jan-Jul 2012 was 189,000 while the average in Jan-Jul 2013 was 195,571, or increase by 3.5 percent. The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the five months from Jan to Jul 2013 was 192,429, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 28.3 million unemployed or underemployed. The difference between the average increase of 192,429 new private nonfarm jobs per month in the US from Jan to Jul 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 79,262 monthly new jobs net of absorption of new entrants in the labor force. There are 28.3 million in job stress in the US currently. Creation of 79,622 new jobs per month net of absorption of new entrants in the labor force would require 357 months to provide jobs for the unemployed and underemployed (28.315 million divided by 79,262) or 30 years (357 divided by 12). The civilian labor force of the US in Jul 2013 not seasonally adjusted stood at 157.196 million with 12.083 million unemployed or effectively 17.577 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.690 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 79,262 by 12, which is 951,144). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.860 million (0.05 times labor force of 157.196 million) for new net job creation of 4.223 million (12.083 million unemployed minus 7.860 million unemployed at rate of 5 percent) that at the current rate would take 4.4 years (4.223 million divided by 0.951144). Under the calculation in this blog, there are 17.577 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.690 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 9.586 million jobs net of labor force growth that at the current rate would take 9.9 years (17.577 million minus 0.05(162.690 million) = 9.443 million divided by 0.951144, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.315 million in Jul 2007 to 145.113 million in Jul 2013, by 2.202 million, or decline of 1.5 percent, while the civilian noninstitutional or economically active population increased from 231.958 million in Jul 2007 to 245.756 million in Jul 2013, by 13.798 million or increase of 5.9 percent, using not seasonally adjusted data. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.
Second, revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.
- Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2012 and at 3.2 percent from 1947 to 2012.
- Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.6 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IQ1986 was 5.7 percent. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IIQ2013 was only 2.7 percent. The US appears to have lost its dynamism of income growth and employment creation.
Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita
| GDP | ||
| Long-Term | ||
| 1929-2012 | 3.3 | |
| 1947-2012 | 3.2 | |
| Cyclical Contractions ∆% | ||
| IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982 | -4.6 | |
| IVQ2007 to IIQ2009 | -4.3 | |
| Cyclical Expansions Average Annual Equivalent ∆% | ||
| IQ1983 to IQ1986 | 5.7 | |
| First Four Quarters IQ1983 to IVQ1983 | 7.8 | |
| IIIQ2009 to IIQ2013 | 2.2 | |
| First Four Quarters IIIQ2009 to IIQ2010 | 2.7 | |
| Real Disposable Income | Real Disposable Income per Capita | |
| Long-Term | ||
| 1929-2012 | 3.2 | 2.0 |
| 1947-1999 | 3.7 | 2.3 |
| Whole Cycles | ||
| 1980-1989 | 3.5 | 2.6 |
| 2006-2012 | 1.4 | 0.6 |
Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf
The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.4 to 1.8 percent per year. Table Summary GDP provides the data.
1. Average Annual Growth in the Past Six Quarters. GDP growth in the four quarters of 2012 to IIQ2013 accumulated to 2.7 percent. This growth is equivalent to 1.8 percent per year, obtained by dividing GDP in IIQ2013 of $16,648.7 by GDP in IVQ2011 of $15,242.1 and compounding by 4/6: {[($15,648.7/$15,242.1)4/6 -1]100 = 1.8.
2. Average Annual Growth in the First Two Quarters of 2013. GDP growth in the first two quarters of 2013 accumulated to 0.7 percent that is equivalent to 1.4 percent in a year. This is obtained by dividing GDP in IIQ2013 of $15648.7 by GDP in IVQ2012 to $15,583.9 and compounding by 4/2: {[($15,648.7/$15,539.6)4/2 -1]100 =1.4%}. The US economy grew 1.4 percent in IIQ2013 relative to the same quarter a year earlier in IIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012.
Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%
| Real GDP, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 14,996.1 | NA | NA | 1.9 |
| IVQ2011 | 15,242.1 | 1.6 | 1.2 | 2.0 |
| IQ2012 | 15,381.6 | 2.6 | 0.9 | 3.3 |
| IIQ2012 | 15,427.7 | 2.9 | 0.3 | 2.8 |
| IIIQ2012 | 15,534.0 | 3.6 | 0.7 | 3.1 |
| IVQ2012 | 15,539.6 | 3.6 | 0.0 | 2.0 |
| IQ2013 | 15,583.9 | 3.9 | 0.3 | 1.3 |
| IIQ2013 | 15,648.7 | 4.4 | 0.4 | 1.4 |
| Cumulative ∆% IQ2012 to IIQ2013 | 2.7 | 2.6 | ||
| Annual Equivalent ∆% | 1.8 | 1.7 |
Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf
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 policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at the conclusion of its meeting on Jan 30, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130130a.htm) and at its meeting on Jul 31, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130731a.htm):
“Release Date: July 31, 2013
For immediate release
Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
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 decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities 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 of 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. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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. 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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.“
There are several important issues in this statement.
- 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”
- 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 decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
- Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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.”
- Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “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.”
- Increase or Reduction of Asset Purchases. Market participants focused on slightly different wording about increasing asset purchases: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”
Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Jul 31, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130731a.htm):
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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. 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.” (emphasis added).
In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:
“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”
Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σy and prices σp. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).
The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.
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 Mar 20, 2013. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.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 IIQ2013 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). The Bureau of Economic Analysis (BEA) provides the first estimate of IIQ2013 GDP released on Jul 31 with revisions since 1929 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.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 Section IV (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html). The report on “Personal Income and Outlays” for Jun was released at 8:30 AM on Aug 2, 2013 with revisions from 1959 to May 2013 (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
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 report for Jul 2013 was released on Aug 2 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html
http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html). “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 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 Mar 20, 2013 and the second row “PR” the projection of the Jun 19, 2013 meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2013 from 2.3 to 2.8 percent at the meeting in Mar 2013 to 2.3 to 2.6 percent at the meeting on Jun 20, 2013. The FOMC increased GDP growth in 2014 from 2.9 to 3.4 percent at the meeting in Mar 2013 to 3.0 to 3.5 percent at the meeting in Jun 2013.
2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment from 7.3 to 7.5 percent at the meeting on Mar 20, 2013 to 7.2 to 7.3 percent at the meeting on Jun 19, 2013. The projection for 2014 decreased to the range of 6.5 to 6.8 in Jun 2013 from 6.7 to 7.0 in Mar 2013. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 5.8 to 6.2 percent in 2015 after the meeting on Jun 19, 2013.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.3 to 1.7 percent at the meeting on Mar 20, 2012 to 0.8 to 1.2 percent at the meeting on Jun 19, 2013. There are no projections exceeding 2.0 percent.
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 that changed from 1.5 to 1.6 percent at the meeting on Mar 20, 2013 to 1.2 to 1.3 percent at the meeting on Jun 19, 2013.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Mar 2013 and Jun 19, 2013
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2013 | 2.3 to 2.6 | 7.2 to 7.3 | 0.8 to 1.2 | 1.2 to 1.3 1.5 to 1.6 |
| 2014 | 3.0 to 3.5 | 6.5 to 6.8 | 1.4 to 2.0 | 1.5 to 1.8 |
| 2015 Mar PR | 2.9 to 3.6 2.9 to 3.7 | 5.8 to 6.2 6.0 to 6.5 | 1.6 to 2.0 1.7 to 2.0 | 1.7 to 2.0 1.8 to 2.1 |
| Longer Run Mar 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 | ||||
| 2013 | 2.0 to 2.6 | 6.9 to 7.5 | 0.8 to 1.5 | 1.1 to 1.5 |
| 2014 | 2.2 to 3.6 | 6.2 to 6.9 | 1.4 to 2.0 | 1.5 to 2.1 |
| 2015 Mar PR | 2.3 to 3.8 2.5 to 3.8 | 5.7 to 6.4 5.7 to 6.5 | 1.6 to 2.3 1.6 to 2.6 | 1.7 to 2.3 1.7 to 2.6 |
| Longer Run Mar PR | 2.0 to 3.0 2.0 to 3.0 | 5.0 to 6.0 5.0 to 6.0 | 2.0 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.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 2013, 2014, 2015 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/fomcprojtabl20130320.pdf). There are 18 participants expecting the rate to remain at 0 to ¼ percent in 2013 and one to be higher in the interval below 1.0 percent. The rate would still remain at 0 to ¼ percent in 2014 for 15 participants with three expecting the rate to be in the range of 0.5 to 1.0 percent and one participant expecting rates at 1.0 to 1.5 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, six participants expect rates to be below or at 1.0 percent while nine expect rates from 1.0 to 1.5 percent and four expecting rates in excess of 2.0 percent. In the long term, all 19 participants expect the fed funds rate in the range of 3.0 to 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, Jun 19, 2013
| 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 | |
| 2013 | 18 | 1 | ||||
| 2014 | 15 | 3 | 1 | |||
| 2015 | 1 | 5 | 9 | 1 | 3 | |
| Longer Run | 19 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2013 to 2015. It is evident from Table IV-4 that the prevailing view of 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. The FOMC states that rates will continue to be low even after return of the economy to potential growth.
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 19, 2013
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2013 | 1 |
| 2014 | 3 |
| 2015 | 14 |
| 2016 | 1 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf
There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Jan 2011 to Aug 2013. The index of current prices paid or costs of inputs increased from 16.13 in Dec 2012 to 20.48 in Jul 2013 while the index of current prices received or sales prices increased from 1.08 in Dec 2012 to 3.61 in Jul 2013. The index of future prices paid or expectations of costs of inputs in the next six months fell from 51.61 in Dec 2012 to 40.96 in Aug 2013 while the index of future prices received or expectation of sales prices in the next six months fell from 25.81 in Dec 2012 to 19.28 in Aug 2013. Prices of sales of finished products are less dynamic than prices of costs of inputs during waves of increases. Prices of costs of costs of inputs fall less rapidly than prices of sales of finished products during waves of price decreases. As a result, margins of prices of sales less costs of inputs oscillate with typical deterioration against producers, forcing companies to manage tightly costs and labor inputs.
Table IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Six Months Prices Paid | Six Months Prices Received | |
| Aug 2013 | 20.48 | 3.61 | 40.96 | 19.28 |
| Jul | 17.39 | 1.09 | 28.26 | 11.96 |
| Jun | 20.97 | 11.29 | 45.16 | 17.74 |
| May | 20.45 | 4.55 | 29.55 | 14.77 |
| Apr | 28.41 | 5.68 | 44.32 | 14.77 |
| Mar | 25.81 | 2.15 | 50.54 | 23.66 |
| Feb | 26.26 | 8.08 | 44.44 | 13.13 |
| Jan | 22.58 | 10.75 | 38.71 | 21.51 |
| Dec 2012 | 16.13 | 1.08 | 51.61 | 25.81 |
| Nov | 14.61 | 5.62 | 39.33 | 15.73 |
| Oct | 17.20 | 4.30 | 44.09 | 24.73 |
| Sep | 19.15 | 5.32 | 40.43 | 23.40 |
| Aug | 16.47 | 2.35 | 31.76 | 14.12 |
| Jul | 7.41 | 3.70 | 35.80 | 16.05 |
| Jun | 19.59 | 1.03 | 34.02 | 17.53 |
| May | 37.35 | 12.05 | 57.83 | 22.89 |
| Apr | 45.78 | 19.28 | 50.60 | 22.89 |
| Mar | 50.62 | 13.58 | 66.67 | 32.10 |
| Feb | 25.88 | 15.29 | 62.35 | 34.12 |
| Jan | 26.37 | 23.08 | 53.85 | 30.77 |
| Dec 2011 | 24.42 | 3.49 | 56.98 | 36.05 |
| Nov | 18.29 | 6.10 | 36.59 | 25.61 |
| Oct | 22.47 | 4.49 | 40.45 | 17.98 |
| Sep | 32.61 | 8.70 | 53.26 | 22.83 |
| Aug | 28.26 | 2.17 | 42.39 | 15.22 |
| Jul | 43.33 | 5.56 | 51.11 | 30.00 |
| Jun | 56.12 | 11.22 | 55.10 | 19.39 |
| May | 69.89 | 27.96 | 68.82 | 35.48 |
| Apr | 57.69 | 26.92 | 56.41 | 38.46 |
| Mar | 53.25 | 20.78 | 71.43 | 36.36 |
| Feb | 45.78 | 16.87 | 55.42 | 27.71 |
| Jan | 35.79 | 15.79 | 60.00 | 42.11 |
Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are provided in Table IV-6. As inflation waves throughout the world (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html), indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the levels in the beginning of 2011 because of risk aversion frustrating carry trades even under zero interest rates. The index of prices paid or prices of inputs fell from 23.5 in Dec 2012 to 17.3 in Aug 2013. The index of current prices received was minus 3.3 in May 2013, indicating decrease of prices received. The index of current prices received decreased from 12.4 in Dec 2012 to 9.90 in Aug 2013. The index of future prices paid fell to 38.7 in Aug 2013 from 45.8 in Dec 2012, indicating expectation of lower pressure of increases of input prices, while the index of future prices received fell from 25.6 in Dec 2012 to 23.0 in Aug 2013. Expectations are incorporating faster increases in prices of inputs or costs of production than of sales of produced goods, forcing companies to manage tightly costs and labor inputs.
Table IV-6, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Future Prices Paid | Future Prices Received | |
| 10-Dec | 44.3 | 6.6 | 59.6 | 25.3 |
| 11-Jan | 48.9 | 11.9 | 58.3 | 34.4 |
| 11-Feb | 58.9 | 13.1 | 62.1 | 33.3 |
| 11-Mar | 57.5 | 16.8 | 60.2 | 31.8 |
| 11-Apr | 49.4 | 19.8 | 54.2 | 32.4 |
| 11-May | 47.7 | 18.5 | 52.7 | 27.6 |
| 11-Jun | 38.9 | 8.1 | 38.3 | 6.8 |
| 11-Jul | 35.6 | 6 | 49.6 | 16.7 |
| 11-Aug | 23.3 | -4.7 | 44.3 | 22.7 |
| 11-Sep | 31.6 | 7.6 | 41.8 | 21.8 |
| 11-Oct | 25.4 | 4.1 | 44.5 | 28.4 |
| 11-Nov | 26.3 | 7.6 | 39 | 29.1 |
| 11-Dec | 27.5 | 8.2 | 46.7 | 23.5 |
| 12-Jan | 27.1 | 7.9 | 47.2 | 21.9 |
| 12-Feb | 30.2 | 9.7 | 43.5 | 28.6 |
| 12-Mar | 14.3 | 5.4 | 35.9 | 22 |
| 12-Apr | 16 | 5.3 | 33.3 | 18.6 |
| 12-May | 5.4 | -2.2 | 37.2 | 8.3 |
| 12-Jun | 5.4 | -3.4 | 29.6 | 16.6 |
| 12-Jul | 10.3 | 4.2 | 29.3 | 19.6 |
| 12-Aug | 15.7 | 4.7 | 38 | 23.9 |
| 12-Sep | 15.4 | 4 | 42.8 | 27.4 |
| 12-Oct | 20.6 | 8.4 | 48.1 | 16.1 |
| 12-Nov | 27.9 | 7.5 | 50.7 | 14 |
| 12-Dec | 23.5 | 12.4 | 45.8 | 25.6 |
| 13-Jan | 14.7 | -1.1 | 34.3 | 21.7 |
| 13-Feb | 8.9 | -0.5 | 26.4 | 25.4 |
| 13-Mar | 8.5 | -0.8 | 30.9 | 16.6 |
| 13-Apr | 3.1 | -7.5 | 26.6 | 8.3 |
| 13-May | 6.9 | -3.3 | 30.7 | 18.2 |
| 13-Jun | 22.5 | 14.6 | 26.4 | 23.5 |
| 13-Jul | 21.5 | 7.00 | 42.1 | 23.9 |
| 13-Aug | 17.3 | 9.90 | 38.7 | 23.00 |
Source: Federal Reserve Bank of Philadelphia
http://philadelphiafed.org/index.cfm
Chart IV-1 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2013. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from central bank policy rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Subsequent risk aversion and flows of capital away from commodities into stocks and high-yield bonds caused sharp decline in the index of prices paid followed by another recent rebound.
Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2013. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices received in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2013 but none of prices paid. Prices paid relative to prices received deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy of zero interest rates, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome desired by unconventional monetary policy.
Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Inflation in advanced economies has been fluctuating in waves at the production level with alternating surges and moderation of commodity price shocks. Table IV-7 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI increased 0.5 percent in Jul 2013 and 2.2 percent in 12 months. Measured by 12-month rates, CGPI inflation increased from minus 0.2 percent in Jul 2010 to a high of 2.2 percent in Jul-Aug 2011 and to 2.2 percent in Jul 2013. Calendar-year inflation for 2012 is minus 0.9 percent and 1.5 percent for 2011, which is the highest after declines in 2009 and 2010 but lower than 4.6 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows waves similar to those in other indices around the world (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). In the first wave, annual equivalent inflation reached 5.9 percent in Jan-Apr 2011, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent inflation of minus 1.2 percent in May-Jun 2011. In the third wave, renewed risk aversion caused annual equivalent decline of the CGPI of minus 2.2 percent in Jul-Nov 2011. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Dec 2011 to Jan 2012. In the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 2.0 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation dropped to minus 5.8 percent in May-Jul 2012. In the seventh wave, annual equivalent inflation jumped to 3.0 percent in Aug-Sep 2012. In the eighth wave, annual equivalent inflation was minus 3.0 percent in Oct-Nov 2012 in a new round of risk aversion. In the ninth wave, annual equivalent inflation returned at 3.3 percent in Dec 2012-Jul 2013. Unconventional monetary policies of zero interest rates and quantitative easing have created a difficult environment for economic and financial decisions with significant inflation volatility.
Table IV-7, Japan, Corporate Goods Price Index (CGPI) ∆%
| Month | Year | |
| Jul 2013 | 0.5 | 2.2 |
| Jun | 0.1 | 1.2 |
| May | 0.0 | 0.5 |
| Apr | 0.4 | 0.1 |
| Mar | 0.1 | -0.5 |
| Feb | 0.5 | -0.1 |
| Jan | 0.2 | -0.4 |
| Dec 2012 | 0.4 | -0.7 |
| AE ∆% Dec-Jul | 3.3 | |
| Nov | -0.1 | -1.1 |
| Oct | -0.4 | -1.1 |
| AE ∆% Oct-Nov | -3.0 | |
| Sep | 0.3 | -1.5 |
| Aug | 0.2 | -2.0 |
| AE ∆% Aug-Sep | 3.0 | |
| Jul | -0.5 | -2.3 |
| Jun | -0.6 | -1.5 |
| May | -0.4 | -0.9 |
| AE ∆% May-Jul | -5.8 | |
| Apr | -0.2 | -0.7 |
| Mar | 0.5 | 0.3 |
| Feb | 0.2 | 0.4 |
| AE ∆% Feb-Apr | 2.0 | |
| Jan | -0.1 | 0.3 |
| Dec 2011 | 0.0 | 0.8 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | -0.1 | 1.3 |
| Oct | -0.8 | 1.3 |
| Sep | -0.2 | 2.0 |
| Aug | -0.1 | 2.2 |
| Jul | 0.3 | 2.2 |
| AE ∆% Jul-Nov | -2.2 | |
| Jun | 0.0 | 1.9 |
| May | -0.2 | 1.6 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.8 | 1.8 |
| Mar | 0.6 | 1.3 |
| Feb | 0.1 | 0.7 |
| Jan | 0.4 | 0.6 |
| AE ∆% Jan-Apr | 5.9 | |
| Dec 2010 | 0.5 | 1.2 |
| Nov | -0.1 | 0.9 |
| Oct | -0.1 | 0.9 |
| Sep | 0.0 | -0.1 |
| Aug | -0.1 | 0.0 |
| Jul | 0.0 | -0.2 |
| Calendar Year | ||
| 2012 | -0.9 | |
| 2011 | 1.5 | |
| 2010 | -0.1 | |
| 2009 | -5.3 | |
| 2008 | 4.6 |
AE: annual equivalent
Source: Bank of Japan
Chart IV-3 of the Bank of Japan provides year-on-year percentage changes of the domestic and services Corporate Goods Price Index (CGPI) of Japan from 1970 to 2013. Percentage changes of inflation of services are not as sharp as for goods. Japan had the same sharp waves of inflation during the 1970s as in the US (see Table IV-7 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html). Behavior of the CGPI of Japan in the 1970s mirrors the Great Inflation episode in the United States with waves of inflation rising to two digits. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation also collapsed in the beginning of the 1980s because of tight monetary policy in the US with focus on inflation instead of on the gap of actual relative to potential output. The areas in shade correspond to the dates of cyclical recessions. The salient event is the sharp rise of inflation of the domestic goods CGPI in 2008 during the global recession that was mostly the result of carry trades from fed funds rates collapsing to zero to long positions in commodity futures in an environment of relaxed financial risk appetite. The panic of toxic assets in banks to be withdrawn by the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009) drove unusual risk aversion with unwinding of carry trades of exposures in commodities and other risk financial assets. Carry trades returned once TARP was clarified as providing capital to financial institutions and stress tests verified the soundness of US banks. The return of carry trades explains the rise of CGPI inflation after mid-2009. Inflation of the CGPI fluctuated with zero interest rates in alternating episodes of risk aversion and risk appetite.
Chart IV-3, Japan, Domestic Corporate Goods Price and Services Index, Year-on-Year Percentage Change, 1970-2013
Notes: Blue: Domestic Corporate Goods Price Index All Commodities; Red: Corporate Price Services Index
Source: Bank of Japan
http://www.boj.or.jp/en/statistics/pi/cgpi_2010/index.htm/
There is similar behavior of year-on-year percentage changes of the US producer price index from 1970 to 2013 in Chart IV-4 of the US Bureau of Labor Statistics as in Chart IV-3 with the domestic goods CGPI. The behavior of the CGPI of Japan in the 1970s is quite similar to that of the US PPI. The US producer price index increased together with the CGPI driven by the period of one percent fed funds rates from 2003 to 2004 inducing carry trades into commodity futures and other risk financial assets and the slow adjustment in increments of 25 basis points at every FOMC meeting from Jun 2004 to Jun 2006. There is also the same increase in inflation in 2008 during the global recession followed by collapse because of unwinding positions during risk aversion and new rise of inflation during risk appetite.
Chart IV-4, US, Producer Price Index Finished Goods, Year-on-Year Percentage Change, 1970-2013
Source: US Bureau of Labor Statistics
Finer detail is provided by Chart IV-5 of the domestic CGPI from 2008 to 2013. The CGPI rose almost vertically in 2008 as the collapse of fed funds rates toward zero drove exposures in commodities and other risk financial assets because of risk appetite originating in the belief that the financial crisis was restricted to structured financial products and not to contracts negotiated in commodities and other exchanges. The panic with toxic assets in banks to be removed by TARP (Cochrane and Zingales 2009) caused unwinding carry trades in flight to US government obligations that drove down commodity prices and price indexes worldwide. Apparent resolution of the European debt crisis of 2010 drove risk appetite in 2011 with new carry trades from zero fed funds rates into commodity futures and other risk financial assets. Domestic CGPI inflation returned in waves with upward slopes during risk appetite and downward slopes during risk aversion. Yen devaluation promoted by monetary and fiscal policy translates imported inputs in higher domestic prices.
Chart IV-5, Japan, Domestic Corporate Goods Price Index, Monthly, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
There is similar behavior of the US producer price index from 2008 to 2013 in Chart IV-4 as in the domestic CGPI in Chart IV-6. A major difference is the strong long-term trend in the US producer price index with oscillations originating mostly in bouts of risk aversion such as the downward slope in the final segment in Chart IV-6 followed by increasing slope during periods of risk appetite. Carry trades from zero interest rates to commodity futures and other risk financial assets drive the upward trend of the US producer price index while oscillations originate in alternating episodes of risk aversion and risk appetite.
Chart IV-6, US, Producer Price Index Finished Goods, Monthly, 2008-2013
Source: US Bureau of Labor Statistics
There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-7 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart IV-7 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 104.9 in Jun 2009 to 94.0 in Jan 2012 or minus 10.4 percent and increased to 107.4 in Jul 2013 for a gain of 14.3 percent relative to Jan 2012 and 2.4 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials.
Chart IV-7, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart IV-7A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 97.9 in Jun 2009 to 103.1 in Apr 2012 or 5.3 percent but dropped to 100.2 in Apr 2013 or minus 2.8 percent relative to Apr 2012 and gained 1.2 percent to 99.1 in Jun 2013 relative to Jun 2009.
Chart IV-7A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart IV-8 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates collapsing to zero into commodity futures and decline during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan. The import corporate goods price index on the yen basis increased from 93.5 in Jun 2009 to 113.1 in Apr 2012 or 21.0 percent and to 122.8 in Jul 2013 or gain of 8.6 percent relative to Apr 2012 and 31.3 percent relative to Jun 2009.
Chart IV-8, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart IV-8A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 86.2 in Jun 2009 to 119.5 in Apr 2012 or 38.6 percent and to 111.6 in Jul 2013 or minus 6.6 percent relative to Apr 2012 and gain of 29.5 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency increased 5.3 percent from Jun 2009 to Apr 2012 while the import corporate goods price index increased 38.6 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.6 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.
Chart IV-8A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Table IV-8 provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Jun 2013. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Jul 2013, the export index on the contract currency basis decreased 0.1 percent and decreased 7.0 percent on the yen basis. For the entire period from Jan 2008 to Jul 2013, the import index increased 10.8 percent on the contract currency basis and increased 3.2 percent on the yen basis. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.
Table IV-8, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis
| Month | Exports Contract | Exports Yen | Imports Contract Currency | Imports Yen |
| 2008/01 | 99.2 | 115.5 | 100.7 | 119.0 |
| 2008/02 | 99.8 | 116.1 | 102.4 | 120.6 |
| 2008/03 | 100.5 | 112.6 | 104.5 | 117.4 |
| 2008/04 | 101.6 | 115.3 | 110.1 | 125.2 |
| 2008/05 | 102.4 | 117.4 | 113.4 | 130.4 |
| 2008/06 | 103.5 | 120.7 | 119.5 | 140.3 |
| 2008/07 | 104.7 | 122.1 | 122.6 | 143.9 |
| 2008/08 | 103.7 | 122.1 | 123.1 | 147.0 |
| 2008/09 | 102.7 | 118.3 | 117.1 | 137.1 |
| 2008/10 | 100.2 | 109.6 | 109.1 | 121.5 |
| 2008/11 | 98.6 | 104.5 | 97.8 | 105.8 |
| 2008/12 | 97.9 | 100.6 | 89.3 | 93.0 |
| 2009/01 | 98.0 | 99.5 | 85.6 | 88.4 |
| 2009/02 | 97.5 | 100.1 | 85.7 | 89.7 |
| 2009/03 | 97.3 | 104.2 | 85.2 | 93.0 |
| 2009/04 | 97.6 | 105.6 | 84.4 | 93.0 |
| 2009/05 | 97.5 | 103.8 | 84.0 | 90.8 |
| 2009/06 | 97.9 | 104.9 | 86.2 | 93.5 |
| 2009/07 | 97.5 | 103.1 | 89.2 | 95.0 |
| 2009/08 | 98.3 | 104.4 | 89.6 | 95.8 |
| 2009/09 | 98.3 | 102.1 | 91.0 | 94.7 |
| 2009/10 | 98.0 | 101.2 | 91.0 | 94.0 |
| 2009/11 | 98.4 | 100.8 | 92.8 | 94.8 |
| 2009/12 | 98.3 | 100.7 | 95.4 | 97.5 |
| 2010/01 | 99.4 | 102.2 | 97.0 | 100.0 |
| 2010/02 | 99.7 | 101.6 | 97.6 | 99.8 |
| 2010/03 | 99.7 | 101.8 | 97.0 | 99.2 |
| 2010/04 | 100.5 | 104.6 | 99.9 | 104.6 |
| 2010/05 | 100.7 | 102.9 | 101.7 | 104.9 |
| 2010/06 | 100.1 | 101.6 | 100.0 | 102.3 |
| 2010/07 | 99.4 | 99.0 | 99.9 | 99.8 |
| 2010/08 | 99.1 | 97.3 | 99.5 | 97.5 |
| 2010/09 | 99.4 | 97.0 | 100.0 | 97.2 |
| 2010/10 | 100.1 | 96.4 | 100.5 | 95.8 |
| 2010/11 | 100.7 | 97.4 | 102.6 | 98.2 |
| 2010/12 | 101.2 | 98.3 | 104.4 | 100.6 |
| 2011/01 | 102.1 | 98.6 | 107.2 | 102.6 |
| 2011/02 | 102.9 | 99.5 | 109.0 | 104.3 |
| 2011/03 | 103.5 | 99.6 | 111.8 | 106.3 |
| 2011/04 | 104.1 | 101.7 | 115.9 | 111.9 |
| 2011/05 | 103.9 | 99.9 | 118.8 | 112.4 |
| 2011/06 | 103.8 | 99.3 | 117.5 | 110.5 |
| 2011/07 | 103.6 | 98.3 | 118.3 | 110.2 |
| 2011/08 | 103.6 | 96.6 | 118.6 | 108.1 |
| 2011/09 | 103.7 | 96.1 | 117.0 | 106.2 |
| 2011/10 | 103.0 | 95.2 | 116.6 | 105.6 |
| 2011/11 | 101.9 | 94.8 | 115.4 | 105.4 |
| 2011/12 | 101.5 | 94.5 | 116.1 | 106.2 |
| 2012/01 | 101.8 | 94.0 | 115.0 | 104.2 |
| 2012/02 | 102.4 | 95.8 | 115.8 | 106.4 |
| 2012/03 | 102.9 | 99.2 | 118.3 | 112.9 |
| 2012/04 | 103.1 | 98.7 | 119.5 | 113.1 |
| 2012/05 | 102.2 | 96.3 | 118.1 | 109.9 |
| 2012/06 | 101.4 | 95.0 | 115.2 | 106.7 |
| 2012/07 | 100.6 | 94.0 | 112.0 | 103.6 |
| 2012/08 | 100.8 | 94.1 | 112.4 | 103.6 |
| 2012/09 | 100.9 | 94.0 | 114.7 | 105.2 |
| 2012/10 | 101.0 | 94.7 | 113.8 | 105.2 |
| 2012/11 | 100.9 | 95.9 | 113.3 | 106.6 |
| 2012/12 | 100.7 | 98.0 | 113.6 | 109.7 |
| 2013/01 | 101.0 | 102.5 | 114.0 | 115.5 |
| 2013/02 | 101.5 | 105.9 | 114.9 | 120.4 |
| 2013/03 | 101.3 | 106.7 | 115.2 | 122.2 |
| 2013/04 | 100.2 | 107.5 | 114.3 | 124.0 |
| 2013/05 | 99.6 | 109.1 | 112.7 | 125.4 |
| 2013/06 | 99.2 | 106.1 | 112.2 | 121.4 |
| 2013/7 | 99.1 | 107.4 | 111.6 | 122.8 |
Source: Bank of Japan http://www.boj.or.jp/en/statistics/pi/cgpi_2010/index.htm/
Chart IV-9 provides the monthly corporate goods price index (CGPI) of Japan from 1970 to 2013. Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html 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). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from interest rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Table IV-7 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html and Table IV-5 at http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve_28.html).
Chart IV-9, Japan, Domestic Corporate Goods Price Index, Monthly, 1970-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
The producer price index of the US from 1970 to 2013 in Chart IV-10 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.
Chart IV-10, US, Producer Price Index Finished Goods, Monthly, 1970-2013
Source: US Bureau of Labor Statistics
Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-9. Petroleum and coal with weight of 5.7 percent increased 2.1 percent in Jul 2013 and increased 16.8 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.1 percent, increased 0.2 percent in Jul 2013 and increased 1.2 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income.
Table IV-9, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%
| Jul 2013 | Weight | Month ∆% | 12 Month ∆% |
| Total | 1000.0 | 0.5 | 2.2 |
| Food, Beverages, Tobacco, Feedstuffs | 137.5 | 0.2 | 1.1 |
| Petroleum & Coal | 57.4 | 2.1 | 16.8 |
| Production Machinery | 30.8 | 0.2 | 1.2 |
| Electronic Components | 31.0 | 0.6 | -0.8 |
| Electric Power, Gas & Water | 52.7 | 5.1 | 9.5 |
| Iron & Steel | 56.6 | 0.3 | -1.7 |
| Chemicals | 92.1 | 0.1 | 5.0 |
| Transport | 136.4 | 0.0 | -1.5 |
Source: Bank of Japan http://www.boj.or.jp/en/ http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1307.pdf
Percentage point contributions to change of the corporate goods price index (CGPI) in Jul 2013 are provided in Table IV-10 divided into domestic, export and import segments. In the domestic CGPI, increasing 0.5 percent in Jul 2013, the energy shock is evident in the contribution of 0.33 percentage points by electric power, gas and water in new carry trades of exposures in commodity futures. The exports CGPI decreased 0.1 percent on the basis of the contract currency with deduction of 0.09 percentage points by metals and related products. The imports CGPI decreased 0.5 percent on the contract currency basis. Metals & related products deducted 0.37 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide.
Table IV-10, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index
| Groups Jul 2013 | Contribution to Change Percentage Points |
| A. Domestic Corporate Goods Price Index | Monthly Change: |
| Electric Power, Gas & Water | 0.33 |
| Petroleum & Coal Products | 0.15 |
| Food, Beverages, Tobacco & Feedstuff | 0.04 |
| Lumber & Wood Products | 0.02 |
| Agriculture, Forestry & Fishery Products | 0.02 |
| Iron & Steel | 0.02 |
| Nonferrous Metals | -0.02 |
| B. Export Price Index | Monthly Change: |
| Metals & Related Products | -0.09 |
| Transportation Equipment | -0.08 |
| General Purpose, Production & Business Oriented Machinery | -0.05 |
| Electric & Electronic Products | 0.12 |
| Chemicals & Related Products | 0.03 |
| C. Import Price Index | Monthly Change: -0.5 % contract currency basis |
| Metals & Related Products | -0.37 |
| Petroleum, Coal & Natural Gas | -0.11 |
| Foodstuffs & Feedstuffs | -0.05 |
| Chemicals & Related Products | -0.03 |
| Electric & Electronic Products | 0.02 |
Source: Bank of Japan http://www.boj.or.jp/en/ http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1307.pdf
The harmonized index of consumer prices of the euro area in Table IV-11 has similar inflation waves as in most countries (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html). In the first wave, consumer prices in the euro area increased at the annual equivalent rate of 5.2 percent in Jan-Apr 2011. In the second wave, risk aversion caused unwinding of commodity carry trades with inflation decreasing at the annual equivalent rate of minus 2.4 percent in May-Jul 2011. In the third wave, improved risk appetite resulted in annual equivalent inflation in Aug-Nov 2011 at 4.3 percent. In the fourth wave, return of risk aversion caused decline of consumer prices at the annual equivalent rate of minus 3.0 percent in Dec 2011 to Jan 2012. In the fifth wave, improved attitudes toward risk aversion resulted in higher consumer price inflation at the high annual equivalent rate of 9.6 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation fell to minus 2.8 percent in May-Jul 2012. In the seventh wave, increasing risk appetite caused new carry trade exposures that resulted in annual equivalent inflation of 6.8 percent in Aug-Sep 2012 and 5.3 percent in Aug-Oct 2012. In the eighth wave, annual-equivalent inflation was minus 2.4 percent in Nov 2012. In the ninth wave, annual equivalent inflation was 4.9 percent in Dec 2012. In the tenth wave, annual equivalent inflation was minus 11.4 percent in Jan 2013. In the eleventh wave, annual equivalent inflation was 10.0 percent in Feb-Mar 2013. In the twelfth wave, annual equivalent inflation was minus 1.2 percent in Apr 2013. In the thirteenth wave, annual equivalent inflation rose to 1.2 percent in May-Jun 2013. In the fourteenth wave, annual equivalent inflation was minus 5.8 percent in Jul 2013. Inflation volatility around the world is confusing the information required in investment and consumption decisions.
Table IV-11, Euro Area Harmonized Index of Consumer Prices Month and 12 Months ∆%
| Month ∆% | 12 Months ∆% | |
| Jul 2013 | -0.5 | 1.6 |
| AE ∆% Jul | -5.8 | |
| Jun | 0.1 | 1.6 |
| May | 0.1 | 1.4 |
| AE ∆% May-Jun | 1.2 | |
| Apr | -0.1 | 1.2 |
| AE ∆% Apr | -1.2 | |
| Mar | 1.2 | 1.7 |
| Feb | 0.4 | 1.9 |
| AE ∆% Feb-Mar | 10.0 | |
| Jan | -1.0 | 2.0 |
| AE ∆% Jan | -11.4 | |
| Dec 2012 | 0.4 | 2.2 |
| AE ∆% Dec | 4.9 | |
| Nov | -0.2 | 2.2 |
| AE ∆% Nov | -2.4 | |
| Oct | 0.2 | 2.5 |
| Sep | 0.7 | 2.6 |
| Aug | 0.4 | 2.6 |
| AE ∆% Aug-Oct | 5.3 | |
| Jul 2012 | -0.5 | 2.4 |
| Jun | -0.1 | 2.4 |
| May | -0.1 | 2.4 |
| AE ∆% May-Jul | -2.8 | |
| Apr | 0.5 | 2.6 |
| Mar | 1.3 | 2.7 |
| Feb | 0.5 | 2.7 |
| AE ∆% Feb-Apr | 9.6 | |
| Jan | -0.8 | 2.7 |
| Dec 2011 | 0.3 | 2.7 |
| AE ∆% Dec-Jan | -3.0 | |
| Nov | 0.1 | 3.0 |
| Oct | 0.4 | 3.0 |
| Sep | 0.7 | 3.0 |
| Aug | 0.2 | 2.6 |
| AE ∆% Aug-Nov | 4.3 | |
| Jul | -0.6 | 2.6 |
| Jun | 0.0 | 2.7 |
| May | 0.0 | 2.7 |
| AE ∆% May-Jul | -2.4 | |
| Apr | 0.6 | 2.8 |
| Mar | 1.4 | 2.7 |
| Feb | 0.4 | 2.4 |
| Jan | -0.7 | 2.3 |
| AE ∆% Jan-Apr | 5.2 | |
| Dec 2010 | 0.6 | 2.2 |
AE: annual equivalent Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Table IV-12 provides weights and inflation of selected components of the HICP of the euro area. Inflation of all items excluding energy increased 1.6 percent in Jul 2013 relative to Jul 2012 and decreased 0.5 percent in Jul 2013 relative to Jun 2013. Prices of non-energy industrial goods increased 0.4 percent in Jul 2013 relative to a year earlier and fell 3.7 percent in Jul 2013. Inflation of services was 1.4 percent in Jul 2013 relative to a year earlier and increased 1.0 percent in Jul 2013.
Table IV-12, Euro Area, HICP Inflation and Selected Components, ∆%
| Weight 2013 | Jul 2013/ Jun 2012 | 12-month Average Rate Jul 2013-2012/ Jul 2012-2011 | ∆% Jul 2013/Jun 2013 | |
| All Items | 1000.0 | 1.6 | 2.0 | -0.5 |
| All Items ex Energy | 890.4 | 1.6 | 1.7 | -0.7 |
| All Items ex Energy, Food, Alcohol & Tobacco | 696.7 | 1.1 | 1.3 | -0.9 |
| All Items ex Energy & Unprocessed Food | 816.9 | 1.3 | 1.5 | -0.7 |
| All Items ex Seasonal Food | 852.7 | 1.4 | 1.5 | -0.6 |
| All Items ex Tobacco | 975.8 | 1.5 | 1.9 | -0.6 |
| Energy | 109.6 | 1.6 | 4.0 | 0.8 |
| Food, Alcohol & Tobacco | 193.7 | 3.5 | 3.1 | -0.1 |
| Non-energy Industrial Goods | 273.6 | 0.4 | 0.9 | -3.7 |
| Services | 423.0 | 1.4 | 1.6 | 1.0 |
Source: EUROSTAT AE: annual equivalent Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
Table IV-13 provides weights and inflation of selected components of the HICP of the euro area with highest annual impact. Prices of fruit with weight of 11.8 increased 11.4 percent in Jul 2013 relative to a year earlier and contributed 0.12 percentage points. Inflation of vegetables with weight of 11.8 increased 8.0 percent in Jul 2013 relative to a year earlier and contributed 0.09 percentage points. Fuels for transport with weight of 50.0 fell 0.4 percent relative to a year earlier, deducting 6 percentage points in reversal of energy carry trades.
Table IV-13, Euro Area, Components with Highest Impact on Annual Inflation
| Weight % 2013 | Annual Rate Jul 2013 ∆% | Impact Percentage Points Jul 2013 | |
| Fruit | 11.8 | 11.4 | 0.12 |
| Vegetables | 15.2 | 8.0 | 0.09 |
| Tobacco | 24.2 | 4.9 | 0.08 |
| Fuels for Transport | 50.0 | 0.4 | -0.06 |
| Medical and Paramedical Services | 11.3 | -5.0 | -0.08 |
| Telecommunications | 29.4 | -4.4 | -0.18 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
The estimate of consumer price inflation in Germany in Table IV-14 is 1.9 percent in 12 months ending in Jul 2013, 0.5 percent NSA (not seasonally adjusted) in Jul 2013 relative to Jun 2013 and 0.2 percent CSA (calendar and seasonally adjusted) in Jul 2013 relative to Jun 2013. There are waves of consumer price inflation in Germany similar to those worldwide (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html), as shown in Table IV-14. In the first wave, annual equivalent inflation was 3.0 percent in Feb-Apr 2011 NSA and 2.4 percent SA during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent NSA and 3.0 percent SA in May-Jun 2011 because of risk aversion caused by European sovereign debt event. In the third wave, annual equivalent consumer price inflation was 1.7 percent NSA and 1.9 percent SA in Jul-Nov 2011 because of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 0.6 percent NSA and 1.8 percent SA in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 4.5 percent NSA and 2.4 percent SA in Feb-Apr 2012 during another energy-commodity carry trade shock. In the sixth wave, annual equivalent inflation in May-Jun 2012 is minus 1.2 percent NSA and 0.6 percent SA. In the seventh wave, annual equivalent inflation NSA is 4.9 percent in Jul-Aug 2012 and 3.7 percent SA. In the eighth wave in Sep-Dec 2012, annual equivalent inflation is 1.5 percent NSA and 1.8 percent SA. In the ninth wave, annual equivalent inflation fell to minus 5.8 percent NSA in Jan 2013 and minus 1.2 percent SA. In the eleventh wave, annual equivalent inflation rose to 6.8 percent NSA in Feb-Mar 2013 and 1.2 percent CSA. In the twelfth wave, annual equivalent inflation in Apr fell to minus 5.8 percent NSA and minus 0.0 percent SA in reversal of carry trades into commodity futures. In the thirteenth wave, annual equivalent inflation returned at 4.1 percent in May-Jul 2013 NSA and 3.7 percent SA. Under unconventional monetary policy of zero interest rates and quantitative easing inflation becomes highly volatile during alternative shocks of risk aversion and risk appetite, preventing sound investment and consumption decisions.
Table IV-14, Germany, Consumer Price Index ∆%
| 12-Month ∆% | Month ∆% NSA | Month ∆% CSA | |
| Jul 2013 | 1.9 | 0.5 | 0.2 |
| Jun | 1.8 | 0.1 | 0.3 |
| May | 1.5 | 0.4 | 0.4 |
| AE ∆% May-Jul | 4.1 | 3.7 | |
| Apr | 1.2 | -0.5 | 0.0 |
| AE ∆% Apr | -5.8 | 0.0 | |
| Mar | 1.4 | 0.5 | 0.1 |
| Feb | 1.5 | 0.6 | 0.1 |
| AE ∆% Feb-Mar | 6.8 | 1.2 | |
| Jan | 1.7 | -0.5 | -0.1 |
| AE ∆% Jan | -5.8 | -1.2 | |
| Dec 2012 | 2.0 | 0.3 | 0.2 |
| Nov | 1.9 | 0.1 | 0.1 |
| Oct | 2.0 | 0.0 | 0.2 |
| Sep | 2.0 | 0.1 | 0.1 |
| AE ∆% Sep-Dec | 1.5 | 1.8 | |
| Aug | 2.2 | 0.4 | 0.3 |
| Jul | 1.9 | 0.4 | 0.2 |
| AE ∆% Jul-Aug | 4.9 | 3.0 | |
| Jun | 1.7 | -0.2 | 0.0 |
| May | 2.0 | 0.0 | 0.1 |
| AE ∆% May-Jun | -1.2 | 0.6 | |
| Apr | 2.0 | -0.2 | 0.2 |
| Mar | 2.2 | 0.6 | 0.2 |
| Feb | 2.2 | 0.7 | 0.2 |
| AE ∆% Feb-Apr | 4.5 | 2.4 | |
| Jan | 2.1 | -0.1 | 0.3 |
| Dec 2011 | 2.0 | 0.2 | 0.0 |
| AE ∆% Dec-Jan | 0.6 | 1.8 | |
| Nov | 2.4 | 0.2 | 0.2 |
| Oct | 2.3 | 0.0 | 0.1 |
| Sep | 2.4 | 0.2 | 0.3 |
| Aug | 2.1 | 0.1 | 0.1 |
| Jul | 2.1 | 0.2 | 0.1 |
| AE ∆% Jul-Nov | 1.7 | 1.9 | |
| Jun | 2.1 | 0.1 | 0.3 |
| May | 2.0 | 0.0 | 0.2 |
| AE ∆% May-Jun | 0.6 | 3.0 | |
| Apr | 1.9 | 0.0 | 0.2 |
| Mar | 2.0 | 0.6 | 0.2 |
| Feb | 1.9 | 0.6 | 0.2 |
| Jan | 1.7 | -0.2 | 0.2 |
| AE ∆% Feb-Apr | 3.0 | 2.4 | |
| Dec 2010 | 1.3 | 0.6 | 0.2 |
| Nov | 1.5 | 0.1 | 0.2 |
| Oct | 1.3 | 0.1 | 0.2 |
| Sep | 1.2 | -0.1 | 0.1 |
| Aug | 1.0 | 0.1 | 0.1 |
| Annual Average ∆% | |||
| 2012 | 2.0 | ||
| 2011 | 2.1 | ||
| 2010 | 1.1 | ||
| 2009 | 0.4 | ||
| 2008 | 2.6 | ||
| Dec 2009 | 0.8 | ||
| Dec 2008 | 1.1 | ||
| Dec 2007 | 3.2 | ||
| Dec 2006 | 1.4 | ||
| Dec 2005 | 1.4 | ||
| Dec 2004 | 2.2 | ||
| Dec 2003 | 1.1 | ||
| Dec 2002 | 1.1 | ||
| Dec 2001 | 1.6 |
AE: Annual Equivalent
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-11 of the Statistisches Bundesamt Deutschland, or federal statistical office of Germany, provides the unadjusted consumer price index of Germany from 2005 to 2013. There is evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in subsequent months with renewed strength in Dec 2011, decline in Jan 2012 and another upward spike from Feb to Apr 2012, new drop in May-Jun 2012 and increases in Jul and Aug 2012 relaxed in Sep-Nov 2012. Inflation returned in Dec 2012 and fell in Jan 2013, rebounding in Feb-Mar 2013. Inflation fell in Apr 2013 and rebounded in May 2013. Reversals of commodity exposures caused the decline in Apr 2013 followed by increases in May-Jul 2013. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.
Chart IV-11, Germany, Consumer Price Index, Unadjusted, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-11A provides the consumer price index NSA of the US from 2005 to 2013. The salient similarity is the hump in 2008 caused by commodity carry trades driven by the movement to zero interest rates. Inflation communicated worldwide through carry trade from zero interest rates to exposures in commodity futures, creating instability in financial and economic decisions.
Chart IV-11A, US, Consumer Price Index, All Items, NSA, 2005-2013
Source: Bureau of Labor Statistics http://www.bls.gov/cpi/data.htm
Chart IV-12, of the Statistisches Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index and trend of Germany from 2009 to 2013. Chart IV-12 captures inflation waves with alternation of periods of positive and negative slopes resulting from zero interest rates with shocks of risk appetite and risk aversion. For example, the negative slope of decline of inflation by 0.2 percent in Jun 2012 and 0.0 percent in May 2012 follows an upward slope of price increases in Feb-Apr 2012 after decline of inflation by 0.1 percent in Jan 2012. The final segment shows another positive slope caused by inflation of 0.4 percent in Jul 2012, which is followed by 0.4 percent in Aug 2012 and flattening segment as inflation remains almost unchanged with 0.1 percent in Sep and 0.0 percent in Oct 2012, increasing 0.1 percent in Nov 2012 and increasing 0.3 percent in Dec 2012. Inflation fell 0.5 percent in Jan 2013 and jumped 0.6 percent in Feb 2013 and 0.5 percent in Mar 2013. The final declining segment indicates the decline of 0.5 percent in Apr 2013 followed by the increases in May-Jul 2013. The waves occur around an upward trend of prices, disproving the proposition of fear of deflation.
Chart IV-12, Germany, Consumer Price Index, Unadjusted and Trend, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table IV-15 provides the monthly and 12-month rate of inflation for segments of the consumer price index of Germany in Jul 2013. Inflation excluding energy increased 0.3 percent in Jul 2013 and rose 1.8 percent in 12 months. Excluding household energy inflation was 0.4 percent in Jul 2013 and rose 1.6 percent in 12 months. Food prices decreased 0.3 percent in Jul 2013 and increased 5.7 percent in 12 months. There were differences in inflation of energy-related prices. Heating oil decreased 3.6 percent in 12 months and increased 3.3 percent in Jul in return of carry trades. Motor fuels increased 1.9 percent in Jul and decreased 0.1 percent in 12 months.
Table IV-15, Germany, Consumer Price Index ∆%
| Jul 2013 | Weight | 12- Month ∆% | Month ∆% |
| Total | 1,000.00 | 1.9 | 0.5 |
| Excluding heating oil and motor fuels | 950.52 | 2.0 | 0.3 |
| Excluding household energy | 931.81 | 1.6 | 0.4 |
| Excluding Energy | 893.44 | 1.8 | 0.3 |
| Total Goods | 479.77 | 2.5 | -0.1 |
| Nondurable Consumer Goods | 307.89 | 3.3 | 0.4 |
| Medium-Term Life Consumer Goods | 91.05 | 1.7 | -2.2 |
| Durable Consumer Goods | 80.83 | -0.7 | 0.0 |
| Services | 520.23 | 1.5 | 0.9 |
| Energy Components | |||
| Motor Fuels | 38.37 | -0.1 | 1.9 |
| Household Energy | 68.19 | 4.8 | 0.7 |
| Heating Oil | 11.11 | -3.6 | 3.3 |
| Food | 90.52 | 5.7 | -0.3 |
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/08/PE13_267_611.html
Table IV-16 provides monthly and 12 months consumer price inflation in France. There are the same waves as in inflation worldwide (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). In the first wave, annual equivalent inflation in Jan-Apr 2011 was 4.3 percent driven by the carry trade from zero interest rates to commodity futures positions in an environment of risk appetite. In the second wave, risk aversion caused the reversal of carry trades into commodity futures, resulting in the fall of the annual equivalent inflation rate to minus 1.2 percent in May-Jul 2011. In the third wave, annual equivalent inflation rose to 3.0 percent in Aug-Nov 2011 with alternations of risk aversion and risk appetite. In the fourth wave, risk aversion originating in the European debt crisis caused annual equivalent inflation of 0.0 percent from Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation increased to 5.3 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation was minus 2.4 percent in May-Jul 2012 during another bout of risk aversion causing reversal of carry trades from zero interest rates to commodity price futures exposures. In the seventh wave, annual equivalent inflation jumped to 8.7 percent in Aug 2012, 3.0 percent in Aug-Sep 2012 and 2.8 percent in Aug-Oct 2012. In the eighth wave, annual equivalent inflation was minus 2.4 percent in Nov 2012 and minus 1.6 percent in Nov 2012 to Jan 2013. In the ninth wave, annual equivalent inflation was 6.8 percent in Feb-Mar 2013. In the tenth wave, annual equivalent inflation was minus 1.2 percent in Apr because of reversal of commodity carry trades. In the eleventh wave, annual equivalent inflation was 1.8 percent in May-Jun 2013. In the twelfth wave, annual equivalent inflation was minus 3.5 percent in Jul 2013.
Table IV-16, France, Consumer Price Index, Month and 12-Month ∆%
| Month ∆% | 12-Month ∆% | |
| Jul 2013 | -0.3 | 1.1 |
| AE ∆% Jul | -3.5 | |
| Jun | 0.2 | 0.9 |
| May | 0.1 | 0.8 |
| AE ∆% May-Jun | 1.8 | |
| Apr | -0.1 | 0.7 |
| AE ∆% Apr | -1.2 | |
| Mar | 0.8 | 1.0 |
| Feb | 0.3 | 1.0 |
| AE ∆% Feb-Mar | 6.8 | |
| Jan | -0.5 | 1.2 |
| Dec 2012 | 0.3 | 1.3 |
| Nov | -0.2 | 1.4 |
| AE ∆% Nov-Jan | -1.6 | |
| Oct | 0.2 | 1.9 |
| Sep | -0.2 | 1.9 |
| Aug | 0.7 | 2.1 |
| AE ∆% Aug-Oct | 2.8 | |
| Jul | -0.5 | 1.9 |
| Jun | 0.0 | 1.9 |
| May | -0.1 | 2.0 |
| AE ∆% May-Jul | -2.4 | |
| Apr | 0.1 | 2.1 |
| Mar | 0.8 | 2.3 |
| Feb | 0.4 | 2.3 |
| AE ∆% Feb-Apr | 5.3 | |
| Jan | -0.4 | 2.4 |
| Dec 2011 | 0.4 | 2.5 |
| AE ∆% Dec-Jan | 0.0 | |
| Nov | 0.3 | 2.5 |
| Oct | 0.3 | 2.4 |
| Sep | -0.1 | 2.2 |
| Aug | 0.5 | 2.2 |
| AE ∆% Aug-Nov | 3.0 | |
| Jul | -0.5 | 1.9 |
| Jun | 0.1 | 2.1 |
| May | 0.1 | 2.0 |
| AE ∆% May-Jul | -1.2 | |
| Apr | 0.3 | 2.1 |
| Mar | 0.8 | 2.0 |
| Feb | 0.5 | 1.6 |
| Jan | -0.2 | 1.8 |
| AE ∆% Jan-Apr | 4.3 | |
| Dec 2010 | 0.4 | 1.8 |
| Annual | ||
| 2012 | 2.0 | |
| 2011 | 2.1 | |
| 2010 | 1.5 | |
| 2009 | 0.1 | |
| 2008 | 2.8 | |
| 2007 | 1.5 | |
| 2006 | 1.6 | |
| 2005 | 1.8 | |
| 2004 | 2.1 | |
| 2003 | 2.1 | |
| 2002 | 1.9 | |
| 2001 | 1.7 | |
| 2000 | 1.7 | |
| 1999 | 0.5 | |
| 1998 | 0.7 | |
| 1997 | 1.2 | |
| 1996 | 2.0 | |
| 1995 | 1.8 | |
| 1994 | 1.6 | |
| 1993 | 2.1 | |
| 1992 | 2.4 | |
| 1991 | 3.2 |
AE: Annual Equivalent Metropolitan France
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20130814
Chart IV-13 of Institut National de la Statistique et des Études Économiques provides the consumer price index in France since Jan 1998. There is the same jump and decline of inflation during the global recession from 2008 to 2009 caused by carry trades from zero interest rates into commodity exposures. The index also captures the waves of inflation around an upward trend.
Chart IV-13, France, Consumer Price Index, Jan 1998-Jun 2013, 1998=100
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20130814
Table IV-177 provides consumer price inflation in France and of various items in Jul 2013 and in the 12 months ending in Jul 2013. Inflation of all items was minus 0.3 percent in Jul 2013 and 1.1 percent in 12 months. Energy prices increased 0.3 percent in Jul 2013 and increased 1.8 percent in 12 months. Transport and communications increased 2.9 percent in Jul 2013 and fell 4.8 percent in 12 months. Food and rentals and dwellings show higher 12-month increases of 1.8 percent and 1.8 percent, respectively, with energy increasing 1.8 percent in 12 months
Table IV-17, France, Consumer Price Index, Month and 12-Month Percentage Changes of Index and Components, ∆%
| Jul 2013 | Weights | Month ∆% | 12-Month ∆% |
| All Items | 10000 | -0.3 | 1.1 |
| Food | 1658 | -0.7 | 1.8 |
| Manufactured Products | 2738 | -2.8 | -0.5 |
| Energy | 822 | 0.3 | 1.8 |
| Petroleum Products | 495 | 0.4 | 0.1 |
| Services | 4576 | 1.1 | 1.1 |
| Rentals, Dwellings | 748 | 0.2 | 1.8 |
| Transport and Communications | 506 | 2.9 | -4.8 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20130814
Chart IV-14 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows headline and core consumer price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. The current downward trend of inflation originates in concentration of carry trades in equities and high-yield bonds with reversal of exposures in commodities.
Chart IV-14, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20130814
Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-18 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12-month rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct 2011, 5.4 percent in Nov 2011 and down to 1.8 percent in Jul 2012. Inflation of all manufactured products increased marginally to 2.3 percent in Aug 2012, 2.5 percent in Sep, 2.6 in Oct, 2.1 percent in Nov-Jan 2012, 2.3 percent in Feb 2013, 1.9 percent in Mar 2013 and 1.0 percent in Apr 2013. Output prices increased 1.2 percent in the 12 months ending in May 2013, 2.0 percent in Jun 2013 and 2.1 percent in Jul 2013. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by output prices for the UK, which was originated in decline of commodity prices (see Barsky and Killian 2004) but was used as an argument for unconventional monetary policy of zero interest rates and quantitative easing during the past decade.
Table IV-18, UK Output Prices 12 Months ∆% NSA
| All Manufactured Products | Excluding Food, Beverage, Tobacco and | All Excluding Duty | |
| Jul 2013 | 2.1 | 1.1 | 2.2 |
| Jun | 2.0 | 0.9 | 2.0 |
| May | 1.2 | 0.8 | 1.4 |
| Apr | 1.0 | 0.7 | 1.1 |
| Mar | 1.9 | 1.3 | 1.7 |
| Feb | 2.3 | 1.3 | 2.1 |
| Jan | 2.1 | 1.4 | 1.9 |
| Dec 2012 | 2.1 | 1.5 | 1.8 |
| Nov | 2.1 | 1.4 | 1.8 |
| Oct | 2.6 | 1.4 | 2.3 |
| Sep | 2.5 | 1.2 | 2.2 |
| Aug | 2.3 | 1.2 | 1.9 |
| Jul | 1.8 | 1.2 | 1.5 |
| Jun | 2.0 | 1.7 | 1.7 |
| May | 2.8 | 2.1 | 2.5 |
| Apr | 3.3 | 2.3 | 3.1 |
| Mar | 3.7 | 2.5 | 3.5 |
| Feb | 4.1 | 3.0 | 4.1 |
| Jan | 4.0 | 2.4 | 4.0 |
| Dec 2011 | 4.8 | 3.0 | 4.8 |
| Nov | 5.4 | 3.1 | 5.6 |
| Oct | 5.7 | 3.3 | 5.9 |
| Sep | 6.3 | 3.7 | 6.4 |
| Aug | 6.0 | 3.5 | 6.2 |
| Jul | 6.1 | 3.4 | 6.2 |
| Jun | 5.8 | 3.2 | 5.9 |
| May | 5.4 | 3.4 | 5.5 |
| Apr | 5.6 | 3.6 | 5.8 |
| Mar | 5.6 | 3.1 | 5.5 |
| Feb | 5.3 | 3.1 | 5.2 |
| Jan | 5.0 | 3.3 | 5.0 |
| Dec 2010 | 4.2 | 2.7 | 4.0 |
| Year ∆% | |||
| 2012 | 2.8 | 1.8 | 2.5 |
| 2011 | 5.6 | 3.4 | 5.7 |
| 2010 | 4.2 | 3.0 | 3.9 |
| 2009 | 1.6 | 2.5 | 1.0 |
| 2008 | 6.7 | 3.7 | 6.7 |
| 2007 | 2.4 | 1.4 | 2.1 |
| 2006 | 2.0 | 1.5 | 2.0 |
| 2005 | 1.9 | 1.0 | 1.9 |
| 2004 | 1.0 | -0.3 | 0.6 |
| 2003 | 0.6 | 0.1 | 0.5 |
| 2002 | -0.1 | -0.4 | -0.1 |
| 2001 | -0.3 | -0.6 | -0.3 |
| 2000 | 1.4 | -0.5 | 0.8 |
| 1999 | 0.6 | -1.0 | -0.3 |
| 1998 | 0.0 | -0.9 | -0.9 |
| 1997 | 0.9 | 0.3 | 0.1 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
Monthly and annual equivalent rates of change of output prices are shown in Table IV-19. There are waves of inflation similar to those in other countries (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html). In the first wave, annual equivalent inflation was 12.0 percent in Jan-Apr 2011 with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 2.0 percent in May-Oct 2011. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.6 percent in Nov 2011 to Jan 2012. In the fourth wave, the energy commodity shock processed through carry trades caused the jump of annual equivalent inflation to 7.9 percent in Feb-Apr 2012. A fifth wave occurred in May-Jun 2012 with decline of output inflation by 5.3 percent annual equivalent in an environment of risk aversion that caused decline of commodity prices. A sixth wave under commodity shocks induced by carry trades from zero interest rates resulted in annual equivalent inflation of 4.5 percent in Jul-Sep 2012 and 4.0 percent in Jul-Oct 2012. In the seventh wave, annual equivalent inflation in Nov-Dec 2012 fell to minus 3.0 percent. In the eighth wave, annual equivalent inflation returned at 5.3 percent in Jan-Mar 2013. In the ninth wave, risk aversion returned with annual equivalent inflation of minus 1.2 percent in Apr-May 2013. In the tenth wave, annual equivalent inflation was 1.8 percent in Jun-Jul 2013.
Table IV-19, UK Output Prices Month ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Jul 2013 | 0.2 | 0.1 | 0.3 |
| Jun | 0.1 | -0.1 | 0.0 |
| ∆% AE Jun-Jul | 1.8 | 0.0 | 1.8 |
| May | -0.1 | 0.1 | -0.1 |
| Apr | -0.2 | 0.0 | -0.2 |
| ∆% AE Apr-May | -1.8 | 0.6 | -1.8 |
| Mar | 0.2 | 0.1 | 0.2 |
| Feb | 0.7 | 0.3 | 0.8 |
| Jan | 0.4 | 0.3 | 0.4 |
| ∆% AE Jan-Mar | 5.3 | 2.8 | 5.7 |
| Dec 2012 | -0.2 | 0.0 | -0.2 |
| Nov | -0.3 | -0.1 | -0.2 |
| ∆% AE Nov-Dec | -3.0 | -0.6 | -2.4 |
| Oct | 0.2 | 0.1 | 0.2 |
| Sep | 0.5 | 0.3 | 0.5 |
| Aug | 0.5 | 0.1 | 0.6 |
| Jul | 0.1 | -0.1 | 0.1 |
| ∆% AE Jul-Oct | 4.0 | 1.2 | 4.3 |
| Jun | -0.6 | -0.2 | -0.6 |
| May | -0.3 | -0.1 | -0.4 |
| ∆% AE May-Jun | -5.3 | -1.8 | -5.8 |
| Apr | 0.7 | 0.6 | 0.5 |
| Mar | 0.6 | 0.1 | 0.5 |
| Feb | 0.6 | 0.5 | 0.6 |
| ∆% AE Feb-Apr | 7.9 | 4.9 | 6.6 |
| Jan | 0.4 | 0.3 | 0.3 |
| Dec 2011 | -0.2 | -0.1 | -0.2 |
| Nov | 0.2 | -0.1 | 0.2 |
| ∆% AE Nov-Jan | 1.6 | 0.4 | 1.2 |
| Oct | 0.0 | -0.1 | 0.1 |
| Sep | 0.3 | 0.3 | 0.2 |
| Aug | 0.0 | 0.1 | 0.1 |
| Jul | 0.3 | 0.4 | 0.3 |
| Jun | 0.2 | 0.2 | 0.2 |
| May | 0.2 | 0.2 | 0.2 |
| ∆% AE May-Oct | 2.0 | 2.2 | 2.2 |
| Apr | 1.1 | 0.8 | 0.9 |
| Mar | 1.1 | 0.5 | 1.1 |
| Feb | 0.5 | 0.0 | 0.5 |
| Jan | 1.1 | 0.8 | 1.1 |
| Jan-Apr | 12.0 | 6.5 | 11.4 |
| Dec 2010 | 0.5 | 0.0 | 0.6 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
Input prices in the UK have been more dynamic than output prices until the current event of risk aversion, as shown by Table IV-20, but with sharp oscillations because of the commodity and raw material content. The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 18.1 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.4 percent in Mar 2012 and 4.1 percent excluding food, tobacco, beverages and petroleum with the rates falling further in Apr 2012 to 1.1 percent for materials and fuels purchased and 2.2 percent excluding food, tobacco, beverages and petroleum. Input-price inflation collapsed in the 12 months ending in Jul 2012 to minus 2.6 percent for materials and fuels purchased and minus 1.5 percent excluding food, beverages and tobacco. Inflation returned at 1.2 percent in the 12 months ending in Aug 2012 but minus 0.5 percent excluding food, tobacco, beverages and petroleum. Inflation of input prices in Sep 2012 was minus 0.8 percent and minus 0.8 percent excluding food, beverages and petroleum. In Nov 2012, inflation of input prices of all manufacturing and materials purchased was minus 0.1 percent in 12 months and minus 0.2 percent in 12 months excluding food, tobacco, beverages and petroleum. Inflation of materials and fuels purchased in 12 months was 0.6 percent in Dec 2012 and 0.1 percent excluding tobacco, beverages and petroleum. Inflation of inputs returned with 1.9 percent in the 12 months ending in Jan 2013 and 0.7 percent excluding various items, increasing to 2.2 percent in Feb 2013 and 1.8 percent excluding various items. In Mar 2013, inflation of all manufacturing materials and fuels increased 0.7 percent in 12 months and 2.0 percent excluding various items. Prices of all manufacturing materials and fuels fell 0.2 percent in the 12 months ending in Apr 2013 and increased 1.3 percent excluding food and other items. Prices of all manufacturing increased 1.6 percent in the 12 months ending in May 2013 and 1.4 percent excluding various items. In Jul 2013, prices of manufactured products increased 5.0 percent in 12 months and 3.9 percent excluding food, tobacco, beverages and petroleum. There is comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum followed in 2009 by decline of 3.8 percent by materials and fuels purchased and increase of 1.6 percent for the index excluding items. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.
Table IV-20, UK, Input Prices 12-Month ∆% NSA
| All Manufacturing Materials and Fuels Purchased | Excluding Food, Tobacco, Beverages and Petroleum | |
| Jul 2013 | 5.0 | 3.9 |
| Jun | 4.0 | 2.1 |
| May | 1.6 | 1.4 |
| Apr | -0.2 | 1.3 |
| Mar | 0.7 | 2.0 |
| Feb | 2.2 | 1.8 |
| Jan | 1.9 | 0.7 |
| Dec 2012 | 0.6 | 0.1 |
| Nov | -0.1 | -0.2 |
| Oct | 0.2 | -0.4 |
| Sep | -0.8 | -0.8 |
| Aug | 1.2 | -0.5 |
| Jul | -2.6 | -1.5 |
| Jun | -2.2 | -0.3 |
| May | 0.1 | 1.1 |
| Apr | 1.1 | 2.2 |
| Mar | 5.4 | 4.1 |
| Feb | 7.7 | 5.7 |
| Jan | 6.5 | 5.6 |
| Dec 2011 | 8.9 | 7.2 |
| Nov | 13.8 | 10.2 |
| Oct | 14.5 | 11.0 |
| Sep | 18.1 | 13.3 |
| Aug | 16.3 | 13.0 |
| Jul | 18.5 | 13.3 |
| Jun | 16.8 | 12.6 |
| May | 16.3 | 11.4 |
| Apr | 17.9 | 12.2 |
| Mar | 14.8 | 10.3 |
| Feb | 14.9 | 10.7 |
| Jan | 14.2 | 10.5 |
| Dec 2010 | 13.1 | 9.0 |
| Year ∆% | ||
| 2012 | 1.4 | 1.1 |
| 2011 | 15.4 | 11.5 |
| 2010 | 9.9 | 5.7 |
| 2009 | -3.8 | 1.6 |
| 2008 | 22.2 | 16.9 |
| 2007 | 2.9 | 2.3 |
| 2006 | 9.8 | 7.3 |
| 2005 | 11.0 | 6.9 |
| 2004 | 3.3 | 1.6 |
| 2003 | 1.2 | -0.6 |
| 2002 | -4.4 | -4.8 |
| 2001 | -1.2 | -1.2 |
| 2000 | 7.4 | 3.7 |
| 1999 | -1.3 | -3.6 |
| 1998 | -9.1 | -4.6 |
| 1997 | -8.2 | -6.3 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
Table IV-21 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are strong waves of inflation of input prices in the UK similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html). In the first wave, input prices rose at the high annual equivalent rate of 35.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 3.1 percent in May-Oct 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 1.2 percent in Nov-Dec 2011. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 18.1 percent in Jan-Mar 2012 under relaxed risk aversion. In the fifth wave, annual equivalent inflation was minus 21.9 percent in Apr-Jun 2012 because of collapse of commodity prices during increasing risk aversion. In the sixth wave, annual equivalent inflation of materials and fuels purchased jumped to 14.0 percent in Jul-Aug 2012. In the seventh wave, annual equivalent inflation moderated to 1.5 percent in Sep-Dec 2012. In the eighth wave, annual equivalent inflation in Jan-Feb 2013 jumped to 28.3 percent. In the eighth wave, annual equivalent inflation of materials and fuels purchased was minus 11.4 percent in Mar-May 2013. In the ninth wave, annual equivalent inflation returned at 8.1 percent in annual equivalent in Jun-Jul 2013.
Table IV-21, UK Input Prices Month ∆%
| All Manufacturing Materials and Fuels Purchased NSA | Excluding Food, Tobacco, Beverages and Petroleum SA | |
| Jul 2013 | 1.1 | 1.0 |
| Jun | 0.2 | 0.4 |
| ∆% Jun-Jul | 8.1 | 8.7 |
| May | -0.7 | -0.3 |
| Apr | -2.4 | -0.5 |
| Mar | 0.1 | -0.3 |
| ∆% Mar-May | -11.4 | -4.3 |
| Feb | 2.8 | 1.6 |
| Jan | 1.4 | 0.4 |
| ∆% Jan-Feb | 28.3 | 12.7 |
| Dec 2012 | 0.1 | -0.2 |
| Nov | 0.1 | 0.2 |
| Oct | 0.2 | 0.3 |
| Sep | 0.1 | 0.3 |
| ∆% Sep-Dec | 1.5 | 1.8 |
| Aug | 2.0 | 1.0 |
| Jul | 0.2 | -0.5 |
| ∆% Jul-Aug | 14.0 | 3.0 |
| Jun | -2.1 | -0.3 |
| May | -2.6 | -0.8 |
| Apr | -1.4 | 0.1 |
| ∆% Apr-Jun | -21.9 | -3.9 |
| Mar | 1.6 | -0.5 |
| Feb | 2.5 | 0.7 |
| Jan | 0.1 | -0.1 |
| ∆% AE Jan-Mar | 18.1 | 0.4 |
| Dec 2011 | -0.6 | -0.7 |
| Nov | 0.4 | 0.1 |
| ∆% AE Nov-Dec | -1.2 | -3.6 |
| Oct | -0.8 | -0.5 |
| Sep | 2.1 | 0.6 |
| Aug | -1.9 | 0.1 |
| Jul | 0.6 | 0.9 |
| Jun | 0.1 | 1.0 |
| May | -1.6 | -0.1 |
| ∆% AE May-Oct | -3.1 | 4.1 |
| Apr | 2.8 | 2.0 |
| Mar | 3.8 | 1.0 |
| Feb | 1.4 | 1.0 |
| Jan | 2.3 | 1.5 |
| ∆% AE Jan-Apr | 35.6 | 17.8 |
| Dec 2010 | 3.9 | 1.9 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-22. There are high contributions to 12-month percentage changes of 0.80 percentage points by food products, 0.31 percentage points by tobacco and alcohol, 0.11 percentage points by computer, electrical and optical and 0.18 percentage points by other manufactured products. There are diversified sources of contributions to 12 months output price inflation such as 0.13 percentage points by clothing, textile and leather and 0.13 percentage points by transport equipment. Petroleum added 0.31 percentage points. In general, contributions by products rich in commodities are the drivers of price changes. There were diversified contributions in percentage points to monthly inflation: 0.03 percentage points by food products and 0.15 percentage points by petroleum.
Table IV-22, UK, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points, NSA
| Jul 2013 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total % | 2.1 | 0.2 | ||
| Food Products | 0.80 | 5.0 | 0.03 | 0.3 |
| Tobacco & Alcohol | 0.31 | 2.8 | -0.01 | -0.1 |
| Clothing, Textile & Leather | 0.13 | 1.1 | 0.00 | -0.1 |
| Paper and Printing | -0.02 | -0.4 | 0.01 | 0.3 |
| Petroleum | 0.31 | 2.7 | 0.15 | 1.6 |
| Chemical & Pharmaceutical | 0.13 | 1.5 | 0.00 | 0.0 |
| Metal, Machinery & Equipment | 0.02 | 0.5 | 0.00 | 0.0 |
| Computer, Electrical & Optical | 0.11 | 1.2 | 0.00 | 0.0 |
| Transport Equipment | 0.13 | 1.3 | 0.02 | 0.3 |
| Other Manufactured Products | 0.18 | 1.1 | 0.01 | 0.1 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices in Jun 2013, shown in Table IV-23. Crude oil is a large factor with contribution of 2.35 percentage points to the 12-month rate and 1.76 percentage points to the monthly rate in Jul 2013. Price changes also transfer to the domestic economy through the prices of imported inputs: imported metals deducted 0.25 percentage points from the 12-month rate and 0.04 percentage points to the Jul rate. Domestic food materials added 0.50 percentage points to the 12-month rate and deducted 1.41 percentage points to the Jul rate. Exposures and reversals of commodity exposures in carry trades during risk aversion are a major source of financial instability.
Table IV-23, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points NSA
| Jul 2013 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total | 5.0 | 1.1 | ||
| Fuel | 0.84 | 8.7 | 0.21 | 2.1 |
| Crude Oil | 2.35 | 9.1 | 1.76 | 6.8 |
| Domestic Food Materials | 0.50 | 4.4 | -1.41 | -10.9 |
| Imported Food Materials | 0.41 | 7.3 | 0.22 | 3.8 |
| Other Domestic Produced Materials | 0.01 | 0.2 | 0.01 | 0.2 |
| Imported Metals | -0.25 | -3.3 | -0.04 | -0.5 |
| Imported Chemicals | 0.23 | 2.1 | 0.06 | 0.5 |
| Imported Parts and Equipment | 0.53 | 3.5 | 0.18 | 1.1 |
| Other Imported Materials | 0.38 | 3.7 | 0.11 | 1.1 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2013/index.html
Consumer price inflation in the UK is shown in Table IV-24. The CPI index changed 0.0 percent in Jul 2013 and increased 2.8 percent in 12 months. The same inflation waves (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html and http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html) are present in UK CPI inflation. In the first wave in Jan-Apr 2011, annual equivalent inflation was at a high 6.5 percent. In the second wave in May-Jul 2011, annual equivalent inflation fell to only 0.4 percent. In the third wave in Aug-Nov 2011, annual equivalent inflation returned at 4.6 percent. In the fourth wave in Dec 2011 to Jan 2012, annual equivalent inflation was minus 0.6 percent because of decline of 0.5 percent in Jan 2012. In the fifth wave, annual equivalent inflation increased to 6.2 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was minus 3.0 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation in Jul-Dec 2012 was 4.5 percent and 6.2 percent in Oct 2012 with the rate in Oct caused mostly by increases in university tuition payments. In the ninth wave, annual equivalent inflation was minus 5.8 percent in Jan 2013. In the tenth wave, annual equivalent inflation jumped to 4.3 percent in Feb-May 2013. In the eleventh wave, annual equivalent inflation was minus 1.2 percent in Jun-Jul 2013.
Table IV-24, UK, Consumer Price Index All Items, Month and 12-Month ∆%
| Month ∆% | 12 Months ∆% | |
| Jul 2013 | 0.0 | 2.8 |
| Jun | -0.2 | 2.9 |
| AE ∆% Jun-Jul | -1.2 | |
| May | 0.2 | 2.7 |
| Apr | 0.2 | 2.4 |
| Mar | 0.3 | 2.8 |
| Feb | 0.7 | 2.8 |
| AE ∆% Feb-May | 4.3 | |
| Jan 2013 | -0.5 | 2.7 |
| AE ∆% Jan | -5.8 | |
| Dec 2012 | 0.5 | 2.7 |
| Nov | 0.2 | 2.7 |
| Oct | 0.5 | 2.7 |
| Sep | 0.4 | 2.2 |
| Aug | 0.5 | 2.5 |
| Jul | 0.1 | 2.6 |
| AE ∆% Jul-Dec | 4.5 | |
| Jun | -0.4 | 2.4 |
| May | -0.1 | 2.8 |
| AE ∆% May-Jun | -3.0 | |
| Apr | 0.6 | 3.0 |
| Mar | 0.3 | 3.5 |
| Feb | 0.6 | 3.4 |
| AE ∆% Feb-Apr | 6.2 | |
| Jan | -0.5 | 3.6 |
| Dec 2011 | 0.4 | 4.2 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | 0.2 | 4.8 |
| Oct | 0.1 | 5.0 |
| Sep | 0.6 | 5.2 |
| Aug | 0.6 | 4.5 |
| AE ∆% Aug-Nov | 4.6 | |
| Jul | 0.0 | 4.4 |
| Jun | -0.1 | 4.2 |
| May | 0.2 | 4.5 |
| May-Jul | 0.4 | |
| Apr | 1.0 | 4.5 |
| Mar | 0.3 | 4.0 |
| Feb | 0.7 | 4.4 |
| Jan | 0.1 | 4.0 |
| AE ∆% Jan-Apr | 6.5 | |
| Dec 2010 | 1.0 | 3.7 |
| Nov | 0.4 | 3.3 |
| Oct | 0.3 | 3.2 |
| Sep | 0.0 | 3.1 |
| Aug | 0.5 | 3.1 |
| Jul | -0.2 | 3.1 |
| Jun | 0.1 | 3.2 |
| May | 0.2 | 3.4 |
| Apr | 0.6 | 3.7 |
| Mar | 0.6 | 3.4 |
| Feb | 0.4 | 3.0 |
| Jan | -0.2 | 3.5 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2013/index.html
Inflation has been unusually high in the UK since 2006, as shown in Table IV-25. There were no rates of inflation close to 2.0 percent in the period from 1997 to 2004. Inflation has exceeded 2 percent since 2005, reaching 3.6 percent in 2008, 3.3 percent in 2010, 4.5 percent in 2011 and 2.8 percent in 2012.
Table IV-25, UK, Consumer Price Index, Annual ∆%
| 1997 | 1.8 |
| 1998 | 1.6 |
| 1999 | 1.3 |
| 2000 | 0.8 |
| 2001 | 1.2 |
| 2002 | 1.3 |
| 2003 | 1.4 |
| 2004 | 1.3 |
| 2005 | 2.1 |
| 2006 | 2.3 |
| 2007 | 2.3 |
| 2008 | 3.6 |
| 2009 | 2.2 |
| 2010 | 3.3 |
| 2011 | 4.5 |
| 2012 | 2.8 |
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2013/index.html
Table IV-26 provides the analysis of inflation in Jul 2013 by the UK Office for National Statistics. In the rate of 0.0 percent for Jul, clothing and footwear deducted 0.22 percentage points, furniture and household goods deducted 0.06 percentage points and transport added 0.13 percentage points. Contributions of percentage points to the 12-month rate of consumer price inflation of 2.8 percent are in the first column in Table IV-26. Food and nonalcoholic beverages added 0.43 percentage points, alcohol and tobacco added 0.28 percentage points, housing and household goods added 0.61 percentage points and transport added 0.23 percentage points.
Table IV-26, UK, Consumer Price Index Month and Twelve-month Percentage Point Contributions to Change by Components
| Jul 2013 | Percentage Point Contribution 12 M Jun | Percentage Point Contribution Jun |
| CPI All Items ∆% | 2.8 | 0.0 |
| Food & Non-Alcoholic Beverages | 0.43 | 0.03 |
| Alcohol & Tobacco | 0.28 | 0.03 |
| Clothing & Footwear | 0.15 | -0.22 |
| Housing & Household Services | 0.61 | 0.05 |
| Furniture & Household Goods | 0.01 | -0.06 |
| Health | 0.07 | 0.02 |
| Transport | 0.23 | 0.13 |
| Communication | 0.09 | 0.01 |
| Recreation & Culture | 0.09 | -0.06 |
| Education | 0.37 | 0.00 |
| Restaurants & Hotels | 0.30 | 0.03 |
| Miscellaneous Goods & Services | 0.14 | 0.01 |
| Rounding Effects | 0.03 | 0.03 |
Note: there are rounding effects in contributions
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2013/index.html
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
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