CMP Associates Regulation Blog: Risks of Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Twenty Eight Million Unemployed or Underemployed, World Economic Slowdown and Global Recession Risk: Part II

Risks of Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Twenty Eight Million Unemployed or Underemployed, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Mediocre and Decelerating United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IB Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

II Twenty Eight Million Unemployed or Underemployed

IIA1 Summary of the Employment Situation

IIA2 Number of People in Job Stress

IIA3 Long-term and Cyclical Comparison of Employment

IIA4 Job Creation

IIB Stagnating Real Wages

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

IB Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides important revisions and enhancements of data on personal income and outlays since 1929 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/iTable/index_nipa.cfm). There are waves of changes in personal income and expenditures in Table IB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. The Bureau of Economic Analysis (BEA) explains as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January [2013] changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December [2012] in anticipation of changes in individual tax rates.”

In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.1 percent, nominal disposable personal income (NDPI) at 5.2 percent and nominal personal consumption expenditures (NPCE) at 5.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.8 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.1 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 4.4 percent, NPDI at 4.3 percent and NPCE at 4.0 percent. RDPI increased at 1.5 percent annual equivalent and RPCE at 1.5 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 1.5 percent and NPCE at 3.3 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 2.1 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.3 percent annual equivalent and NDPI at 7.0 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 3.7 percent annual equivalent and RPCE at 3.7 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 3.7 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.2 percent, NDPI at 1.2 percent and RDPI at 0.6 percent. Financial repression failed to stimulate consumption with NPCE growing at 2.1 percent annual equivalent and RPCE at 2.1 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI increased at 4.5 percent annual equivalent and NDPI increased at 3.7 percent while real disposable income (RDPI) increased at 0.4 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 29.0 percent in Nov-Dec 2012, nominal disposable income at 29.0 percent and real disposable personal income at 29.8 percent with likely effects on nominal personal consumption that increased at 1.8 percent and real personal consumption at 2.4 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 4.4 percent in Jan 2013 or at the annual equivalent rate of decline of 41.7 percent; nominal disposable personal income fell 5.1 percent or at the annual equivalent rate of decline of 46.6 percent; real disposable income fell 5.2 percent or at the annual rate of decline of 47.3 percent; nominal personal consumption expenditures increased 0.2 percent or at the annual equivalent rate of 2.4 percent; and real personal consumption expenditures increased 0.1 percent or at the annual equivalent rate of 1.2 percent. The savings rate fell significantly from 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):

“Contributions for government social insurance -- a subtraction in calculating personal income -- increased $126.7 billion in January, compared with an increase of $6.3 billion in December. The

Further explanation is provided by the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3):

“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The

January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9 billion. The January change in disposable personal income (DPI) mainly reflected the effect of special factors, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to December in anticipation of changes in individual tax rates. Excluding these special factors and others, which are discussed more fully below, DPI increased $46.8 billion in February, or 0.4 percent, after increasing $15.8 billion, or 0.1 percent, in January.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf). In the ninth wave in Feb-Mar 2013, nominal personal income increased at 10.0 percent and nominal disposable income at 10.0 percent annual equivalent, while real disposable income increased at 8.1 percent annual equivalent. Nominal personal consumption expenditures grew at 5.5 annual equivalent and real personal consumption expenditures at 3.7 percent annual equivalent. The savings rate collapsed from 5.0 percent in Oct 2012, 5.9 percent in Nov 2012 and 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013, 4.2 percent in Feb 2013 and 4.3 percent in Mar 2013. In the tenth wave from Apr to Jun 2013, personal income grew at 2.8 percent annual equivalent, nominal disposable income increased at annual equivalent 2.0 percent and nominal personal consumption expenditures at 2.0 percent. Real disposable income grew at 1.2 percent annual equivalent and real personal consumption expenditures at 1.2 percent.

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.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 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 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-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 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html).

RDPI stagnated in Jan-Dec 2011 at 1.2 percent with the latest revised data compared with growth of 2.8 percent in Jan-Dec 2010 but grew at annual equivalent 3.7 percent in Jan-Mar 2012 and 0.6 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE (nominal personal consumption expenditures) to 2.1 percent annual equivalent in Apr-Jul 2012 and of RPCE (real personal consumption expenditures) to 2.1 percent. A bump occurred in Aug 2012 with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.2 percent in Aug 2012 or at annual equivalent 2.4 percent but declined 0.1 percent in real terms. Nominal personal income increased 0.1 percent in Aug 2012 or 1.2 percent annual equivalent while nominal disposable income was flat at 0.0 percent. Real disposable income (RDPI) increased 0.2 percent in Oct 2012 while real personal consumption expenditures (RPCE) increased 0.1 percent. RDPI increased 1.3 percent in Nov 2012 and 3.1 percent in Dec 2012 because of realization of incomes in anticipation of tax increases in Jan 2013 while RPCE increased 0.3 percent in Nov 2012 and 0.1 percent in Dec 2012. In Jan-Dec 2012, RDPI increased 5.9 percent and RPCE 2.1 percent. NPI contracted 4.4 percent in Jan 2013, NDPI 5.1 percent and RDPI 5.2 percent but NPCE increased 0.2 percent and RPCE 0.1 percent, probably by drawing on savings. There is strong recovery in Feb-Mar 2013 and renewed weakness in Apr 2013. While NPI increased at 2.8 percent and NDPI at 2.0 in annual equivalent in Apr-Jun 2013 and RDPI at 1.2 percent, NPCE stagnated in Apr-May 2013 and RPCE increased at 1.2 percent.

Table IB-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2013
Jun	0.3	0.3	-0.1	0.5	0.1
May	0.4	0.3	0.2	0.2	0.1
Apr	0.0	-0.1	0.2	-0.2	0.1
AE ∆% Apr-Jun	2.8	2.0	1.2	2.0	1.2
Mar	0.3	0.3	0.4	0.2	0.3
Feb	1.3	1.3	0.9	0.7	0.3
AE ∆% Feb-Mar	10.0	10.0	8.1	5.5	3.7
Jan	-4.4	-5.1 (0.1)^a	-5.2	0.2	0.1
AE ∆% Jan	-41.7	-46.6 (3.7)^a	-47.3	2.4	1.2
2012
∆% Jan-Dec 2012***	7.9	7.5	5.9	3.8	2.1
Dec	3.1	3.1 (0.3)*	3.1 (0.5)*	0.1	0.1
Nov	1.2	1.2 (0.6)*	1.3 (0.9)*	0.2	0.3
AE ∆% Nov-Dec	29.0	29.0 (5.5)*	29.8 (8.7)*	1.8	2.4
Oct	0.4	0.4	0.2	0.1	-0.1
Sep	0.6	0.5	0.2	0.7	0.4
Aug	0.1	0.0	-0.3	0.2	-0.1
AE ∆% Aug-Oct	4.5	3.7	0.4	4.1	0.8
Jul	-0.1	-0.1	-0.1	0.4	0.4
Jun	0.3	0.3	0.1	0.1	0.0
May	0.0	0.0	0.0	-0.1	0.0
Apr	0.2	0.2	0.2	0.3	0.3
AE ∆% Apr-Jul	1.2	1.2	0.6	2.1	2.1
Mar	0.4	0.3	0.1	0.2	0.0
Feb	0.7	0.6	0.3	0.8	0.5
Jan	0.9	0.8	0.5	0.6	0.4
AE ∆% Jan-Mar	8.3	7.0	3.7	6.6	3.7
2011
∆% Jan-Dec 2011*	4.6	3.6	1.2	4.3	1.7
Dec	0.7	0.6	0.6	0.0	0.0
Nov	-0.1	-0.1	-0.2	0.2	0.0
Oct	0.0	0.1	0.0	0.4	0.4
Sep	-0.1	-0.1	-0.3	0.5	0.3
AE ∆% Sep-Dec	1.5	1.5	0.3	3.3	2.1
Aug	0.1	0.1	-0.1	0.2	0.0
Jul	0.6	0.6	0.4	0.5	0.3
Jun	0.4	0.4	0.3	0.3	0.2
May	0.3	0.3	0.0	0.3	0.0
AE ∆% May-Aug	4.3	4.3	1.8	4.0	1.5
Apr	0.2	0.2	-0.1	0.4	0.0
Mar	0.2	0.2	-0.2	0.7	0.4
Feb	0.6	0.5	0.3	0.4	0.2
Jan	1.6	0.8	0.6	0.3	0.1
AE ∆% Jan-Apr	8.1	5.2	1.8	5.5	2.1
2010
∆% Jan-Dec 2010**	5.3	4.9	2.8	4.4	2.8
Dec	0.9	0.9	0.7	0.3	0.1
Nov	0.5	0.4	0.3	0.6	0.4
Oct	0.5	0.5	0.2	0.8	0.5
IVQ2010∆%	1.9	1.8	1.2	1.7	1.0
IVQ2010 AE ∆%	7.9	7.4	4.9	7.0	4.1

Notes: *Excluding exceptional income gains in Nov and Dec 2012 because of anticipated tax increases in Jan 2013 ((page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). ^aExcluding employee contributions for government social insurance (pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf )Excluding NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011

Source: US Bureau of Economic http://www.bea.gov/iTable/index_nipa.cfm

Further information on income and consumption is provided by Table IB-2. The 12-month rate of increase of RDPI of 2.8 percent in Dec 2010 fell to 1.2 percent in Dec 2011 while RPCE fell from 2.9 percent to 1.8 percent. Revisions shows increase of RDPI of 1.1 percent in the 12 months ending in Jan 2012 and marginal increase to 1.2 percent in the 12 months ending in Feb 2012. The significant difference is continuing growth of 12-month percentage changes of RDPI with 1.7 percent in Jun 2012, 1.5 percent and 1.6 percent in Oct 2012 followed by 3.2 percent in Nov 2012 and 5.9 percent in Dec 2012. The BEA explains increases of RDPI in Nov-Dec 2012: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The 12-month rate of growth of real disposable personal income fell from 6.4 percent in Dec 2012 to 0.3 percent in Jan 2013, increasing to 0.7 percent in Feb 2013, 0.8 percent in Mar 2013 and 1.1 percent in Apr-May 2013. Real disposable income fell 5.2 percent in Jan 2013, which is explained by the Bureau of Economic Analysis as follows (page 2 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):

“The January change in disposable personal income (DPI) mainly reflected the effect of special factors, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to December in anticipation of changes in individual tax rates. Excluding these special factors and others, which are discussed more fully below, DPI increased $46.8 billion in February, or 0.4 percent, after increasing $15.8 billion, or 0.1 percent, in January.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf)

RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.1 percent in Mar 2012, 1.8 percent in Oct 2012, 2.1 percent in Nov 2012, 2.2 percent in Dec 2012 perhaps also with some effects of anticipations of tax increases in Jan 2013, 1.9 percent in Jan 2013 by burning savings, 1.7 percent in Feb 2013 and 2.0 percent in Mar 2013. RPCE increased 1.7 percent in the 12 months ending in Apr 2013, 1.8 percent in the 12 months ending in May 2013 and 2.0 percent in the 12 months ending in Jun 2013. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). Growth of consumption of goods and, in particular, of consumer durable goods drives the faster expansion of the economy while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 6.4 to 8.9 percent from Jan 2012 to Jun 2013. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.3 to 3.0 percent from Jan 2012 to Apr 2013. Growth rates in 12 months of goods and durable goods increased again toward the end of 2012 with strength continuing into 2013. There are limits to sustained growth based on financial repression in an environment of weak labor markets and real labor remuneration.

Table IB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2013
Jun	0.6	2.0	4.2	8.3	0.9
May	0.8	1.8	3.7	7.9	0.9
Apr	0.7	1.7	3.0	7.1	1.1
Mar	0.7	2.0	3.1	6.3	1.4
Feb	0.4	1.7	3.2	6.6	0.9
Jan	-0.2	2.0	3.7	7.7	1.1
2012
Dec	5.9	2.2	4.2	9.0	1.2
Nov	3.2	2.1	3.6	8.4	1.4
Oct	1.7	1.8	2.8	6.1	1.3
Sep	1.6	2.3	4.1	8.8	1.4
Aug	1.1	2.1	4.0	9.1	1.2
Jul	1.2	2.2	3.4	7.9	1.6
Jun	1.7	2.2	3.2	8.9	1.7
May	1.9	2.4	3.5	7.7	1.8
Apr	1.8	2.4	3.0	6.7	2.1
Mar	1.5	2.1	2.9	6.5	1.7
Feb	1.2	2.5	3.0	7.5	2.2
Jan	1.1	2.1	2.3	6.4	1.9
Dec 2011	1.2	1.8	1.9	5.8	1.7
Dec 2010	2.8	2.9	4.7	8.4	2.1

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

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

Chart IB-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2013. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart IB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2013

Source: US Bureau of Economic Analysis

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

Percent changes from the prior period in seasonally adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IB-2 from 1995 to 2013. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IB-2 that the average rate of growth of RPCE was higher before the recession than during the past sixteen quarters of expansion that began in IIIQ2009.

Chart IB-2, Percent Change from Prior Period in Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2013

Source: US Bureau of Economic Analysis

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

Personal income and its disposition are shown in Table IB-3. The latest estimates and revisions have changed movements in four forms. (1) Increase in Jun of personal income by $45.4 billion or 0.3 percent and disposable income of $33.6 billion or 0.3 percent with increase of wages and salaries of 0.5 percent. (2) Decrease of personal income of $317.3 billion from Dec 2012 to Jun 2013 or by 2.2 percent and decrease of disposable income of $401.0 billion or by 3.1 percent. Wages and salaries decreased $79.3 billion from Dec 2012 to Jun 2013 or by 1.1 percent. In 2012, personal income increased $1060.8 billion or 7.9 percent while salaries increased 7.6 percent and disposable income 7.5 percent. Significant part of these gains occurred in Dec 2012 in anticipation of incomes because of tax increases beginning in Jan 2013. (3) Increase of $591.6 billion of personal income in 2011 or by 4.6 percent with increase of salaries of 2.8 percent and disposable income of 3.6 percent. (4) Decline of the rate of savings as percent of disposable income from 5.8 percent in Dec 2010 to 5.4 percent in Dec 2011 and 4.4 percent in Jun 2013.

Table IB-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Jun 2013	14,102.9	7,121.5	1,674.7	12,428.2	4.4
May 2013	14,057.5	7,084.0	1,622.9	12,394.6	4.6
Change Jun 2013/ May 2013	45.4 ∆% 0.3	37.5 ∆% 0.5	51.8 ∆% 3.2	33.6 ∆% 0.3
Jan 2013	13,781.8	6,990.9	1,611.0	12,170.8	2.2
Dec 2012	14,420.2	7,200.8	1,591.0	12,829.2	7.4
Change Jun 2013/ Dec 2012	-317.3 ∆% -2.2	-79.3 ∆% -1.1	83.7 ∆% 5.3	-401.0 ∆% -3.1
Change Dec 2012/ Dec 2011	1060.8 ∆% 7.9	510.7 ∆% 7.6	163.3 ∆% 11.4	897.6 ∆% 7.5
Dec 2011	13,359.4	6,690.1	1,427.7	11,931.6	5.4
Dec 2010	12,767.8	6,506.0	1,254.2	11,513.7	5.8
Change Dec 2011/ Dec 2010	591.6 ∆% 4.6	184.1 ∆% 2.8	173.5 ∆% 13.8	417.9 ∆% 3.6

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

The Bureau of Economic Analysis (BEA) provides a wealth of revisions and enhancements of US personal income and outlays since 1929 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/iTable/index_nipa.cfm). Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of real disposable income of 3.2 percent per year on average from 1929 to 2012 and 2.0 percent in real disposable income per capita. Real disposable income per capita increased at the average yearly rate of 2.0 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.4 percent for real disposable income on average from 1999 to 2012 and 1.5 percent in real disposable per capita income. Real disposable income grew at 3.4 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 1.4 percent on average from 2006 to 2012 and real disposable income at 0.6 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge.

Table IB-4, Average Annual Growth Rates of Real Disposable Income (RDPI) and Real Disposable Income per Capita (RDPIPC), Percent per Year

RDPI Average ∆%
1929-2012	3.2
1947-1999	3.7
1999-2012	2.4
1999-2006	3.2
1980-1989	3.5
2006-2012	1.4
RDPIPC Average ∆%
1929-2012	2.0
1947-1999	2.3
1999-2012	1.5
1999-2006	2.2
1980-1989	2.6
2006-2012	0.6

Source: Bureau of Economic Analysis

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

Chart IB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982.

Chart IB-3, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

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

A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 11.3 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

In IQ2013, personal income fell at the SAAR of minus 4.4 percent; real personal income excluding current transfer receipts at minus 7.5 percent; and real disposable personal income at minus 8.3 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.8 percent and real disposable income at 3.4 percent.

Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013

Source: US Bureau of Economic Analysis

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

Real or inflation-adjusted disposable personal income is provided in Chart IB-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.

Chart IB-5, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

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

In IQ2013, personal income fell at the SAAR of minus 4.4 percent; real personal income excluding current transfer receipts at minus 7.5 percent; and real disposable personal income at minus 8.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0513.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

This is the explanation for the decline in IQ2013 in Chart IB-6. In IIQ2013, personal income increased at 4.1 percent, real disposable income excluding current transfer receipts at 4.8 percent and real disposable income at 3.4 percent.

Chart IB-6, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013

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

Chart IB-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 1980 to 1989. Rates of changes were high during the decade with few negative changes.

Chart IB-7, US, Real Disposable Income Percentage Change from Preceding Period at Quarterly Seasonally-Adjusted Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

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

Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 2007 to 2013. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent, which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In IQ2013, personal income fell at the SAAR of minus 4.4 percent; real personal income excluding current transfer receipts at minus 7.5 percent; and real disposable personal income at minus 8.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.8 percent and real disposable personal income at 3.4 percent.

Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2013

Source: US Bureau of Economic Analysis

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

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Jun 2013 at the seasonally adjusted annual rate of $14,102.9 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf). The major portion of personal income is compensation of employees of $8,841.0 billion, or 62.7 percent of the total. Wage and salary disbursements are $7,121.5 billion, of which $5,927.2 billion by private industries and supplements to wages and salaries of $1,719.6 billion (employer contributions to pension and insurance funds are $1,189.4 billion and contributions to social insurance are $530.2 billion). In Jun 1985, US personal income was $3,504.3 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,383.6 billion, or 68.0 percent of the total. Wage and salary disbursement were $1.978.5 billion of which $1608.0 billion by private industries. Supplements to wages and salaries were $405.1 billion with employer contributions to pension and insurance funds of $257.5 billion and $147.7 billion to government social insurance. Chart IB-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.

Chart IB-9, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989

Source: US Bureau of Economic Analysis

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

Chart IB-10 shows US wage and salary disbursement of private industries from 2007 to 2012. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011, 2012 and 2013.

Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

Chart IB-11 provides finer detail with monthly wage and salary disbursements of private industries from 2007 to 2013. There is decline during the contraction and a period of mild recovery followed by stagnation and recent recovery that is weaker than in earlier expansion periods of the business cycle. There is decline of 3.5 percent in Jan 2013 because of the higher contributions to government social insurance followed by recovery of 0.9 percent in Feb 2013 and 0.3 percent in Mar 2013. Wage and salary disbursements stagnated in Apr 2013 with increase of 0.1 percent and rebounded in May 2013 with increase of 0.3 percent. Wages and salaries of private industries increased 0.6 percent in Jun 2013. Wages and salaries of private industries decreased 1.2 percent from Dec 2012 to Jun 2013. Total wages and salaries decreased 1.1 percent from Dec 2012 to Jun 2013, as shown in Table IB-3.

Chart IB-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

Chart IB-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of wellbeing in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capita grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.

Chart IB-12, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 1980-1989

Source: US Bureau of Economic Analysis

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

Chart IIA-13 provides monthly real disposable personal per capita from 2007 to 2013. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.2 percent from $36,580 in chained dollars of 2009 in Oct 2012 to $37,030 in Nov 2012 and 3.1 percent to $38,170 in Dec 2012 for cumulative increase of 4.3 percent from Oct 2012 to Dec 2012. Real per capita disposable income fell 5.3 percent from $38,170 in Dec 2012 to $36,166 in Jan 2013, increasing marginally 0.8 percent to $36,473 in Feb 2013 for cumulative change of minus 0.3 percent from Oct 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart IB-13 with Nov-Dec 2012, decline in Jan 2013 and recovery in Feb 2013. Real per capita disposable income increased 0.4 percent from $36,473 in Feb 2013 in chained dollars of 2009 to $36,603 in Mar 2013 for cumulative decline of 0.1 percent relative to Oct 2012. Real per capital disposable income increased to $36,699 in May 2013 for gain of 0.2 percent relative to $36,643 in Apr 2013 and 0.3 percent from Oct 2012. Real disposable per capita income increased to $36,631 in Jun 2013 for decrease of 0.2 percent relative to May 2013 and increase of 0.1 percent relative to Oct 2012. BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

Chart IB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

IB2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 2.0 percent in the 12 months ending in Feb 2013 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”

Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:

“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”

Friedman (1970, 26-7) predicted the future:

“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”

In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2013. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.0 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IIA-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.2 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate remained at 2.6 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.3 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.6 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2013

Source: US Bureau of Economic Analysis

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

Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Jun 2013. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.0 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second peak occurred at 8.1 percent in May 2009. There was another rising trend until 5.9 percent in Jun 2010 and then steady downward trend until 4.8 percent in Nov 2011. This was followed by an upward trend with 5.6 percent in Jun 2012 but decline to 4.9 percent in Aug 2012 followed by jump to 8.7 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 3.6 percent. Real disposable personal income fell 5.2 percent and real disposable per capita income fell from $38,170 in Dec 2012 to $36,166 in Jan 2013 or by 5.3 percent, which is explained by the Bureau of Economic Analysis as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):

“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The

January estimate reflected increases in both employer and employee contributions forgovernment social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9billion.”

The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.2 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate remained at 2.6 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.3 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.6 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.

Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2013

Source: US Bureau of Economic Analysis

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

II Twenty Nine Million Unemployed or Underemployed. This section analyzes the employment situation report of the United States of the Bureau of Labor Statistics (BLS). There are four subsections: IIA1 Summary of the Employment Situation; IIA2 Number of People in Job Stress; IIA3 Long-term and Cyclical Comparison of Employment; and IIA4 Job Creation.

IIA1 Summary of the Employment Situation. The Bureau of Labor Statistics (BLS) of the US Department of Labor provides both seasonally adjusted (SA) and not-seasonally adjusted (NSA) or unadjusted data with important uses (Bureau of Labor Statistics 2012Feb3; 2011Feb11):

“Most series published by the Current Employment Statistics program reflect a regularly recurring seasonal movement that can be measured from past experience. By eliminating that part of the change attributable to the normal seasonal variation, it is possible to observe the cyclical and other nonseasonal movements in these series. Seasonally adjusted series are published monthly for selected employment, hours, and earnings estimates.”

Requirements of using best available information and updating seasonality factors affect the comparability over time of United States employment data. In the first month of the year, the BLS revises data for several years by adjusting benchmarks and seasonal factors (page 4 at http://www.bls.gov/news.release/pdf/empsit.pdf), which is the case of the data for Jan 2013 released on Feb 1, 2013:

“In accordance with annual practice, the establishment survey data released today have been benchmarked to reflect comprehensive counts of payroll jobs. These counts are derived principally from unemployment insurance tax records for March 2012. The benchmark process results in revisions to not seasonally adjusted data from April 2011 forward. Seasonally adjusted data from January 2008 forward are subject to revision. In addition, data for some series prior to 2008, both seasonally adjusted and unadjusted, incorporate minor revisions.

The total nonfarm employment level for March 2012 was revised upward by 422,000 (424,000 on a not seasonally adjusted basis). Table A presents revised total nonfarm employment data on a seasonally adjusted basis for January through December 2012.”

The range of differences in total nonfarm employment in revisions in Table A of the employment situation report for Feb 2013 (page 4 at http://www.bls.gov/news.release/pdf/empsit.pdf) is from 348,000 for Jan 2012 to 647,000 for Dec 2012. There are also adjustments of population that affect comparability of labor statistics over time (page 5 at http://www.bls.gov/news.release/pdf/empsit.pdf):

“Effective with data for January 2013, updated population estimates have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population since the previous decennial census. The change in population reflected in the new estimates results from adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. In accordance with usual practice, BLS will not revise the official household survey estimates for December 2012 and earlier months. To show the impact of the population adjustment, however, differences in selected December 2012 labor force series based on the old and new population estimates are shown in table B.

The adjustment increased the estimated size of the civilian noninstitutional population in December by 138,000, the civilian labor force by 136,000, employment by 127,000, unemployment by 9,000, and persons not in the labor force by 2,000. The total unemployment rate, employment-population ratio, and labor force participation rate were unaffected.

Data users are cautioned that these annual population adjustments affect the comparability of household data series over time. Table C shows the effect of the introduction of new population estimates on the comparison of selected labor force measures between December 2012 and January 2013. Additional information on the population adjustments and their effect on national labor force estimates are available at www.bls.gov/cps/cps13adj.pdf (emphasis added).”

There are also adjustments of benchmarks and seasonality factors for establishment data that affect comparability over time (page 1 at http://www.bls.gov/news.release/pdf/empsit.pdf):

“Establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors.”

All comparisons over time are affected by yearly adjustments of benchmarks and seasonality factors. All data in this blog comment use revised data released by the BLS on Jun 7, 2013 (http://www.bls.gov/).

Table II-1 provides summary statistics of the employment situation report of the BLS. The first four rows provide the data from the establishment report of creation of nonfarm payroll jobs and remuneration of workers (for analysis of the differences in employment between the establishment report and the household survey see Abraham, Haltiwanger, Sandusky and Spletzer 2009). Total nonfarm payroll employment seasonally adjusted (SA) increased 162,000 in Jun 2013 and private payroll employment rose 161,000. 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. Subsection IIIA4 Job Creation analyzes the types of jobs created, which are lower paying than earlier. Average hourly earnings in Jul 2013 were $23.98 seasonally adjusted (SA), increasing 1.2 percent not seasonally adjusted (NSA) relative to Jul 2012 and decreasing 0.1 percent relative to Jun 2013 seasonally adjusted. In Jun 2013, average hourly earnings seasonally adjusted were $24.00, increasing 2.9 percent relative to Jun 2012 not seasonally adjusted and increasing 0.4 percent seasonally adjusted relative to May 2013. These are nominal changes in workers’ wages. The following row “average hourly earnings in constant dollars” provides hourly wages in constant dollars calculated by the BLS or what is called “real wages” adjusted for inflation. Data are not available for Jul 2013 because the prices indexes of the BLS for Jul will only be released on Aug 15, 2013 (http://www.bls.gov/cpi/), which will be covered in this blog’s comment on Aug 18, 2013, together with world inflation. The second column provides changes in real wages for Jun 2013. Average hourly earnings adjusted for inflation or in constant dollars increased 1.1 percent in Jun 2013 relative to Jun 2012 but have been decreasing during many consecutive months. World inflation waves in bouts of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html) mask declining trend of real wages. The fractured labor market of the US is characterized by high levels of unemployment and underemployment together with falling real wages or wages adjusted for inflation in a recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html). The following section IIB Stagnating Real Wages provides more detailed analysis. Average weekly hours of US workers seasonally adjusted remained virtually unchanged at 34.4. Another headline number widely followed is the unemployment rate or number of people unemployed as percent of the labor force. The unemployment rate calculated in the household survey fell from 7.6 percent in Jun 2013 to 7.4 percent in Jul 2013, seasonally adjusted. This blog provides with every employment situation report the number of people in the US in job stress or unemployed plus underemployed calculated without seasonal adjustment (NSA) at 28.3 million in Jul 2013 and 28.7 million in Jun 2013. The final row in Table II-1 provides the number in job stress as percent of the actual labor force calculated at 17.4 percent in Jul 2013 and 17.7 percent in Jun 2013. Almost one in every five workers in the US is unemployed or underemployed. The combination of about thirty million people in job stress, falling or stagnating real wages, collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html), decline of US inflation-adjusted household wealth by 5.2 percent from IVQ2007 to IQ2013 while it increased 31.2 percent from IQ1980 to IIIQ1986 (http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html), household median income adjusted for inflation back to 1996 levels, real per capita disposable income of $35,823 in chained 2009 dollars higher in IIQ2013 by only 2.3 percent relative to $36,658 in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm Section IB Collapse), federal deficits of $5.092 trillion in four years and debt/GDP of 72.6 percent in 2012 in the unsustainable path to 89.7 percent of GDP (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and forty-eight million people in poverty and without health insurance (http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-creation-of.html) constitutes a socio-economic disaster.

Table II-1, US, Summary of the Employment Situation Report SA

	Jul 2013	Jun 2013
New Nonfarm Payroll Jobs	162,000	188,000
New Private Payroll Jobs	161,000	196,000
Average Hourly Earnings	Jul 13 $23.98 SA ∆% Jul 13/Jul 12 NSA: 1.2 ∆% Jul 13/Jun 13 SA: -0.1	Jun 13 $24.00 SA ∆% Jun 13/Jun 12 NSA: 2.9 ∆% Jun 13/May 13 SA: 0.4
Average Hourly Earnings in Constant Dollars		∆% Jun 2013/Jun 2012: 1.1
Average Weekly Hours	34.4 SA 34.3 NSA	34.5 SA 34.9 NSA
Unemployment Rate Household Survey % of Labor Force SA	7.4	7.6
Number in Job Stress Unemployed and Underemployed Blog Calculation	28.3 million NSA	28.7 million NSA
In Job Stress as % Labor Force	17.4 NSA	17.7 NSA

Source: US Bureau of Labor Statistics Source: US Bureau of Labor Statistics http://www.bls.gov/

IIA2 Number of People in Job Stress. There are two approaches to calculating the number of people in job stress. The first approach consists of calculating the number of people in job stress unemployed or underemployed with the raw data of the employment situation report as in Table II-2. The data are seasonally adjusted (SA). The first three rows provide the labor force and unemployed in millions and the unemployment rate of unemployed as percent of the labor force. There is increase in the number unemployed from 11.760 million in May 2013 to 11.777 million in Jun 2013 and decrease to 11.514 million in Jul 2013. The rate of unemployment increased from 7.6 in May 2013 and 7.6 percent in May 2013 to 7.4 percent in Jun 2013. An important aspect of unemployment is its persistence for more than 27 weeks with 4.246 million in Jul 2013, corresponding to 36.9 percent of the unemployed. The longer the period of unemployment the lower are the chances of finding another job with many long-term unemployed ceasing to search for a job. Another key characteristic of the current labor market is the high number of people trying to subsist with part-time jobs because they cannot find full-time employment or part-time for economic reasons. The BLS explains as follows: “these individuals were working part time because their hours had been cut back or because they were unable to find a full-time job” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number of part-time for economic reasons increased from 7.904 million in May 2013 to 8.226 million in Jun 2013 and 8.245 million in Jul 2013. Another important fact is the marginally attached to the labor force. The BLS explains as follows: “these individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number in job stress unemployed or underemployed of 22.173 million in Jul 2013 is composed of 11.514 million unemployed (of whom 4.246 million, or 36.9 percent, unemployed for 27 weeks or more) compared with 11.777 million unemployed in Jun 2013 (of whom 4.328 million, or 36.8 percent, unemployed for 27 weeks or more), 8.245 million employed part-time for economic reasons in Jul 2013 (who suffered reductions in their work hours or could not find full-time employment) compared with 7.226 million in Jun 2013 and 2.414 million who were marginally attached to the labor force in Jul 2013 (who were not in the labor force but wanted and were available for work) compared with 2.582 million in Jun 2013. The final row in Table II-2 provides the number in job stress as percent of the labor force: 14.2 percent in Jul 2013, which is about equal to 14.5 percent in Jun 2013 and 14.0 percent in May 2013.

Table II-2, US, People in Job Stress, Millions and % SA

2013	Jul 2013	Jun 2013	May 2013
Labor Force Millions	155.798	155.835	155.658
Unemployed Millions	11.514	11.777	11.760
Unemployment Rate (unemployed as % labor force)	7.4	7.6	7.6
Unemployed ≥27 weeks Millions	4.246	4.328	4.357
Unemployed ≥27 weeks %	36.9	36.8	37.0
Part Time for Economic Reasons Millions	8.245	8.226	7.904
Marginally Attached to Labor Force Millions	2.414	2.582	2.164
Job Stress Millions	22.173	22.585	21.828
In Job Stress as % Labor Force	14.2	14.5	14.0

Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force

Source: US Bureau of Labor Statistics http://www.bls.gov/

Table II-3 repeats the data in Table II-2 but including Apr and additional data. What really matters is the number of people with jobs or the total employed. The final row of Table II-3 provides people employed as percent of the population or employment to population ratio. The number has remained relatively constant around 58.7 percent. The employment to population ratio fell from an annual level of 63.1 percent in 2006 to 58.6 percent in 2012 with the lowest level at 58.4 percent in 2011.

Table II-3, US, Unemployment and Underemployment, SA, Millions and Percent

	Jul 2013	Jun 2013	May 2013	Apr 2013
Labor Force	155.798	155.835	155.658	155.238
Unemployed	11.514	11.777	11.760	11.659
UNE Rate %	7.4	7.6	7.6	7.5
Part Time Economic Reasons	8.245	8.226	7.904	7.916
Marginally Attached to Labor Force	2.414	2.582	2.164	2.347
In Job Stress	22.173	22.585	21.828	21.922
In Job Stress % Labor Force	14.2	14.5	14.0	14.1
Employed	144.285	144.058	143.898	143.579
Employment % Population	58.7	58.7	58.6	58.6

Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force

Source: US Bureau of Labor Statistics http://www.bls.gov/

The balance of this section considers the second approach. Charts II-1 to II-12 explain the reasons for considering another approach to calculating job stress in the US. Chart II-1 of the Bureau of Labor Statistics provides the level of employment in the US from 2001 to 2013. There was a big drop of the number of people employed from 147.315 million at the peak in Jul 2007 (NSA) to 136.809 million at the trough in Jan 2010 (NSA) with 10.506 million fewer people employed. Recovery has been anemic compared with the shallow recession of 2001 that was followed by nearly vertical growth in jobs. The number employed in Jul 2013 was 145.113 million (NSA) or 2.202 million fewer people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population increased from 231.958 million in Jul 2007 to 245.756 million in Jul 2013 or by 13.798 million.

Chart II-1, US, Employed, Thousands, SA, 2001-2013

Source: Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-2 of the Bureau of Labor Statistics provides 12-month percentage changes of the number of people employed in the US from 2001 to 2013. There was recovery since 2010 but not sufficient to recover lost jobs. Many people in the US who had jobs before the global recession are not working now.

Chart II-2, US, Employed, 12-Month Percentage Change NSA, 2001-2013

Source: Bureau of Labor Statistics

http://www.bls.gov/data/

The foundation of the second approach derives from Chart II-3 of the Bureau of Labor Statistics providing the level of the civilian labor force in the US. The civilian labor force consists of people who are available and willing to work and who have searched for employment recently. The labor force of the US grew 9.4 percent from 142.828 million in Jan 2001 to 156.255 million in Jul 2009 but is virtually equal at 157.196 million in Jun 2013, all numbers not seasonally adjusted. Chart II-3 shows the flattening of the curve of expansion of the labor force and its decline in 2010 and 2011. The ratio of the labor force of 154.871 million in Jul 2007 to the noninstitutional population of 231.958 million in Jul 2007 was 66.8 percent while the ratio of the labor force of 157.196 million in Jul 2013 to the noninstitutional population of 245.756 million in Jul 2013 was 64.0 percent. The labor force of the US in Jul 2013 corresponding to 66.8 percent of participation in the population would be 164.165 million (0.668 x 245.756). The difference between the measured labor force in Jul 2013 of 157.196 million and the labor force in Jul 2013 with participation rate of 66.8 percent (as in Jul 2007) of 164.165 million is 6.969 million. The level of the labor force in the US has stagnated and is 6.969 million lower than what it would have been had the same participation rate been maintained. Millions of people have abandoned their search for employment because they believe there are no jobs available for them. The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job.

Chart II-3, US, Civilian Labor Force, Thousands, SA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-4 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of the labor force in the US. The rate of growth fell almost instantaneously with the global recession and became negative from 2009 to 2011. The labor force of the US collapsed and did not recover. Growth in the beginning of the summer originates in younger people looking for jobs in the summer after graduation or during school recess.

Chart II-4, US, Civilian Labor Force, Thousands, NSA, 12-month Percentage Change, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-5 of the Bureau of Labor Statistics provides the labor force participation rate in the US or labor force as percent of the population. The labor force participation rate of the US fell from 66.8 percent in Jan 2001 to 64.0 percent NSA in Jul 2013, all numbers not seasonally adjusted. The annual labor force participation rate for 1979 was 63.7 percent and also 63.7 percent in Nov 1980 during sharp economic contraction. This comparison is further elaborated below. Chart II-5 shows an evident downward trend beginning with the global recession that has continued throughout the recovery beginning in IIIQ2009. The critical issue is whether people left the workforce of the US because they believe there is no longer a job for them.

Chart II-5, Civilian Labor Force Participation Rate, Percent of Population in Labor Force SA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-6 of the Bureau of Labor Statistics provides the level of unemployed in the US. The number unemployed rose from the trough of 6.272 million in Oct 2006 to the peak of 16.147 million in Jan 2010, declining to 13.400 million in Jul 2012, 12.696 million in Aug 2012, 11.742 million in Sep 2012. The level unemployed fell to 11.741 million in Oct 2012, 11.404 million in Nov 2012, 11.844 million in Dec 2012, 13.181 million in Jan 2013, 12.500 million in Feb 2013 and 12.083 million in Jul 2013, all numbers not seasonally adjusted.

Chart II-6, US, Unemployed, Thousands, SA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-7 of the Bureau of Labor Statistics provides the rate of unemployment in the US or unemployed as percent of the labor force. The rate of unemployment of the US rose from 4.7 percent in Jan 2001 to 6.5 percent in Jun 2003, declining to 4.1 percent in Oct 2006. The rate of unemployment jumped to 10.6 percent in Jan 2010 and declined to 7.6 percent in Dec 2012 but increased to 8.5 percent in Jan 2013 and 8.1 percent in Feb 2013, falling back to 7.1 percent in Apr 2013 and 7.8 percent in Jun 2013, all number not seasonally adjusted. The rate of unemployment not seasonally adjusted stabilized at 7.7 percent in Jul 2013.

Chart II-7, US, Unemployment Rate, SA, 2001-2013

Source: Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-8 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of unemployed. There was a jump of 81.8 percent in Apr 2009 with subsequent decline and negative rates since 2010. On an annual basis, the level of unemployed rose 59.8 percent in 2009 and 26.1 percent in 2008 with increase of 3.9 percent in 2010, decline of 7.3 percent in 2011, decrease of 9.0 percent in 2012 and decrease of 9.8 percent in Jul 2013 relative to Jul 2012.

Chart II-8, US, Unemployed, 12-month Percentage Change, NSA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-9 of the Bureau of Labor Statistics provides the number of people in part-time occupations because of economic reasons, that is, because they cannot find full-time employment. The number underemployed in part-time occupations not seasonally adjusted rose from 3.732 million in Jan 2001 to 5.270 million in Jan 2004, falling to 3.787 million in Apr 2006. The number underemployed seasonally adjusted jumped to 9.103 million in Nov 2009, falling to 8.168 million in Dec 2011 but increasing to 8.220 million in Jan 2012 and 8.127 million in Feb 2012 but then falling to 7.918 million in Dec 2012 and increasing to 8.245 million in Jul 2013. Without seasonal adjustment, the number employed part-time for economic reasons reached 9.354 million in Dec 2009, declining to 8.918 million in Jan 2012 and 8.166 million in Dec 2012 but increasing to 8.324 million in Jul 2013. The longer the period in part-time jobs the worst are the chances of finding another full-time job.

Chart II-9, US, Part-Time for Economic Reasons, Thousands, SA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart I-10 of the Bureau of Labor Statistics repeats the behavior of unemployment. The 12-month percentage change of the level of people at work part-time for economic reasons jumped 84.7 percent in Mar 2009 and declined subsequently. The declines have been insufficient to reduce significantly the number of people who cannot shift from part-time to full-time employment. On an annual basis, the number of part-time for economic reasons increased 33.5 percent in 2008 and 51.7 percent in 2009, declining 0.4 percent in 2010, 3.5 percent in 2011 and 5.1 percent in 2012. The number of part-time for economic reasons increased 0.1 percent in Jul 2013 relative to Jul 2012.

Chart II-10, US, Part-Time for Economic Reasons NSA 12-Month Percentage Change, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-11 of the Bureau of Labor Statistics provides the same pattern of the number marginally attached to the labor force jumping to significantly higher levels during the global recession and remaining at historically high levels. The number marginally attached to the labor force not seasonally adjusted increased from 1.295 million in Jan 2001 to 1.691 million in Feb 2004. The number of marginally attached to the labor force fell to 1.299 million in Sep 2006 and increased to 2.609 million in Dec 2009 and 2.800 million in Jan 2011. The number marginally attached to the labor force was 2.540 million in Dec 2011, increasing to 2.809 million in Jan 2012, falling to 2.608 million in Feb 2012, 2.352 million in Mar 2012, 2.363 million in Apr 2012, 2.423 million in May 2012, 2.483 million in Jun 2012, 2.529 million in Jul 2012, 2.561 million in Aug 2012, 2.517 million in Sep 2012, 2.433 million in Oct 2012, 2.505 million in Nov 2012 and 2.614 million in Dec 2012. The number marginally attached to the labor force fell to 2.414 million in Jul 2013.

Chart II-11, US, Marginally Attached to the Labor Force, Thousands, NSA, 2001-2013

Chart II-12 provides 12-month percentage changes of the marginally attached to the labor force from 2001 to 2013. There was a jump of 56.1 percent in May 2009 during the global recession followed by declines in percentage changes but insufficient negative changes. On an annual basis, the number of marginally attached to the labor force increased in four consecutive years: 15.7 percent in 2008, 37.9 percent in 2009, 11.7 percent in 2010 and 3.5 percent in 2011. The number marginally attached to the labor force fell 2.2 percent on annual basis in 2012 but increased 2.9 percent in the 12 months ending in Dec 2012, fell 13.0 percent in the 12 months ending in Jan 2013, falling 10.7 percent in the 12 months ending in May 2013. The number marginally attached to the labor force increased 4.0 percent in the 12 months ending in Jun 2013 and fell 4.5 percent in the 12 months ending in Jul 2013.

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart II-12, US, Marginally Attached to the Labor Force 12-Month Percentage Change, NSA, 2001-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Table II-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 10.8 percent and the number of people in job stress could be around 28.3 million, which is 17.4 percent of the effective labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Jul 2012, Jun 2013 and Jul 2013 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table II-4b provides the yearly labor force participation rate from 1979 to 2013. The objective of Table II-4 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the noninstitutional civilian population in Jul 2012 and Jun 2013 and Jul 2013 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 64.3 percent by Jul 2012 and was 64.0 percent in Jun 2013 and 64.0 percent in Jul 2013, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 5.494 million unemployed in Jul 2013 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 17.577 million (Total UEM) and not 12.083 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 10.8 percent (Total UEM%) and not 7.7 percent, not seasonally adjusted, or 7.4 percent seasonally adjusted; and (4) the number of people in job stress is close to 28.3 million by adding the 5.494 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table II-4 provides the number of people in job stress not seasonally adjusted at 28.315 million in Jul 2013, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table II-4 shows that the number of people in job stress is equivalent to 17.4 percent of the labor force in May 2013. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.8 percent in Jul 2012, 59.0 percent in Jun 2013 and 59.0 percent in Jul 2013. 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. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are several million fewer people working in 2013 than in 2006 and the number employed is not increasing while population increased 13.798 million. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html).

Table II-4, US, Population, Labor Force and Unemployment, NSA

	2006	Jul 2012	Jun 2013	Jul 2013
POP	229	243,354	245,552	245,756
LF	151	156,526	157,089	157,196
PART%	66.2	64.3	64.0	64.0
EMP	144	143,126	144,841	145,113
EMP/POP%	62.9	58.8	59.0	59.0
UEM	7	13,400	12,248	12,083
UEM/LF Rate%	4.6	8.6	7.8	7.7
NLF	77	86,828	88,463	88,560
LF PART 66.2%		161,100	162,555	162,690
∆NLF UEM		4,574	5,466	5,494
Total UEM		17,974	17,714	17,577
Total UEM%		11.2	10.9	10.8
Part Time Economic Reasons		8,316	8,440	8,324
Marginally Attached to LF		2,529	2,582	2,414
In Job Stress		28,819	28,736	28,315
People in Job Stress as % Labor Force		17.9	17.7	17.4

Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF

Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted

The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%

Source: US Bureau of Labor Statistics http://www.bls.gov/

In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share s_i of a demographic group in an industry i and unemployment rate y_i of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):

Y = ∑_is_iy_i (1)

This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):

∆Y = ∑_i∆s_iy*_i+ ∑_i∆y_is*_i (2)

The first term in (2) captures changes in the demographic and industrial composition of the economy ∆s_i multiplied by the average rate of unemployment y*_i, or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆y_i, multiplied by the average share of the group s*_i,or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:

“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”

Table II-4b and Chart II-12-b provide the US labor force participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels. The civilian labor force participation rate dropped from the peak of 66.9 percent in Jul 2006 to 64.0 percent in Jul 2013. The civilian labor force participation rate was 63.7 percent on an annual basis in 1979 and 63.4 percent in Dec 1980 and Dec 1981, reaching even 62.9 percent in both Apr and May 1979. The civilian labor force participation rate jumped with the recovery to 64.8 percent on an annual basis in 1985 and 65.9 percent in Jul 1985. Structural factors cannot explain these sudden changes vividly shown visually in the final segment of Chart II-12b. Seniors would like to delay their retiring especially because of the adversities of financial repression on their savings. Labor force statistics are capturing the disillusion of potential workers with their chances in finding a job in what Lazear and Spletzer (2012JHJul22) characterize as accentuated cyclical factors.

Table II-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Dec	Annual
1979	62.9	63.0	63.2	62.9	62.9	64.5	64.9	63.8	63.7
1980	63.3	63.2	63.2	63.2	63.5	64.6	65.1	63.4	63.8
1981	63.2	63.2	63.5	63.6	63.9	64.6	65.0	63.4	63.9
1982	63.0	63.2	63.4	63.3	63.9	64.8	65.3	63.8	64.0
1983	63.3	63.2	63.3	63.2	63.4	65.1	65.4	63.8	64.0
1984	63.3	63.4	63.6	63.7	64.3	65.5	65.9	64.3	64.4
1985	64.0	64.0	64.4	64.3	64.6	65.5	65.9	64.6	64.8
1986	64.2	64.4	64.6	64.6	65.0	66.3	66.6	65.0	65.3
1987	64.7	64.8	65.0	64.9	65.6	66.3	66.8	65.5	65.6
1988	65.1	65.2	65.2	65.3	65.5	66.7	67.1	65.9	65.9
1989	65.8	65.6	65.7	65.9	66.2	67.4	67.7	66.3	66.5
1990	66.0	66.0	66.2	66.1	66.5	67.4	67.7	66.1	66.5
1991	65.5	65.7	65.9	66.0	66.0	67.2	67.3	65.8	66.2
1992	65.7	65.8	66.0	66.0	66.4	67.6	67.9	66.1	66.4
1993	65.6	65.8	65.8	65.6	66.3	67.3	67.5	66.2	66.3
1994	66.0	66.2	66.1	66.0	66.5	67.2	67.5	66.5	66.6
1995	66.1	66.2	66.4	66.4	66.4	67.2	67.7	66.2	66.6
1996	65.8	66.1	66.4	66.2	66.7	67.4	67.9	66.7	66.8
1997	66.4	66.5	66.9	66.7	67.0	67.8	68.1	67.0	67.1
1998	66.6	66.7	67.0	66.6	67.0	67.7	67.9	67.0	67.1
1999	66.7	66.8	66.9	66.7	67.0	67.7	67.9	67.0	67.1
2000	66.8	67.0	67.1	67.0	67.0	67.7	67.6	67.0	67.1
2001	66.8	66.8	67.0	66.7	66.6	67.2	67.4	66.6	66.8
2002	66.2	66.6	66.6	66.4	66.5	67.1	67.2	66.2	66.6
2003	66.1	66.2	66.2	66.2	66.2	67.0	66.8	65.8	66.2
2004	65.7	65.7	65.8	65.7	65.8	66.5	66.8	65.8	66.0
2005	65.4	65.6	65.6	65.8	66.0	66.5	66.8	65.9	66.0
2006	65.5	65.7	65.8	65.8	66.0	66.7	66.9	66.3	66.2
2007	65.9	65.8	65.9	65.7	65.8	66.6	66.8	65.9	66.0
2008	65.7	65.5	65.7	65.7	66.0	66.6	66.8	65.7	66.0
2009	65.4	65.5	65.4	65.4	65.5	66.2	66.2	64.4	65.4
2010	64.6	64.6	64.8	64.9	64.8	65.1	65.3	64.1	64.7
2011	63.9	63.9	64.0	63.9	64.1	64.5	64.6	63.8	64.1
2012	63.4	63.6	63.6	63.4	63.8	64.3	64.3	63.4	63.7
2013	63.3	63.2	63.1	63.1	63.5	64.0	64.0

Source: US Bureau of Labor Statistics http://www.bls.gov/

Chart II-12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013

Source: Bureau of Labor Statistics

http://www.bls.gov/data/

Broader perspective is provided by Chart II-12c of the US Bureau of Labor Statistics. The United States civilian noninstitutional population has increased along a consistent trend since 1948 that continued through earlier recessions and the global recession from IVQ2007 to IIQ2009 and the cyclical expansion after IIIQ2009.

Chart II-12c, US, Civilian Noninstitutional Population, Thousands, NSA, 1948-2013

Sources: US Bureau of Labor Statistics

http://www.bls.gov/data/

The labor force of the United States in Chart II-12d has increased along a trend similar to that of the civilian noninstitutional population in Chart II-12c. There is an evident stagnation of the civilian labor force in the final segment of Chart II-12d during the current economic cycle. This stagnation is explained by cyclical factors similar to those analyzed by Lazear and Spletzer (2012JHJul22) that motivated an increasing population to drop out of the labor force instead of structural factors. Large segments of the potential labor force are not observed, constituting unobserved unemployment and of more permanent nature because those afflicted have been seriously discouraged from working by the lack of opportunities.

Chart II-12d, US, Labor Force, Thousands, NSA, 1948-2013

Sources: US Bureau of Labor Statistics

http://www.bls.gov/data/

IIA3 Long-term and Cyclical Comparison of Employment. There is initial discussion here of long-term employment trends followed by cyclical comparison. Growth and employment creation have been mediocre in the expansion beginning in Jul IIIQ2009 from the contraction between Dec IVQ2007 and Jun IIQ2009 (http://www.nber.org/cycles.html). A series of charts from the database of the Bureau of Labor Statistics (BLS) provides significant insight. Chart II-13 provides the monthly employment level of the US from 1948 to 2013. The number of people employed has trebled. There are multiple contractions throughout the more than six decades but followed by resumption of the strong upward trend. The contraction after 2007 is deeper and followed by a flatter curve of job creation. The United States missed this opportunity of high growth in the initial phase of recovery that historically eliminated unemployment and underemployment created during the contraction. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 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 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-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 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html).

Chart II-13, US, Employment Level, Thousands, SA, 1948-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The steep and consistent curve of growth of the US labor force is shown in Chart II-14. The contraction beginning in Dec 2007 flattened the path of the US civilian labor force and is now followed by a flatter curve during the current expansion.

Chart II-14, US, Civilian Labor Force, SA, 1948-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-15 for the period from 1948 to 2013. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart II-15 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.

Chart II-15, US, Civilian Labor Force Participation Rate, SA, 1948-2013, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number of unemployed in the US jumped seasonally adjusted from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The jump not seasonally adjusted was from 5.4 million in May 1979 to 12.5 million in Jan 1983, by 7.1 million or 131.5 percent. The number of unemployed seasonally adjusted jumped from 6.7 million in Mar 2007 to 15.4 million in Oct 2009, by 8.7 million, or 129.9 percent. The number of unemployed not seasonally adjusted jumped from 6.5 million in Apr 2007 to 16.1 million in Jan 2010, by 9.6 million or 147.7 percent. These are the two episodes with steepest increase in the level of unemployment in Chart I-16.

Chart II-16, US, Unemployed, SA, 1948-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-17 provides the rate of unemployment of the US from 1948 to 2012. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009. The unadjusted rate of unemployment reached 10.6 percent in Jan 2010.

Chart II-17, US, Unemployment Rate, SA, 1948-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-18 provides the number unemployed for 27 weeks and over from 1948 to 2013. The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.6 million in Jun 2010, by 5.5 million, or 500 percent.

Chart II-18, US, Unemployed for 27 Weeks or More, 1948-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The employment-population ratio in Chart II-19 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.5 in Dec 2006 to 58.6 in Jul 2011 and stands at 59.0 NSA in Jul 2013. There is no comparable decline followed by stabilization during an expansion in Chart II-19.

Chart II-19, US, Employment-Population Ratio, 1948-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number employed part-time for economic reasons in Chart II-20 increased in the recessions and declined during the expansions. In the current cycle, the number employed part-time for economic reasons increased sharply and has not returned to normal levels. Lower growth of economic activity in the expansion after IIIQ2009 failed to reduce the number desiring to work full time but finding only part-time occupations.

Chart II-20, US, Part-Time for Economic Reasons, NSA, 1955-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Table II-5 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. US GDP fell 4.6 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.3 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first three years of the expansions in the 1980s and the current expansion. GDP grew at 4.6 percent in 1983, 7.3 percent in 1984 and 4.2 percent in 1985 while GDP grew, 2.5 percent in 2010, 1.8 percent in 2011 and 2.8 percent in 2012. Actual annual equivalent GDP growth in the four quarters of 2012 and first two quarters of 2013 is 1.8 percent and 1.4 percent in the first two quarters of 2013. GDP grew at 4.2 percent in 1985 and 3.5 percent in 1986 while the forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.3 to 2.6 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf).

Table II-5, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.5	1980	-0.2	2000	4.1
1931	-6.4	1981	2.6	2001	1.0
1932	-12.9	1982	-1.9	2002	1.8
1933	-1.3	1983	4.6	2003	2.8
1934	10.8	1984	7.3	2004	3.8
1935	8.9	1985	4.2	2005	3.4
1936	12.9	1986	3.5	2006	2.7
1937	5.1	1987	3.5	2007	1.8
1938	-3.3	1988	4.2	2008	-0.3
1930	8.0	1989	3.7	2009	-2.8
1940	8.8	1990	1.9	2010	2.5
1941	17.7	1991	-0.1	2011	1.8
1942	18.9	1992	3.6	2012	2.8

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

Characteristics of the four cyclical contractions are provided in Table II-6 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.6 percent, which is almost equal to the decline of 4.3 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table II-6, US, Number of Quarters, GDP Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	3	-2.5	-0.8
IIIQ1957 to IIQ1958	3	-3.0	-1.0
IVQ1973 to IQ1975	5	-3.1	-0.6
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.5	-0.64
IVQ2007 to IIQ2009	6	-4.3	-0.72

Sources: Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles.html

Table II-7 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the fifteen quarters of the current cyclical expansion from IIIQ2009 to IIQ2013 and the average of 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986, 5.3 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986 and 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986. The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of recovery. 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). Table I-5 provides an average of 7.7 percent in the first four quarters of major cyclical expansions while the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 is 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. As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (Section II and earlierhttp://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html). BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 decelerating to 1.8 percent annual growth in 2011 and 2.8 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.7 percent from IQ1983 to IVQ1983. 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 of $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, just at the borderline of contraction.

Table II-7, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983 to IQ1986 IQ1983 to IIIQ1986 IQ1983 to IVQ1986	13 15 16	19.9 21.6 22.3	5.7 5.4 5.2
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IIQ2013	16	9.0	2.2
First Four Quarters IIIQ2009 to IIQ2010		2.7

*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IIQ1976; 7.8% IQ1983-IVQ1983

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles.html

A group of charts from the database of the Bureau of Labor Statistics facilitate the comparison of employment in the 1980s and 2000s. The long-term charts and tables from I-5 to I-7 in the discussion above confirm the view that the comparison of the current expansion should be with that in the 1980s because of similar dimensions. Chart I-21 provides the level of employment in the US between 1979 and 1989. Employment surged after the contraction and grew rapidly during the decade.

Chart II-21, US, Employed, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

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. Chart I-22 shows tepid recovery early in 2010 followed by near stagnation and marginal expansion.

Chart II-22, US, Employed, Thousands, 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart II-23. There were fluctuations but strong long-term dynamism over an entire decade.

Chart II-23, US, Civilian Labor Force, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The civilian labor force in Chart II-24 grew steadily on an upward trend in the 2000s until it contracted together with the economy after 2007. There has not been recovery during the expansion but rather decline and marginal turn of the year 2011 into expansion in 2012 followed by stability and oscillation into 2013.

Chart II-24, US, Civilian Labor Force, Thousands, 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The rate of participation of the labor force in population stagnated during the stagflation and conquest of inflation in the late 1970s and early 1980s, as shown in Chart II-25. Recovery was vigorous during the expansion and lasted through the remainder of the decade.

Chart II-25, US, Civilian Labor Force Participation Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart II-26. The rate of participation in the labor force continued to decline both during the contraction after 2007 and the expansion after 2009 with marginal expansion at the turn of the year into 2012 followed by trend of decline and stability.

Chart II-26, US, Civilian Labor Force Participation Rate, 2001-2013, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-27 provides the number unemployed during the 1980s. The number unemployed peaked at 12.051 million in Dec 1982 seasonally adjusted and 12.517 in Jan 1983 million not seasonally adjusted, declining to 8.358 million in Dec 1984 seasonally adjusted and 7.978 million not seasonally adjusted during the first two years of expansion from the contraction. The number unemployed then fell to 6.667 million in Dec 1989 seasonally adjusted and 6.300 million not seasonally adjusted.

Chart II-27, US, Unemployed Thousands 1979-1989

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-28 provides the number unemployed from 2001 to 2013. Using seasonally adjusted data, the number unemployed rose from 6.727 million in Oct 2006 to 15.382 million in Oct 2009, declining to 13.049 million in Dec 2011 and to 11.514 million in Jul 2013. Using data not seasonally adjusted, the number unemployed rose from 6.272 million in Oct 2006 to 16.147 million in Jan 2010, declining to 11.844 million in Dec 2012, increasing to 13.181 million in Jan 2013 and declining to 12.083 million in Jul 2013.

Chart II-28, US, Unemployed Thousands 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The rate of unemployment peaked at 10.8 percent in both Nov and Dec 1982 seasonally adjusted, as shown in Chart II-29. The rate of unemployment dropped sharply during the expansion after 1984 and continued to decline during the rest of the decade to 5.4 percent in Dec 1989. Using not seasonally adjusted data, the rate of unemployment peaked at 11.4 percent in Jan 1983, declining to 7.0 percent in Dec 1984 and 5.1 percent in Dec 1989.

Chart II-29, US, Unemployment Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The rate of unemployment in the US seasonally adjusted jumped from 4.4 percent in May 2007 to 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009, as shown in Chart II-30. The rate of unemployment fluctuated at around 9.0 percent in 2011, declining to 7.8 percent in Dec 2012 and 7.4 percent in Jul 2013.

Chart II-30, US, Unemployment Rate, 2001-2013, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The employment population ratio seasonally adjusted fell from around 60.1 in Dec 1979 to 57.1 in both Feb and Mar 1983, as shown in Chart II-31. The employment population ratio seasonally adjusted rose back to 59.9 in Dec 1984 and reached 63.0 later in the decade in Dec 1989. Using not seasonally adjusted data, the employment population ratio dropped from 60.4 percent in Oct 1979 to 56.1 percent in Jan 1983, increasing to 59.8 in Dec 1984 and to 62.9 percent in Dec 1989.

Chart II-31, US, Employment Population Ratio, 1979-1989, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The US employment-population ratio seasonally adjusted has fallen from 63.4 in Dec 2006 to 58.6 in Dec 2011, 58.6 in Dec 2012 and 58.7 in Jul 2013, as shown in Chart II-32. The employment population-ratio has stagnated during the expansion. Using not seasonally adjusted data, the employment population ratio fell from 63.6 percent in Jul 2006 to 57.6 percent in Jan 2011, 58.5 percent in Dec 2012 and 59.0 percent in Jul 2013.

Chart II-32, US, Employment Population Ratio, 2001-2013, %

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number unemployed for 27 weeks or over peaked at 2.885 million in Jun 1983 as shown in Chart II-33. The number unemployed for 27 weeks or over fell sharply during the expansion to 1.393 million in Dec 1984 and continued to decline throughout the 1980s to 0.635 million in Dec 1989.

Chart II-33, US, Number Unemployed for 27 Weeks or More 1979-1989, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number unemployed for 27 weeks or over, seasonally adjusted, increased sharply during the contraction as shown in Chart II-34 from 1.131 million in Nov 2006 to 6.704 million in Apr 2010. The number of unemployed for 27 weeks remained at around 6 million during the expansion compared with somewhat above 1 million before the contraction, falling to 4.322 million in Jul 2013 seasonally adjusted and 4.246 million not seasonally adjusted.

Chart II-34, US, Number Unemployed for 27 Weeks or More, 2001-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number of persons working part-time for economic reasons because they cannot find full-time work peaked during the contraction at 6.857 million in Oct 1982, as shown in Chart II-35. The number of persons at work part-time for economic reasons fell sharply during the expansion to 5.797 million in Dec 1984 and continued to fall throughout the decade to 4.817 million in Dec 1989.

Chart II-35, US, Part-Time for Economic Reasons, 1979-1989, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number of people working part-time because they cannot find full-time employment, not seasonally adjusted, increased sharply during the contraction from 3.787 million in Apr 2006, not seasonally adjusted, to 9.354 million in Dec 2009, as shown in Chart II-36. The number of people working part-time because of failure to find an alternative occupation stagnated at a very high level during the expansion, declining to 7.916 million not seasonally adjusted in Jul 2013.

Chart II-36, US, Part-Time for Economic Reasons, 2001-2013, Thousands

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The number marginally attached to the labor force in Chart II-37 jumped from 1.252 million in Dec 2006 to 2.800 million in Jan 2011, remaining at a high level of 2.540 million in Dec 2011, 2.809 million in Jan 2012, 2.614 million in Dec 2012 and 2.414 million in Jul 2013.

Chart II-37, US, Marginally Attached to the Labor Force, 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

What is striking about the data in Table II-8 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2013. The civilian noninstitutional population growing by 39.6 percent from 174.215 million in 1983 to 243.284 million in 2012 and labor force higher by 38.9 percent, growing from 111.550 million in 1983 to 154.975 million in 2012. Total nonfarm payroll employment seasonally adjusted (SA) increased 162,000 in Jun 2013 and private payroll employment rose 161,000. 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.

Table II-8, US, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	14	-794	-13	-17
Feb	67	-6	-78	-85	-695	-40	-26
Mar	104	-129	173	-79	-830	154	111
Apr	74	-281	276	-215	-704	229	170
May	10	-45	277	-186	-352	521	102
Jun	196	-243	378	-169	-472	-130	94
Jul	112	-343	418	-216	-351	-86	103
Aug	-36	-158	-308	-270	-210	-37	129
Sep	-87	-181	1114	-459	-233	-43	113
Oct	-100	-277	271	-472	-170	228	188
Nov	-209	-124	352	-775	-21	144	154
Dec	-278	-14	356	-705	-220	95	114
			1984			2011	Private
Jan			447			69	80
Feb			479			196	243
Mar			275			205	223
Apr			363			304	303
May			308			115	183
Jun			379			209	177
Jul			312			78	206
Aug			241			132	129
Sep			311			225	256
Oct			286			166	174
Nov			349			174	197
Dec			127			230	249
			1985			2012	Private
Jan			266			311	323
Feb			124			271	265
Mar			346			205	208
Apr			195			112	120
May			274			125	152
Jun			145			87	78
Jul			189			153	177
Aug			193			165	131
Sep			204			138	118
Oct			187			160	217
Nov			209			247	256
Dec			168			219	224
			1985			2013	Private
Jan			123			148	164
Feb			107			332	319
Mar			93			142	154
Apr			188			199	188
May			125			176	187
Jun			-93			188	196
Jul			318			162	161
Aug			113
Sep			346
Oct			187
Nov			186
Dec			204

Source: US Bureau of Labor Statistics http://www.bls.gov/

Charts numbered from II-38 to II-41 from the database of the Bureau of Labor Statistics provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart I-38 provides total nonfarm payroll jobs from 2001 to 2013. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then inadequate growth in 2012 and 2013.

Chart II-38, US, Total Nonfarm Payroll Jobs SA 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart II-39 provides total nonfarm jobs SA from 1979 to 1989. Recovery is strong throughout the decade with the economy growing at trend.

Chart II-39, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Most job creation in the US is by the private sector. Chart II-40 shows the sharp destruction of private payroll jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rates, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.

Chart II-40, US, Total Private Payroll Jobs SA 2001-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart II-41. Rapid growth of creation of private jobs continued throughout the 1980s.

Chart II-41, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

IIA4 Creation of Jobs. Types of jobs created, and not only the pace of job creation, may be important. Aspects of growth of payroll jobs from Jul 2012 to Jul 2013, not seasonally adjusted (NSA), are provided in Table II-9. Total nonfarm employment increased by 2,296,000 (row A, column Change), consisting of growth of total private employment by 2,335,000 (row B, column Change) and decrease by 39,000 of government employment (row C, column Change). Monthly average growth of private payroll employment has been 194,583, which is mediocre relative to 24 to 30 million in job stress, while total nonfarm employment has grown on average by only 191,133 per month, which barely keeps with 113,167 new entrants per month in the labor force. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 16,000, at the monthly rate of 1,333 while private service providing employment grew by 2,132,000, at the monthly rate of 177,666. An important feature in Table I-9 is that jobs in professional and business services increased by 638,000 with temporary help services increasing by 171,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. The segment leisure and hospitality added 477,000 jobs in 12 months. An important characteristic is that the loss of government jobs has stabilized in federal government with loss of 65,000 jobs while states reduced 24,000 jobs and local government added 50,000 jobs. Local government provides the bulk of government jobs, 13.106 million, while federal government provides 2.761 million and states government 4.716 million.

Table II-9, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted, in Thousands

	Jul 2012	Jul 2013	Change
A Total Nonfarm	133,368	135,664	2,296
B Total Private	112,746	115,081	2,335
B1 Goods Producing	18,785	18,988	203
B1a Manufacturing	12,029	12,045	16
B2 Private service providing	93,961	96,093	2,132
B2a Wholesale Trade	5,721	5,804	83
B2b Retail Trade	14,838	15,192	354
B2c Transportation & Warehousing	4,372	4,422	50
B2d Financial Activities	7,847	7,971	124
B2e Professional and Business Services	18,053	18,691	638
B2e1 Temporary help services	2,508	2,679	171
B2f Health Care & Social Assistance	16,933	17,255	322
B2g Leisure & Hospitality	14,387	14,864	477
C Government	20,622	20,583	-39
C1 Federal	2,826	2,761	-65
C2 State	4,740	4,716	-24
C3 Local	13,056	13,106	50

Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3

Source: US Bureau of Labor Statistics http://www.bls.gov/

Greater detail on the types of jobs created is provided in Table II-10 with data for Jun and Jul 2013. Strong seasonal effects are shown by the significant difference between seasonally adjusted (SA) and not-seasonally-adjusted (NSA) data. The purpose of adjusting for seasonality is to isolate nonseasonal effects. The 162,000 SA total nonfarm jobs created in Jul 2013 relative to Jun 2013 actually correspond to decrease of 1,113,000 jobs NSA, as shown in row A. The 161,000 total private payroll jobs SA created in Jul 2013 relative to Jun 2013 actually correspond to increase of 106,000 jobs NSA. The analysis of NSA job creation in the prior Table I-9 does show improvement over the 12 months ending in Jul 2013 that is not clouded by seasonal variations but is inadequate number of jobs created. In fact, the 12-month rate of job creation without seasonal adjustment is stronger indication of marginal improvement in the US job market but that is insufficient in even making a dent in about 30 million people unemployed or underemployed. Benchmark and seasonal adjustments affect comparability of data over time.

Table II-10, US, Employees on Nonfarm Payrolls and Selected Industry Detail, Thousands, SA and NSA

	Jun 2013 SA	Jul 2013 SA	∆	Jun 2013 NSA	Jul 2013 NSA	∆
A Total Nonfarm	135,876	136,038	162	136,777	135,664	-1113
B Total Private	114,025	114,186	161	114,975	115,081	106
B1 Goods Producing	18,639	18,643	4	18,923	18,988	65
B1a Constr.	5,799	5,793	-6	5,992	6,054	62
B Mfg	11,969	11,975	6	12,050	12,045	-5
B2 Private Service Providing	95,386	95,543	157	96,052	96,093	41
B2a Wholesale Trade	5,755	5,769	14	5,791	5,804	13
B2b Retail Trade	15,144	15,191	47	15,144	15,192	48
B2c Couriers & Mess.	531	533	2	518	518	0
B2d Health-care & Social Assistance	17,295	17,303	8	17,296	17,255	-41
B2De Profess. & Business Services	18,550	18,586	36	18,657	18,691	34
B2De1 Temp Help Services	2,691	2,699	8	2,704	2,679	-25
B2f Leisure & Hospit.	14,186	14,209	23	14,782	14,864	82

Notes: ∆: Absolute Change; Constr.: Construction; Mess.: Messengers; Temp: Temporary; Hospit.: Hospitality. SA aggregates do not add because of seasonal adjustment.

Source: US Bureau of Labor Statistics http://www.bls.gov/

Chart I-42 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-42, 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

Manufacturing jobs increased 6,000 in Jul 2013 relative to Jun 2013, seasonally adjusted (Section II 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 II-11 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-13. 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 II-11, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IVQ2012	% 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

The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table I-12 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million from 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.728 million in 2010 relative to 2007 and fell by 959,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion. Nonfarm jobs declined from 137.645 million in 2007 to 133.739 million in 2012, by 3.906 million or 2.8 percent.

Table II-12, US, Total Nonfarm Employment in Thousands

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,528	2000	131,881
1981	91,289	2001	131,919
1982	89,677	2002	130,450
1983	90,280	2003	130,100
1984	94,530	2004	131,509
1985	97,511	2005	133,747
1986	99,474	2006	136,125
1987	102,088	2007	137,645
1988	105,345	2008	136,852
1989	108,014	2009	130,876
1990	109,487	2010	129,917
1991	108,377	2011	131,497
1992	108,745	2012	133,739

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained in 1939 at 29 percent below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).

The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):

“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”

The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table I-13 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 7 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.

Table II-13, US, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in

Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent

	Total Nonfarm Jobs	Total Private Jobs
06/1981 #	92,288	75,969
11/1982 #	89,482	73,260
Change #	-2,806	-2,709
Change ∆%	-3.0	-3.6
12/1982 #	89,383	73,185
05/1984 #	94,471	78,049
Change #	5,088	4,864
Change ∆%	5.7	6.6
11/2007 #	139,090	116,291
05/2009 #	131,626	108,601
Change %	-7,464	-7,690
Change ∆%	-5.4	-6.6
12/2009 #	130,178	107,338
05/2011 #	131,753	108,494
Change #	1,575	1,156
Change ∆%	1.2	1.1
05/1983 #	90,005	73,667
05/1984 #	94,471	78,049
Change #	4,466	4,382
Change ∆%	4.9	5.9
05/2010 #	130,801	107,405
05/2011 #	131,753	109,203
Change #	952	1,798
Change ∆%	0.7	1.7
Change # by ∆% as in 05/1984 to 05/1985	6,409*	6,337**
Difference in Jobs that Would Have Been Created	5,457 = 6,409-952	4,539 = 6,337-1,798

*[(130,801x1.049)-130,801] = 6,409 thousand

**[(107,405)x1.059 – 107,405] = 6,337 thousand

Source: http://www.bls.gov/data/

IIB Stagnating Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table IIB-1 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, decreasing from $24.00/hour in Jun 2012 to $23.98/hour in Jul 2013, or by 0.1 percent. There has been disappointment about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for about 68.7 percent of GDP (Table I-10 and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Growth of consumption by decreasing savings by means of controlling interest rates in what is called financial repression may not be lasting and sound for personal finances (See Pelaez and Pelaez, Globalization and the State, Vol. II (2008c), 81-6, Pelaez (1975), http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html

http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html

{[(wage bill in Jun 2013)/(wage bill in Jun 2012)]-1}100 =

{[($23.95x34.9)/($23.30x34.4)]-1]}100

= {[($835.86/$801.52)]-1}100 = 4.3%

CPI inflation was 1.8 percent in the 12 months ending in Jun 2013 (http://www.bls.gov/cpi/) for an inflation-adjusted wage-bill change of minus 2.5 percent :{[(1.043/1.018)-1]100} (see Table IIB-5 below for Jun 2013). The wage bill for Jul 2013 before inflation adjustment increased 4.2 percent relative to the wage bill for Jul 2012:

{[(wage bill in Jul 2013)/(wage bill in Jul 2012)]-1}100 =

{[($23.81x34.3)/($23.52x34.8)]-1]}100

= {[($816.68/$818.50)]-1}100 = -0.2%

Average hourly earnings increased 1.2 percent from Jul 2012 to Jul 2013 {[($23.81/23.52) – 1]100 = 1.2%} while hours worked decreased 1.4 percent {[(34.3/34.8) – 1]100 = -1.4%}. The increase of the wage bill is the product of the increase of hourly earnings of 1.2 percent and decrease of hours worked of 1.4 percent {[(1.012x0.986) -1]100 = -0.2%}.

Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shocks in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov 2010 with the sovereign issues in Europe triggered by Ireland; in Mar 2011 by the earthquake and tsunami in Japan; and in the beginning of May 2011 by the decline in oil prices and sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/). Renewed risk aversion because of the sovereign risks in Europe had reduced the rate of increase of the DJ UBS commodity index to 1.4 percent on Aug 2, 2013, relative to Jul 2, 2010 (see Table VI-4) but there has been a shift in investor preferences into equities. Inflation has been rising in waves with carry trades driven by zero interest rates to commodity futures during periods of risk appetite with interruptions during risk aversion (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). Inflation-adjusted wages fall sharply during carry trades from zero interest rates to long positions in commodity futures during periods of risk appetite.

Table IIB-1, US, Earnings per Hour and Average Weekly Hours SA

Earnings per Hour	Jul 2012	May 2013	Jun 2013	Jul 2013
Total Private	$23.54	$23.90	$24.00	$23.98
Goods Producing	$24.72	$25.08	$25.21	$25.18
Service Providing	$23.25	$23.62	$23.71	$23.69
Average Weekly Earnings
Total Private	$809.78	$824.55	$828.00	$824.91
Goods Producing	$993.74	$1,013.23	$1,018.48	$1,012.24
Service Providing	$724.23	$786.55	$789.54	$786.51
Average Weekly Hours
Total Private	34.4	34.5	34.5	34.4
Goods Producing	40.2	40.4	40.4	40.2
Service Providing	33.3	33.3	33.3	33.2

Source: US Bureau of Labor Statistics http://www.bls.gov/

Average weekly hours in Table IIB-2 fell from 35.0 in Dec 2007 at the beginning of the contraction to 33.8 in Jun 2009, which was the last month of the contraction. Average weekly hours rose to 34.4 in Dec 2011 and oscillated to 34.9 in Dec 2012 and 34.3 in Jul 2013.

Table IIB-2, US, Average Weekly Hours of All Employees, NSA 2006-2013

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2006			34.2	34.6	34.3	34.6	34.9	34.6	34.5	34.9	34.4	34.6
2007	34.1	34.2	34.3	34.7	34.4	34.7	34.9	34.7	35.0	34.5	34.5	35.0
2008	34.2	34.2	34.8	34.4	34.4	34.9	34.5	34.6	34.4	34.4	34.6	34.1
2009	33.8	34.3	34.0	33.6	33.7	33.8	33.8	34.3	33.7	33.8	34.3	33.9
2010	33.7	33.6	33.8	34.0	34.4	34.1	34.2	34.7	34.1	34.3	34.2	34.2
2011	34.2	34.0	34.1	34.3	34.6	34.4	34.4	34.4	34.4	34.9	34.3	34.4
2012	34.5	34.2	34.3	34.7	34.3	34.4	34.8	34.5	34.9	34.3	34.3	34.9
2013	34.0	34.2	34.3	34.3	34.3	34.9	34.3

Source: US Bureau of Labor Statistics http://www.bls.gov/

Chart IIB-1 provides average weekly hours monthly from Mar 2006 to Jun 2013. Average weekly hours remained relatively stable in the period before the contraction and fell sharply during the contraction as business could not support lower production with the same labor input. Average weekly hours rose rapidly during the expansion but have stabilized at a level below that prevailing before the contraction.

Chart IIB-1, US, Average Weekly Hours of All Employees, SA 2006-2013

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Calculations using BLS data of inflation-adjusted average hourly earnings are in Table IIB-3. The final column of Table IIB-3 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in five months in 2010 and in all but the first month in 2011 and the loss accelerated at 1.8 percent in Sep 2011, declining to a real loss of 1.1 percent in Feb 2012 and 0.6 percent in Mar 2012. There was a gain of 0.6 percent in Apr 2012 in inflation-adjusted average hourly earnings but another fall of 0.5 percent in May 2012 followed by increases of 0.3 percent in Jun and 1.0 percent in Jul 2012. Real hourly earnings stagnated in the 12 months ending in Aug 2012 with increase of only 0.1 percent and increased 0.7 percent in the 12 months ending in Sep 2012. Real hourly earnings fell 1.3 percent in Oct 2012 and gained 1.1 percent in Dec 2012 but declined 0.2 percent in Jan 2012 and stagnated at change of 0.1 percent in Feb 2013. Real hourly earnings increased 0.4 percent in the 12 months ending in Mar 2013 and stagnated at 0.1 percent in Apr 2013, increasing 0.5 percent in May 2013. In Jun 2013, real hourly earnings increased 1.0 percent relative to Jun 2012. Real hourly earnings are oscillating in part because of world inflation waves caused by carry trades from zero interest rates to commodity futures (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html) and in part because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html).

Table IIB-3, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.82	3.7	2.8	0.9
Apr	$21.05	3.3	2.6	0.7
May	$20.83	3.7	2.7	1.0
Jun	$20.82	3.8	2.7	1.1
Jul	$20.99	3.4	2.4	1.0
Aug	$20.85	3.5	2.0	1.5
Sep	$21.19	4.1	2.8	1.3
Oct	$21.07	2.7	3.5	-0.8
Nov	$21.13	3.3	4.3	-0.9
Dec	$21.37	3.7	4.1	-0.4
2010
Jan	$22.55	1.9	2.6	-0.7
Feb	$22.61	1.4	2.1	-0.7
Mar	$22.52	1.2	2.3	-1.1
Apr	$22.57	1.8	2.2	-0.4
May	$22.64	2.5	2.0	0.5
Jun	$22.38	1.8	1.1	0.7
Jul	$22.44	1.8	1.2	0.6
Aug	$22.58	1.7	1.1	0.6
Sep	$22.63	1.8	1.1	0.7
Oct	$22.73	1.9	1.2	0.7
Nov	$22.72	1.0	1.1	-0.1
Dec	$22.79	1.7	1.5	0.2
2011
Jan	$23.20	2.9	1.6	1.3
Feb	$23.03	1.9	2.1	-0.2
Mar	$22.93	1.8	2.7	-0.9
Apr	$22.99	1.9	3.2	-1.3
May	$23.09	2.0	3.6	-1.5
Jun	$22.84	2.1	3.6	-1.4
Jul	$22.97	2.4	3.6	-1.2
Aug	$22.88	1.3	3.8	-2.4
Sep	$23.08	2.0	3.9	-1.8
Oct	$23.33	2.6	3.5	-0.9
Nov	$23.18	2.0	3.4	-1.4
Dec	$23.25	2.0	3.0	-1.0
2012
Jan	$23.59	1.7	2.9	-1.2
Feb	$23.44	1.8	2.9	-1.1
Mar	$23.42	2.1	2.7	-0.6
Apr	$23.65	2.9	2.3	0.6
May	$23.36	1.2	1.7	-0.5
Jun	$23.30	2.0	1.7	0.3
Jul	$23.52	2.4	1.4	1.0
Aug	$23.30	1.8	1.7	0.1
Sep	$23.70	2.7	2.0	0.7
Oct	$23.55	0.9	2.2	-1.3
Nov	$23.62	1.9	1.8	0.1
Dec	$23.89	2.8	1.7	1.1
2013
Jan	$23.92	1.4	1.6	-0.2
Feb	$23.94	2.1	2.0	0.1
Mar	$23.86	1.9	1.5	0.4
Apr	$23.94	1.2	1.1	0.1
May	$23.81	1.9	1.4	0.5
Jun	$23.95	2.8	1.8	1.0
Jul	$23.81	1.2

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees for Jan-Feb 2006

Source: US Bureau of Labor Statistics http://www.bls.gov/

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IIB-4. Average hourly earnings fell 0.5 percent after adjusting for inflation in the 12 months ending in Mar 2012 and gained 0.6 percent in the 12 months ending in Apr 2012 but then lost 0.6 percent in the 12 months ending in May 2012 with a gain of 0.3 percent in the 12 months ending in Jun 2012 and 1.0 percent in Jul 2012 followed by 0.1 percent in Aug 2012 and 0.7 percent in Sep 2012. Average hourly earnings adjusted by inflation fell 1.2 percent in the 12 months ending in Oct 2012. Average hourly earnings adjusted by inflation increased 0.1 percent in the 12 months ending in Nov 2012 and 1.1 percent in the 12 months ending in Dec 2012 but fell 0.2 percent in the 12 months ending in Jan 2013 and stagnated with gain of 0.1 percent in the 12 months ending in Feb 2013. Average hourly earnings adjusted for inflation increased 0.4 percent in the 12 months ending in Mar 2013 and increased 0.2 percent in the 12 months ending in Apr 2013. Average hourly earnings adjusted for inflation increased 0.6 percent in the 12 months ending in May 2013 and 1.1 percent in the 12 months ending in Jun 2013. Table IIB-4 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011 and into 2012 with 12-month percentage declines in three of the first four months of 2012 (-1.1 percent in Jan, -1.1 percent in Feb and -0.5 percent in Mar), declines of 0.6 percent in May and 1.2 percent in Oct and increase in five (0.6 percent in Apr, 0.3 percent in Jun, 1.0 percent in Jul, 0.7 percent in Sep and 1.1 percent in Dec) and stagnation in two (0.1 percent in Aug and 0.1 percent in Nov). Average hourly earnings adjusted for inflation fell 0.2 percent in the 12 months ending in Jan 2013, stagnated with gain of 0.1 percent in the 12 months ending in Feb 2013 and gained 0.4 percent in the 12 months ending Mar 2013. Real average hourly earnings increased 0.2 percent in the 12 months ending in Apr 2013 and 0.6 percent in the 12 months ending in May 2013. Average hourly earnings increased 1.1 percent in the 12 months ending in Jun 2013. Annual data are revealing: -0.7 percent in 2008 during carry trades into commodity futures in a global recession, 3.2 percent in 2009 with reversal of carry trades, no change in 2010 and 2012 and decline by 1.1 percent in 2011. Annual average hourly earnings of all employees in the United States adjusted for inflation increased 1.4 percent from 2007 to 2012 at the yearly average rate of 0.3 percent (from $10.11 in 2007 to $10.25 in 2012 in dollars of 1982-1984 using data in http://www.bls.gov/data/). Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html).

Table IIB-4, US, Average Hourly Earnings of All Employees NSA in Constant Dollars of 1982-1984

Year	Jan	Feb	Mar	Apr	May	Jun	Dec
2006			10.05	10.11	9.92	9.89	10.21
2007	10.23	10.22	10.14	10.18	10.02	9.99	10.17
2008	10.11	10.12	10.11	10.00	9.91	9.84	10.47
2009	10.48	10.50	10.47	10.40	10.32	10.20	10.38
2010	10.41	10.43	10.35	10.35	10.38	10.27	10.40
2011	10.53	10.41	10.26	10.22	10.22	10.12	10.30
2012	10.41	10.30	10.21	10.28	10.16	10.15	10.41
∆% 12 M	-1.1	-1.1	-0.5	0.6	-0.6	0.3	1.1
2013	10.39	10.31	10.25	10.30	10.22	10.26
∆% 12 M	-0.2	0.1	0.4	0.2	0.6	1.1

Source: US Bureau of Labor Statistics http://www.bls.gov/

Chart IIB-2 of the US Bureau of Labor Statistics plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from annual earnings of $10.36 in 2009 and $10.36 again in 2010 to $10.25 in 2011 and $10.25 again in 2012 or loss of 1.1 percent (data in http://www.bls.gov/data/).

Chart IIB-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013

Chart II-3 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011 and into 2012 with temporary increase in Apr 2012 that was reversed in May with another gain in Jun and Jul 2012 followed by stagnation in Aug 2012 and marginal gain in Sep 2012 with sharp decline in Oct 2012, stagnation in Nov 2012, increase in Dec 2012 and renewed decrease in Jan 2013 with near stagnation in Feb 2013 followed by mild increase in Mar-Apr 2013. Hourly earnings adjusted for inflation increased in Jun 2013.

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart IIB-3, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, NSA 2007-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IIB-5. Average weekly earnings fell 3.2 percent after adjusting for inflation in the 12 months ending in Aug 2011, decreased 0.9 percent in the 12 months ending in Sep 2011, increased 0.9 percent in the 12 months ending in Oct 2011, fell 1.0 percent in the 12 months ending in Nov 2011 and 0.3 in the 12 months ending in Dec 2011, declining 0.3 percent in the 12 months ending in Jan 2012 and 0.5 percent in the 12 months ending in Feb 2012. Average weekly earnings in constant dollars were virtually flat in Mar 2012 relative to Mar 2011, increasing 0.1 percent. Average weekly earnings in constant dollars increased 1.7 percent in Apr 2012 relative to Apr 2011 but fell 1.4 percent in May 2012 relative to May 2011, increasing 0.3 percent in the 12 months ending in Jun and 2.1 percent in Jul 2012. Real weekly earnings increased 0.4 percent in the 12 months ending in Aug 2012 and 2.1 percent in the 12 months ending in Sep 2012. Real weekly earnings fell 2.9 percent in the 12 months ending in Oct 2012 and increased 0.1 percent in the 12 months ending in Nov 2012 and 2.5 percent in the 12 months ending in Dec 2012. Real weekly earnings fell 1.6 percent in the 12 months ending in Jan 2013 and virtually stagnated with gain of 0.2 percent in the 12 months ending in Feb 2013, increasing 0.4 percent in the 12 months ending in Mar 2013. Real weekly earnings fell 1.0 percent in the 12 months ending in Apr 2013 and increased 0.6 percent in the 12 months ending in May 2013.

Average weekly earnings increased 2.5 percent in the 12 months ending in Jun 2013. Table II-5 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011 and into 2012 with oscillations according to carry trades causing world inflation waves (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). On an annual basis, average weekly earnings in constant 1982-1984 dollars increased from $349.78 in 2007 to $353.66 in 2012, by 1.1 percent or at the average rate of 0.2 percent per year (data in http://www.bls.gov/data/). Annual average weekly earnings in constant dollars of $353.50 in 2010 were virtually unchanged at $353.66 in 2012. Those who still work bring back home a paycheck that buys fewer high-quality goods than a year earlier. The fractured US job market does not provide an opportunity for advancement as in past booms following recessions (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html).

Table IIB-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2013

Year	Jan	Feb	Mar	Apr	May	Jun	Jul
2006			343.71	349.95	340.12	342.08	347.97
2007	348.72	349.40	347.76	353.41	344.58	346.74	351.68
2008	345.92	346.21	351.70	344.13	340.93	343.40	337.06
2009	354.10	360.31	355.81	349.33	347.94	344.59	345.92
2010	350.71	350.51	349.76	351.99	356.97	350.13	352.02
2011	360.29	353.81	349.90	350.62	353.56	348.08	349.75
2012	359.06	352.12	350.19	356.68	348.65	349.28	357.26
∆% 12 M	-0.3	-0.5	0.1	1.7	-1.4	0.3	2.1
2013	353.17	352.66	351.59	353.13	350.59	357.96
∆% 12 M	-1.6	0.2	0.4	-1.0	0.6	2.5

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart IIB-4 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall with oscillations caused by carry trades from zero interest rates into commodity futures from 2010 to 2011 and into 2012 and 2013.

Chart IIB-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart IIB-5 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 and 2012. (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html

Chart IIB-5, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change, NSA 2007-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

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 Jul 26 and daily values throughout the week ending on Aug 2, 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 Jul 26 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Jul 26, 2013”, first row “USD/EUR 1.3279 -1.1%,” provides the information that the US dollar (USD) depreciated 1.1 percent to USD 1.3279/EUR in the week ending on Fri Jul 26 relative to the exchange rate on Fri Jul 19. 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 1.3279/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Jul 26, appreciating to USD 1.3263/EUR on Mon Jul 29, 2013, or by 0.1 percent. The dollar depreciated because fewer dollars, $1.3263, were required on Mon Jul 29 to buy one euro than $1.3279 on Jul 26. 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 1.3279/EUR on Jul 26; 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 Jul 26, to the last business day of the current week, in this case Fri Aug 2, such as 0.0 percent to USD 1.3281/EUR by Aug 2 {[(1.3281/1.3279)-1]100 = 0.0%}; 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 0.5 percent from the rate of USD 1.3279/EUR on Fri Jul 26 to the rate of USD 1.3208/EUR on Thu Aug 1 {[(1.3208/1.3279) – 1]100 = -0.5%} and depreciated (denoted by negative sign) by 0.6 percent from the rate of USD 1.3208 on Thu Aug 1 to USD 1.3281/EUR on Fri Aug 2 {[(1.3281/1.3208) -1]100 = 0.6%}. 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 Jul 29 to Aug 2, 2013

Fri Jul 26

M 29

Tue 30

W 31

Thu 1

Fri 2

USD/EUR

1.3279

-1.1%

1.3263

0.1%

1.3263

0.1%

0.0%

1.3302

-0.2%

-0.3%

1.3208

0.5%

0.7%

1.3281

0.0%

-0.6%

JPY/ USD

98.28

2.3%

97.95

0.3%

98.03

0.3%

-0.1%

97.89

0.4%

0.1%

99.55

-1.3%

-1.7%

98.95

-0.7%

0.6%

CHF/ USD

0.9285

1.3%

0.9311

-0.3%

0.9298

-0.1%

0.1%

0.9262

0.2%

0.4%

0.9367

-0.9%

-1.1%

0.9293

-0.1%

0.8%

CHF/ EUR

1.2331

0.3

1.2348

-0.1%

1.2331

0.0%

0.1%

1.2320

0.1%

1.2374

-0.3%

-0.4%

1.2342

-0.1%

0.3%

USD/ AUD

0.9265

1.0793

1.0%

0.9206

1.0863

-0.6%

0.9064

1.1033

-2.2%

-1.6%

0.8982

1.1133

-3.2%

-0.9%

0.8925

1.1205

-3.8%

-0.6%

0.8904

1.1231

-4.1%

-0.2%

10 Year T Note

2.565

2.592

2.602

2.59

2.713

2.597

2 Year T Note

0.315

0.311

0.315

0.31

0.331

0.299

German Bond

2Y 0.15 10Y 1.66

2Y 0.16 10Y 1.66

2Y 0.15 10Y 1.67

2Y 0.15 10Y 1.66

2Y 0.15 10Y 1.65

DJIA

15558.83

0.1%

15521.97

-0.2%

15520.59

-0.2%

0.0%

15499.54

-0.4%

-0.1%

15628.02

0.4%

0.8%

15658.36

0.6%

0.2%

DJ Global

2250.40

0.8%

2235.72

-0.7%

2237.60

-0.6%

0.1%

2233.18

-0.8%

-0.2%

2260.41

0.4%

1.2%

2277.30

1.2%

0.8%

DJ Asia Pacific

1384.91

0.4%

1360.74

-1.7%

1367.87

-1.2%

0.5%

1352.27

-2.4%

-1.1%

1364.98

-1.4%

0.9%

1386.06

0.1%

1.5%

Nikkei

14129.98

-3.2%

13661.13

-3.3%

13869.82

-1.8%

1.5%

13668.32

-3.3%

-1.5%

14005.77

-0.9%

2.5%

14466.16

2.4%

3.3%

Shanghai

2010.85

0.9%

1976.31

-1.7%

1990.06

-1.0%

0.7%

1993.80

-0.8%

0.2%

2029.07

0.9%

1.8%

2029.42

0.9%

0.0%

DAX

8244.91

-1.0%

8259.03

0.2%

8271.02

0.3%

0.1%

8275.97

0.4%

0.1%

8410.73

2.0%

1.6%

8406.94

2.0%

0.0%

DJ UBS

Comm.

126.62

-2.3%

126.17

-0.4%

125.27

-1.1%

-0.7%

126.16

-0.4%

0.7%

126.26

-0.3%

0.1%

125.68

-0.7%

-0.5%

WTI $ B

104.70

-3.4%

104.53

-0.2%

103.06

-1.6%

-1.4%

105.21

0.5%

2.1%

107.83

3.0%

2.5%

106.85

2.1%

-0.9%

Brent $/B

107.16

-1.1%

107.56

0.4%

106.86

-0.3%

-0.7%

107.79

0.6%

0.9%

109.54

2.2%

1.6%

108.90

1.6%

-0.6%

Gold $/OZ

1333.4

2.9%

1328.7

-0.4%

1326.4

-0.5%

-0.2%

1324.0

-0.7%

-0.2%

1304.5

-2.2%

-1.5%

1312.0

-1.6%

0.6%

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 Jun 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130619a.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. 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 σ_y and prices σ_p. 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 15,658.36

on Fri Aug 2, 2013, which is higher by 10.5 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 10.3 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 4.591 percent on Aug 5, 2013, and that of the ten-year sovereign bond of Italy at 4.286 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 2, 2013, the yield of the two-year Treasury decreased to 0.299 percent and that of the ten-year Treasury increased to 2.597 percent while the two-year bond of Germany stabilized at 0.15 percent and the ten-year decreased to 1.65 percent; and the dollar depreciated to USD 1.3281/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 2.480 is higher than consumer price inflation of 1.8 percent in the 12 months ending in Jun 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html) and the expectation of higher inflation if risk aversion diminishes. The one-year Treasury yield of 0.114 percent is well below the 12-month consumer price inflation of 1.8 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
08/2/13	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, 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 Jul 25, 2013, with the one-month yield at 0.02 percent, the two-year at 0.35 percent, the ten-year at 2.74 percent, the fed funds rate at 0.08 percent and the corporate Baa bond at 5.40 percent. There is an evident increase in the yields of the 10-year Treasury constant maturity and the Moody’s Baa corporate bond.

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

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 1, 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:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines.

There was strong performance in equity indexes with several indexes in Table III-1 increasing in the week ending on Aug 2, 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 increased 0.2 percent on Aug, increasing 0.6 percent in the week. Germany’s Dax changed 0.0 percent on Fri Aug 2 and increased 2.0 percent in the week. Dow Global increased 0.8 percent on Aug 2 and increased 1.2 percent in the week. Japan’s Nikkei Average increased 3.3 percent on Fri Aug 2 and increased 2.4 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM increased 1.5 percent on Aug 2 and increased 0.1 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 2029.42 on Fri Aug 2 for change of 0.0 percent and increase of 0.9 percent in the week of Aug 2. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.

Commodities were mixed in the week of Aug 2, 2013. The DJ UBS Commodities Index decreased 0.5 percent on Fri Aug 2 and decreased 0.7 percent in the week, as shown in Table III-1. WTI increased 2.1 percent in the week of Aug 2 while Brent increased 1.6 percent in the week. Gold increased 0.6 percent on Fri Aug 2 and decreased 1.6 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 €800,574 million on Jul 26, 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 €1,408,211 million in the statement of Jul 26, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €90,395 million as analyzed by Cochrane (2012Aug31).

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

	Dec 31, 2010	Dec 28, 2011	Jul 26, 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	247,668
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	25,890
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	20,790
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	800,574
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	86,040
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	607,637
8 General Government Debt Denominated in Euro	34,954	33,928	28,356
9 Other Assets	278,719	336,574	259,258
TOTAL ASSETS	2,004, 432	2,733,235	2,396,181
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,408,211
Capital and Reserves	78,143	81,481	90,395

Source: European Central Bank

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

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

http://www.ecb.int/press/pr/wfs/2013/html/fs130730.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-May 2013. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 4.2 percent in Jan-May 2013 relative to Jan-May 2012 while those to EMU are growing at minus 4.0 percent.

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

Apr 2013	Exports % Share	∆% Jan-May 2013/ Jan-May 2012	Imports % Share	∆% Jan-May 2013/ Jan-May 2012
EU	53.7	-3.2	52.9	-3.0
EMU 17	40.5	-4.0	42.7	-3.0
France	11.1	-2.8	8.3	-6.5
Germany	12.5	-4.7	14.6	-7.5
Spain	4.7	-8.2	4.4	-2.2
UK	4.9	-0.2	2.5	-2.2
Non EU	46.3	4.2	47.1	-11.8
Europe non EU	13.9	1.4	11.3	7.4
USA	6.8	-1.3	3.3	-19.1
China	2.3	5.0	6.5	-8.2
OPEC	5.7	13.0	10.8	-27.2
Total	100.0	0.1	100.0	-7.2

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €454 million with the 17 countries of the euro zone (EMU 17) in May 2013 and cumulative deficit of €2065 million in Jan-May 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of €2687 million in Jan-May 2013 with Europe non European Union, the trade surplus of €6260 million with the US and trade surplus with non-European Union of €5526 million in Jan-May 2013. There is significant rigidity in the trade deficits in Jan-May 2013 of €5821 million with China and €3683 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 May 2013 Millions of Euro	Trade Balance Cumulative Jan-May 2013 Millions of Euro
EU	890	3,114
EMU 17	-454	-2,065
France	1,042	5,127
Germany	-342	-2,049
Spain	53	369
UK	762	3,599
Non EU	3,005	5,526
Europe non EU	738	2,687
USA	1,817	6,260
China	-1,116	-5,821
OPEC	-64	-3,683
Total	3,895	8,640

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677

Growth rates of Italy’s trade and major products are in Table III-5 for the period Jan-May 2013 relative to Jan-May 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 19.4 percent and minus 11.4 percent for durable goods. The higher rate of growth of exports of 0.1 percent in Jan-May 2013/Jan-May 2012 relative to imports of minus 7.2 percent may reflect weak demand in Italy with GDP declining during seven consecutive quarters from IIIQ2011 through IQ2013 together with softening commodity prices.

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

	Exports Share %	Exports ∆% Jan-May 2013/ Jan-May 2012	Imports Share %	Imports ∆% Jan-May 2013/ Jan-May 2012
Consumer Goods	29.3	7.1	25.6	0.6
Durable	5.8	1.4	2.9	-11.4
Non-Durable	23.5	8.6	22.7	2.2
Capital Goods	31.6	0.1	19.5	-8.3
Inter- mediate Goods	33.6	-3.0	32.6	-4.0
Energy	5.5	-16.6	22.3	-19.4
Total ex Energy	94.5	1.1	77.7	-3.7
Total	100.0	0.1	100.0	-7.2

Note: % Share for 2012 total trade.

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677

Table VG-4 provides Italy’s trade balance by product categories in May 2013 and cumulative Jan-May 2013. Italy’s trade balance excluding energy generated surplus of €7807 million in May 2013 and €31,731 million cumulative in Jan-May 2013 but the energy trade balance created deficit of €3911 million in May 2013 and cumulative €22,731 million in Jan-May 2013. The overall surplus in May 2013 was €3895 million with cumulative surplus of €8640 million in Jan-May 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

	May 2013	Cumulative Jan-May 2013
Consumer Goods	1,712	8,244
Durable	1,125	5,168
Nondurable	587	3,076
Capital Goods	5,366	20,753
Intermediate Goods	729	2,374
Energy	-3,911	-22,731
Total ex Energy	7,807	31,731
Total	3,895	8,640

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677

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 USD Billions	Primary Net Lending Borrowing % GDP 2013	General Government Net Debt % GDP 2013
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 III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for May 2013. German exports to other European Union (EU) members are 56.7 percent of total exports in May 2013 and 57.2 percent in cumulative Jan-May 2013. Exports to the euro area are 36.6 percent in May and 37.4 percent cumulative in Jan-May. Exports to third countries are 43.3 percent of the total in May and 42.8 percent cumulative in Jan-May. There is similar distribution for imports. Exports to non-euro countries are decreasing 2.4 percent in the 12 months ending in May 2013, increasing 0.9 percent cumulative in Jan-May 2013 while exports to the euro area are decreasing 9.6 percent in the 12 months ending in May 2013, and decreasing 3.6 percent cumulative in Jan-May 2013. Exports to third countries, accounting for 43.3 percent of the total in May 2013, are decreasing 1.6 percent in the 12 months ending in May 2013 and increasing 2.2 percent cumulative in Jan-May 2013, accounting for 42.8 percent of the cumulative total in Jan-May 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 ∆%

	May 2013 € Billions	May 12-Month ∆%	Cumulative Jan-May 2012 € Billions	Cumulative Jan-May 2013/ Jan-May 2012 ∆%
Total Exports	88.2	-4.8	454.3	-0.3
A. EU Members	50.0 % 56.7	-7.1	259.9 % 57.2	-2.1
Euro Area	32.3 % 36.6	-9.6	169.8 % 37.4	-3.6
Non-euro Area	17.7 % 20.1	-2.4	90.1 % 19.8	0.9
B. Third Countries	38.2 % 43.3	-1.6	194.4 % 42.8	2.2
Total Imports	75.2	-2.6	374.0	-1.7
C. EU Members	49.1 % 65.3	-0.7	242.0 % 64.7	0.3
Euro Area	34.6 % 46.0	-0.5	169.0 % 45.2	-0.7
Non-euro Area	14.4 % 19.1	-1.3	73.1 % 19.5	2.5
D. Third Countries	26.1 % 34.7	-5.9	132.0 % 35.3	-5.0

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

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2013/07/PE13_224_51.html

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

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

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

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

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

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

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

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

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

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

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

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

M_tV(i_t, ·) = P_tY_t (5)

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

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

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

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

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

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

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

CMP Associates Regulation Blog

Followers

Blog Archive

About Me

Tuesday, August 6, 2013

Risks of Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Twenty Eight Million Unemployed or Underemployed, World Economic Slowdown and Global Recession Risk: Part II

No comments:

Post a Comment