Global Financial Risk, Mediocre United States Economic Growth, Stagnating Real Disposable Income, Twenty Nine Million Unemployed/Underemployed, Stagnating Real Wages, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
Executive Summary
I Mediocre and Decelerating United States Economic Growth
IA Mediocre and Decelerating United States Economic Growth
IA1 Contracting Real Private Fixed Investment
IA2 Swelling Undistributed Corporate Profits
IB Stagnating Real Disposable Income and Consumption Expenditures
IB1 Stagnating Real Disposable Income and Consumption Expenditures
IB2 Financial Repression
II Twenty Nine 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
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: IA1 Summary of the Employment Situation; IA2 Number of People in Job Stress; IA3 Long-term and Cyclical Comparison of Employment; and IA4 Job Creation.
IA1 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 I-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 204,000 in Oct 2013 and private payroll employment rose 212,000. The average number of nonfarm jobs created in Jan-Oct 2012 was 172,700 while the average number of nonfarm jobs created in Jan-Sep 2013 was 186,300, or increase by 7.9 percent. The average number of private jobs created in the US in Jan-Oct 2012 was 178,900 while the average in Jan-Sep 2013 was 187,500, or increase by 4.8 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 ten months from Jan to Oct 2013 was 186,300, 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 28.9 million unemployed or underemployed. The difference between the average increase of 186,300 new private nonfarm jobs per month in the US from Jan to Oct 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,133 monthly new jobs net of absorption of new entrants in the labor force. There are 28.9 million in job stress in the US currently. Creation of 73,133 new jobs per month net of absorption of new entrants in the labor force would require 396 months to provide jobs for the unemployed and underemployed (28.942 million divided by 73,133) or 33 years (396 divided by 12). The civilian labor force of the US in Oct 2013 not seasonally adjusted stood at 155.918 million with 10.773 million unemployed or effectively 18.959 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 163.104 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 73.133 by 12, which is 877,596). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.746 million (0.05 times labor force of 154.918 million) for new net job creation of 3.027 million (10.773 million unemployed minus 7.746 million unemployed at rate of 5 percent) that at the current rate would take 3.4 years (3.027 million divided by 0.877596). Under the calculation in this blog, there are 18.959 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.104 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.164 million jobs net of labor force growth that at the current rate would take 12.3 years (18.959 million minus 0.05(163.104 million) = 10.804 million divided by 0.877596, 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 Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent. 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 IA4 Job Creation analyzes the types of jobs created, which are lower paying than earlier. Average hourly earnings in Oct 2013 were $24.10 seasonally adjusted (SA), increasing 2.2 percent not seasonally adjusted (NSA) relative to Oct 2012 and increasing 0.1 percent relative to Sep 2013 seasonally adjusted. In Sep 2013, average hourly earnings seasonally adjusted were $24.08, increasing 2.1 percent relative to Sep 2012 not seasonally adjusted and increasing 0.1 percent seasonally adjusted relative to Aug 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 Oct 2013 because the prices indexes of the BLS for Oct 2013 will only be released on Nov 20, 2013 (http://www.bls.gov/cpi/), which will be covered in this blog’s comment on Nov 24, 2013, together with world inflation. The second column provides changes in real wages for Sep 2013. Average hourly earnings adjusted for inflation or in constant dollars increased 0.9 percent in Sep 2013 relative to Sep 2012 but have been decreasing during multiple months. World inflation waves in bouts of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.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 (Section IC and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). The following section IB 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 increased from 7.2 percent in Sep 2013 to 7.3 percent in Oct 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 28.9 million in Oct 2013 and 28.1 million in Sep 2013. The final row in Table I-1 provides the number in job stress as percent of the actual labor force calculated at 17.7 percent in Oct 2013 and 17.3 percent in Sep 2013. Almost one in every five workers in the US is unemployed or underemployed. There is socio-economic stress in the combination of adverse events:
- Mediocre economic growth below potential and long-term trend, resulting in idle productive resources (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Private fixed investment declining 4.0 percent in the entire cycle from IVQ2007 to IIIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Twenty nine million or 17.7 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html)
- Stagnating real disposable income per person or income per person after inflation and taxes (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- Depressed hiring that does not afford an opportunity for reducing unemployment/underemployment and moving to better-paid jobs (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html)
- Unsustainable government deficit/debt and balance of payments deficit (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
- Worldwide waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html)
- Deteriorating terms of trade and net revenue margins in squeeze of economic activity by carry trades induced by zero interest rates (http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.html)
- Financial repression of interest rates and credit affecting the most people without means and access to sophisticated financial investments with likely adverse effects on income distribution and wealth disparity (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
- 47 million in poverty and 48 million without health insurance with family income adjusted for inflation regressing to 1995 levels (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html
- Net worth of households and nonprofits organizations declining by 0.9 percent after adjusting for inflation in the entire cycle from IVQ2007 to IIQ2013 in contrast with growth at 3.0 percent in real terms from 1945 to 2012 (http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html)
Table I-1, US, Summary of the Employment Situation Report SA
| Oct 2013 | Sep 2013 | |
| New Nonfarm Payroll Jobs | 204,000 | 163,000 |
| New Private Payroll Jobs | 212,000 | 150,000 |
| Average Hourly Earnings | Oct 13 $24.10 SA ∆% Oct 13/Oct 12 NSA: 2.2 ∆% Oct 13/Sep 13 SA: 0.1 | Sep 13 $24.08 SA ∆% Sep 13/Sep 12 NSA: 2.1 ∆% Sep 13/Aug 13 SA: 0.1 |
| Average Hourly Earnings in Constant Dollars | ∆% Sep 2013/Sep 2012: 0.9 | |
| Average Weekly Hours | 34.4 SA 34.4 NSA | 34.4 SA 34.9 NSA |
| Unemployment Rate Household Survey % of Labor Force SA | 7.3 | 7.2 |
| Number in Job Stress Unemployed and Underemployed Blog Calculation | 28.9 million NSA | 28.1 million NSA |
| In Job Stress as % Labor Force | 17.7 NSA | 17.3 NSA |
Source: US Bureau of Labor Statistics Source: US Bureau of Labor Statistics
IA2 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 I-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 decrease in the number unemployed from 11.316 million in Aug 2013 to 11.255 million in Sep 2013 and increase to 11.272 million in Sep 2013. The rate of unemployment decreased from 7.3 in Aug 2013 to 7.2 percent in Sep 2013 and increase to 7.3 percent in Oct 2013. An important aspect of unemployment is its persistence for more than 27 weeks with 4.063 million in Oct 2013, corresponding to 36.0 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 7.911 million in Aug 2013 to 7.926 million in Sep 2013 and increased to 8.050 million in Oct 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 21.605 million in Oct 2013 is composed of 11.272 million unemployed (of whom 4.063 million, or 36.0 percent, unemployed for 27 weeks or more) compared with 11.255 million unemployed in Sep 2013 (of whom 4.146 million, or 36.8 percent, unemployed for 27 weeks or more), 8.050 million employed part-time for economic reasons in Oct 2013 (who suffered reductions in their work hours or could not find full-time employment) compared with 7.926 million in Sep 2013 and 2.283 million who were marginally attached to the labor force in Oct 2013 (who were not in the labor force but wanted and were available for work) compared with 2.302 million in Sep 2013. The final row in Table I-2 provides the number in job stress as percent of the labor force: 14.0 percent in Oct 2013, which is close to 13.8 percent in Sep 2013 and 13.9 percent in Aug 2013.
Table I-2, US, People in Job Stress, Millions and % SA
| 2013 | Oct 2013 | Sep 2013 | Aug 2013 |
| Labor Force Millions | 154.839 | 155.559 | 155.486 |
| Unemployed | 11.272 | 11.255 | 11.316 |
| Unemployment Rate (unemployed as % labor force) | 7.3 | 7.2 | 7.3 |
| Unemployed ≥27 weeks | 4.063 | 4.146 | 4.290 |
| Unemployed ≥27 weeks % | 36.0 | 36.8 | 37.9 |
| Part Time for Economic Reasons | 8.050 | 7.926 | 7.911 |
| Marginally | 2.283 | 2.302 | 2.342 |
| Job Stress | 21,605 | 21.483 | 21.569 |
| In Job Stress as % Labor Force | 14.0 | 13.8 | 13.9 |
Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force
Source: US Bureau of Labor Statistics http://www.bls.gov/
Table I-3 repeats the data in Table I-2 but including Jun and additional data. What really matters is the number of people with jobs or the total employed. The final row of Table I-3 provides people employed as percent of the population or employment to population ratio. The number has remained relatively constant around 58.7 percent, declining to 58.3 percent in Oct 2013. 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 I-3, US, Unemployment and Underemployment, SA, Millions and Percent
| Oct 2013 | Sep 2013 | Aug 2013 | Jul 2013 | |
| Labor Force | 154.839 | 155.559 | 155.486 | 155.798 |
| Unemployed | 11.272 | 11.255 | 11.316 | 11.514 |
| UNE Rate % | 7.3 | 7.2 | 7.3 | 7.4 |
| Part Time Economic Reasons | 8.050 | 7.926 | 7.911 | 8.245 |
| Marginally Attached to Labor Force | 2.283 | 2.302 | 2.342 | 2.414 |
| In Job Stress | 21,605 | 21.483 | 21.569 | 22.173 |
| In Job Stress % Labor Force | 14.0 | 13.8 | 13.9 | 14.2 |
| Employed | 143.568 | 144.303 | 144.170 | 144.285 |
| Employment % Population | 58.3 | 58.6 | 58.6 | 58.7 |
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 I-1 to I-12 explain the reasons for considering another approach to calculating job stress in the US. Chart I-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 Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent.
Chart I-1, US, Employed, Thousands, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-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 I-2, US, Employed, 12-Month Percentage Change NSA, 2001-2013
Source: Bureau of Labor Statistics
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 lower at 154.918 million in Sep 2013, all numbers not seasonally adjusted. Chart I-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 154.918 million in Oct 2013 to the noninstitutional population of 246.381 million in Oct 2013 was 62.9 percent. The labor force of the US in Oct 2013 corresponding to 66.8 percent of participation in the population would be 164.583 million (0.668 x 246.381). The difference between the measured labor force in Oct 2013 of 154.918 million and the labor force in Oct 2013 with participation rate of 66.8 percent (as in Jul 2007) of 164.583 million is 9.665 million. The level of the labor force in the US has stagnated and is 9.665 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 I-3, US, Civilian Labor Force, Thousands, SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-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 I-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 I-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 62.9 percent NSA in Oct 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 I-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 I-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 I-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 and 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 10.773 million in Oct 2013, all numbers not seasonally adjusted.
Chart I-6, US, Unemployed, Thousands, SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-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 numbers not seasonally adjusted. The rate of unemployment not seasonally adjusted stabilized at 7.7 percent in Jul 2013 and fell to 7.0 percent in Oct 2013.
Chart I-7, US, Unemployment Rate, SA, 2001-2013
Source: Bureau of Labor Statistics
Chart I-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 8.2 percent in Oct 2013 relative to Oct 2012.
Chart I-8, US, Unemployed, 12-month Percentage Change, NSA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-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. The number employed part-time for economic reasons seasonally adjusted reached 8.050 million in Oct 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 number employed part-time for economic reasons NSA stood at 7.700 million in Oct 2013. The longer the period in part-time jobs the lower are the chances of finding another full-time job.
Chart I-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 decreased 2.2 percent in Oct 2013 relative to Oct 2012.
Chart I-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 2.283 million in Oct 2013.
Chart I-11, US, Marginally Attached to the Labor Force, Thousands, NSA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-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 and 8.6 percent in the 12 months ending in Aug 2013. The number marginally attached to the labor force fell 6.2 percent in the 12 months ending in Oct 2013.
Chart I-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 I-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.6 percent and the number of people in job stress could be around 28.9 million, which is 17.7 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 Oct 2012, Sep 2013 and Oct 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 I-4b provides the yearly labor force participation rate from 1979 to 2013. The objective of Table I-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 Oct 2012, Sep 2013 and Oct 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 63.8 percent by Oct 2012 and was 63.2 percent in Sep 2013 and 62.9 percent in Oct 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:
- there are an estimated 8.186 million unemployed in Oct 2013 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM), that is, they dropped out of their job searches
- the total number of unemployed is effectively 18.959 million (Total UEM) and not 10.773 million (UEM) of whom many have been unemployed long term
- the rate of unemployment is 11.6 percent (Total UEM%) and not 7.0 percent, not seasonally adjusted, or 7.3 percent seasonally adjusted
- the number of people in job stress is close to 28.9 million by adding the 8.186 million leaving the labor force because they believe they could not find another job.
The row “In Job Stress” in Table I-4 provides the number of people in job stress not seasonally adjusted at 28.136 million in Sep 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 I-4 shows that the number of people in job stress is equivalent to 17.7 percent of the labor force in Oct 2013. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 59.0 percent in Oct 2012, 58.8 percent in Sep 2013 and 58.5 percent in Oct 2013. The number employed in Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent. 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 14.423 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/2013/10/twenty-eight-million-unemployed-or.html).
Table I-4, US, Population, Labor Force and Unemployment, NSA
| 2006 | Oct 2012 | Sep 2013 | Oct 2013 | |
| POP | 229 | 243,983 | 246,168 | 246,381 |
| LF | 151 | 155,779 | 155,536 | 154,918 |
| PART% | 66.2 | 63.8 | 63.2 | 62.9 |
| EMP | 144 | 144,039 | 144,651 | 144,144 |
| EMP/POP% | 62.9 | 59.0 | 58.8 | 58.5 |
| UEM | 7 | 11,741 | 10,885 | 10,773 |
| UEM/LF Rate% | 4.6 | 7.5 | 7.0 | 7.0 |
| NLF | 77 | 88,204 | 90,632 | 91,463 |
| LF PART 66.2% | 161,517 | 162,963 | 163,104 | |
| ∆NLF UEM | 5,738 | 7,427 | 8,186 | |
| Total UEM | 17,479 | 18,312 | 18,959 | |
| Total UEM% | 10.8 | 11.2 | 11.6 | |
| Part Time Economic Reasons | 7,870 | 7,522 | 7,700 | |
| Marginally Attached to LF | 2,433 | 2,302 | 2,283 | |
| In Job Stress | 27,782 | 28,136 | 28,942 | |
| People in Job Stress as % Labor Force | 17.2 | 17.3 | 17.7 |
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 si of a demographic group in an industry i and unemployment rate yi of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):
Y = ∑isiyi (1)
This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):
∆Y = ∑i∆siy*i + ∑i∆yis*i (2)
The first term in (2) captures changes in the demographic and industrial composition of the economy ∆si 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 ∆yi, 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 I-4b and Chart I-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 62.9 percent in Oct 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 I-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 I-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
| Year | Apr | May | Jun | Jul | Aug | Sep | Oct | Dec | Annual |
| 1979 | 62.9 | 62.9 | 64.5 | 64.9 | 64.5 | 63.8 | 64.0 | 63.8 | 63.7 |
| 1980 | 63.2 | 63.5 | 64.6 | 65.1 | 64.5 | 63.6 | 63.9 | 63.4 | 63.8 |
| 1981 | 63.6 | 63.9 | 64.6 | 65.0 | 64.6 | 63.5 | 64.0 | 63.4 | 63.9 |
| 1982 | 63.3 | 63.9 | 64.8 | 65.3 | 64.9 | 64.0 | 64.1 | 63.8 | 64.0 |
| 1983 | 63.2 | 63.4 | 65.1 | 65.4 | 65.1 | 64.3 | 64.1 | 63.8 | 64.0 |
| 1984 | 63.7 | 64.3 | 65.5 | 65.9 | 65.2 | 64.4 | 64.6 | 64.3 | 64.4 |
| 1985 | 64.3 | 64.6 | 65.5 | 65.9 | 65.4 | 64.9 | 65.1 | 64.6 | 64.8 |
| 1986 | 64.6 | 65.0 | 66.3 | 66.6 | 66.1 | 65.3 | 65.5 | 65.0 | 65.3 |
| 1987 | 64.9 | 65.6 | 66.3 | 66.8 | 66.5 | 65.5 | 65.9 | 65.5 | 65.6 |
| 1988 | 65.3 | 65.5 | 66.7 | 67.1 | 66.8 | 65.9 | 66.1 | 65.9 | 65.9 |
| 1989 | 65.9 | 66.2 | 67.4 | 67.7 | 67.2 | 66.3 | 66.6 | 66.3 | 66.5 |
| 1990 | 66.1 | 66.5 | 67.4 | 67.7 | 67.1 | 66.4 | 66.5 | 66.1 | 66.5 |
| 1991 | 66.0 | 66.0 | 67.2 | 67.3 | 66.6 | 66.1 | 66.1 | 65.8 | 66.2 |
| 1992 | 66.0 | 66.4 | 67.6 | 67.9 | 67.2 | 66.3 | 66.2 | 66.1 | 66.4 |
| 1993 | 65.6 | 66.3 | 67.3 | 67.5 | 67.0 | 66.1 | 66.4 | 66.2 | 66.3 |
| 1994 | 66.0 | 66.5 | 67.2 | 67.5 | 67.2 | 66.5 | 66.8 | 66.5 | 66.6 |
| 1995 | 66.4 | 66.4 | 67.2 | 67.7 | 67.1 | 66.5 | 66.7 | 66.2 | 66.6 |
| 1996 | 66.2 | 66.7 | 67.4 | 67.9 | 67.2 | 66.8 | 67.1 | 66.7 | 66.8 |
| 1997 | 66.7 | 67.0 | 67.8 | 68.1 | 67.6 | 67.0 | 67.1 | 67.0 | 67.1 |
| 1998 | 66.6 | 67.0 | 67.7 | 67.9 | 67.3 | 67.0 | 67.1 | 67.0 | 67.1 |
| 1999 | 66.7 | 67.0 | 67.7 | 67.9 | 67.3 | 66.8 | 67.0 | 67.0 | 67.1 |
| 2000 | 67.0 | 67.0 | 67.7 | 67.6 | 67.2 | 66.7 | 66.9 | 67.0 | 67.1 |
| 2001 | 66.7 | 66.6 | 67.2 | 67.4 | 66.8 | 66.6 | 66.7 | 66.6 | 66.8 |
| 2002 | 66.4 | 66.5 | 67.1 | 67.2 | 66.8 | 66.6 | 66.6 | 66.2 | 66.6 |
| 2003 | 66.2 | 66.2 | 67.0 | 66.8 | 66.3 | 65.9 | 66.1 | 65.8 | 66.2 |
| 2004 | 65.7 | 65.8 | 66.5 | 66.8 | 66.2 | 65.7 | 66.0 | 65.8 | 66.0 |
| 2005 | 65.8 | 66.0 | 66.5 | 66.8 | 66.5 | 66.1 | 66.2 | 65.9 | 66.0 |
| 2006 | 65.8 | 66.0 | 66.7 | 66.9 | 66.5 | 66.1 | 66.4 | 66.3 | 66.2 |
| 2007 | 65.7 | 65.8 | 66.6 | 66.8 | 66.1 | 66.0 | 66.0 | 65.9 | 66.0 |
| 2008 | 65.7 | 66.0 | 66.6 | 66.8 | 66.4 | 65.9 | 66.1 | 65.7 | 66.0 |
| 2009 | 65.4 | 65.5 | 66.2 | 66.2 | 65.6 | 65.0 | 64.9 | 64.4 | 65.4 |
| 2010 | 64.9 | 64.8 | 65.1 | 65.3 | 65.0 | 64.6 | 64.4 | 64.1 | 64.7 |
| 2011 | 63.9 | 64.1 | 64.5 | 64.6 | 64.3 | 64.2 | 64.1 | 63.8 | 64.1 |
| 2012 | 63.4 | 63.8 | 64.3 | 64.3 | 63.7 | 63.6 | 63.8 | 63.4 | 63.7 |
| 2013 | 63.1 | 63.5 | 64.0 | 64.0 | 63.4 | 63.2 | 62.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2013
Source: Bureau of Labor Statistics
Broader perspective is provided by Chart I-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 I-12c, US, Civilian Noninstitutional Population, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
The labor force of the United States in Chart I-12d has increased along a trend similar to that of the civilian noninstitutional population in Chart I-12c. There is an evident stagnation of the civilian labor force in the final segment of Chart I-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 I-12d, US, Labor Force, Thousands, NSA, 1948-2013
Sources: US Bureau of Labor Statistics
http://www.bea.gov/iTable/index_nipa.cfm
IA3 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 I-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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html).
Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
Chart I-13, US, Employment Level, Thousands, SA, 1948-2013
Source: US Bureau of Labor Statistics
The steep and consistent curve of growth of the US labor force is shown in Chart I-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 I-14, US, Civilian Labor Force, SA, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
Chart I-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 I-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 I-15, US, Civilian Labor Force Participation Rate, SA, 1948-2013, %
Source: US Bureau of Labor Statistics
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 I-16, US, Unemployed, SA, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
Chart I-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 I-17, US, Unemployment Rate, SA, 1948-2013
Source: US Bureau of Labor Statistics
Chart I-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 2.885 million in Jun 1983, by 2.4 million, or 465.7 percent. The number of unemployed 27 weeks or over jumped from 1.132 million in May 2007 to 6.607 million in Jun 2010, by 5.475 million, or 483.7 percent.
Chart I-18, US, Unemployed for 27 Weeks or More, 1948-2013, Thousands
Source: US Bureau of Labor Statistics
The employment-population ratio in Chart I-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 58.5 NSA in Oct 2013. There is no comparable decline followed by stabilization during an expansion in Chart I-19.
Chart I-19, US, Employment-Population Ratio, 1948-2013
Source: US Bureau of Labor Statistics
The number employed part-time for economic reasons in Chart I-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 I-20, US, Part-Time for Economic Reasons, NSA, 1955-2013, Thousands
Source: US Bureau of Labor Statistics
Table I-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 4.7 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 1.9 percent and 1.8 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 2.0 to 2.3 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130918.pdf).
Table I-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://bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical contractions are provided in Table I-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 4.7 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 I-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 | -2.4 | -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://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html
Table I-7 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.3 percent of the US economy in the seventeen 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, 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986 and 5.0 percent in the first seventeen quarters of expansion from IQ1983 to IQ1987. 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 28.9 million unemployed or underemployed in the United States for an effective unemployment rate 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-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 7.8 percent from IQ1983 to IVQ1983. GDP growth in the first three quarters of 2013 accumulated to 1.6 percent that is equivalent to 2.2 percent in a year. This is obtained by dividing GDP in IIIQ2013 of 15,790.1 by GDP in IVQ2012 of $15,539.6 and compounding by 4/3: {[(15,790.1/$15,539.6)4/2 -1]100 = 2.2 %}. The US economy grew 1.6 percent in IIIQ2013 relative to the same quarter a year earlier in IIIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, just at the borderline of contraction.
Table I-7, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number | 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-IQ1986 IQ1983-IIIQ1986 IQ1983-IQ1986 IQ1983-IQ1987 | 13 15 16 17 | 19.9 21.6 22.3 23.1 | 5.7 5.4 5.2 5.0 |
| First Four Quarters IQ1983 to IVQ1983 | 4 | 7.8 | |
| Average First Four Quarters in Four Expansions* | 7.7 | ||
| IIIQ2009 to IIIQ2013 | 17 | 10.0 | 2.3 |
| 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://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.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 I-21, US, Employed, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
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. The number employed in Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent.
![clip_image001[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image120.png "clip_image001[1]")
Chart I-22, US, Employed, Thousands, 2001-2013
Source: US Bureau of Labor Statistics
There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart I-23. There were fluctuations but strong long-term dynamism over an entire decade.
Chart I-23, US, Civilian Labor Force, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
The civilian labor force in Chart I-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.
![clip_image003[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image124.png "clip_image003[1]")
Chart I-24, US, Civilian Labor Force, Thousands, 2001-2013
Source: US Bureau of Labor Statistics
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 I-25. Recovery was vigorous during the expansion and lasted through the remainder of the decade.
Chart I-25, US, Civilian Labor Force Participation Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart I-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.
![clip_image005[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image128.png "clip_image005[1]")
Chart I-26, US, Civilian Labor Force Participation Rate, 2001-2013, %
Source: US Bureau of Labor Statistics
Chart I-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 in Dec 1984 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 I-27, US, Unemployed Thousands 1979-1989
Source: US Bureau of Labor Statistics
Chart I-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 11.272 million in Oct 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 10.773 million in Oct 2013.
![clip_image006[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image132.png "clip_image006[1]")
Chart I-28, US, Unemployed Thousands 2001-2013
Source: US Bureau of Labor Statistics
The rate of unemployment peaked at 10.8 percent in both Nov and Dec 1982 seasonally adjusted, as shown in Chart I-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 I-29, US, Unemployment Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
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 I-30. The rate of unemployment fluctuated at around 9.0 percent in 2011, declining to 7.8 percent in Dec 2012 and 7.3 percent in Oct 2013.
![clip_image007[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image136.png "clip_image007[1]")
Chart I-30, US, Unemployment Rate, 2001-2013, %
Source: US Bureau of Labor Statistics
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 I-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 I-31, US, Employment Population Ratio, 1979-1989, %
Source: US Bureau of Labor Statistics
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 58.3 in Oct 2013, as shown in Chart I-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 58.5 percent in Oct 2013.
Chart I-32, US, Employment Population Ratio, 2001-2013, %
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over peaked at 2.885 million SA in Jun 1983 as shown in Chart I-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 SA and 0.598 million NSA.
Chart I-33, US, Number Unemployed for 27 Weeks or More 1979-1989, SA, Thousands
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over, seasonally adjusted, increased sharply during the contraction as shown in Chart I-34 from 1.131 million in Nov 2006 to 6.704 million in Apr 2010 not seasonally adjusted. 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 4.063 million in Oct 2013 seasonally adjusted and 3.957 million not seasonally adjusted.
Chart I-34, US, Number Unemployed for 27 Weeks or More, 2001-2013, SA, Thousands
Source: US Bureau of Labor Statistics
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 SA in Oct 1982, as shown in Chart I-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 SA and 4.709 million NSA.
Chart I-35, US, Part-Time for Economic Reasons, 1979-1989, Thousands
Source: US Bureau of Labor Statistics
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 I-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 7.700 million not seasonally adjusted in Oct 2013.
![clip_image009[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image152.png "clip_image009[1]")
Chart I-36, US, Part-Time for Economic Reasons, 2001-2013, Thousands
Source: US Bureau of Labor Statistics
The number marginally attached to the labor force in Chart I-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 2.283 million in Oct 2013.
![clip_image011[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3B2BA2\image160.png "clip_image011[1]")
Chart I-37, US, Marginally Attached to the Labor Force, 2001-2013
Source: US Bureau of Labor Statistics
What is striking about the data in Table I-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 grew 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 204,000 in Oct 2013 and private payroll employment rose 212,000. The average number of nonfarm jobs created in Jan-Oct 2012 was 172,700 while the average number of nonfarm jobs created in Jan-Sep 2013 was 186,300, or increase by 7.9 percent. The average number of private jobs created in the US in Jan-Oct 2012 was 178,900 while the average in Jan-Sep 2013 was 187,500, or increase by 4.8 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 ten months from Jan to Oct 2013 was 186,300, 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 28.9 million unemployed or underemployed. The difference between the average increase of 186,300 new private nonfarm jobs per month in the US from Jan to Oct 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,133 monthly new jobs net of absorption of new entrants in the labor force. There are 28.9 million in job stress in the US currently. Creation of 73,133 new jobs per month net of absorption of new entrants in the labor force would require 396 months to provide jobs for the unemployed and underemployed (28.942 million divided by 73,133) or 33 years (396 divided by 12). The civilian labor force of the US in Oct 2013 not seasonally adjusted stood at 155.918 million with 10.773 million unemployed or effectively 18.959 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 163.104 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 73.133 by 12, which is 877,596). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.746 million (0.05 times labor force of 154.918 million) for new net job creation of 3.027 million (10.773 million unemployed minus 7.746 million unemployed at rate of 5 percent) that at the current rate would take 3.4 years (3.027 million divided by 0.877596). Under the calculation in this blog, there are 18.959 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.104 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.164 million jobs net of labor force growth that at the current rate would take 12.3 years (18.959 million minus 0.05(163.104 million) = 10.804 million divided by 0.877596, 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 Oct 2013 was 144.144 million (NSA) or 3.171 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 246.381 million in Oct 2013 or by 14.423 million. The number employed fell 2.2 percent from Jul 2007 to Oct 2013 while population increased 6.2 percent. 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. 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.
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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.pdf
http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the first estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_adv.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/2013/09/mediocre-and-decelerating-united-states.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/2013/09/mediocre-and-decelerating-united-states.html). As a result, there are 28.9 million unemployed or underemployed in the United States for an effective unemployment rate of 17.7 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
Table I-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 | 172 | 194 | ||||
| Jul | 318 | 89 | 100 | ||||
| Aug | 113 | 238 | 207 | ||||
| Sep | 346 | 163 | 150 | ||||
| Oct | 187 | 204 | 212 | ||||
| Nov | 186 | ||||||
| Dec | 204 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Charts numbered from I-38 to I-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 I-38, US, Total Nonfarm Payroll Jobs SA 2001-2013
Source: US Bureau of Labor Statistics
Chart I-39 provides total nonfarm jobs SA from 1979 to 1989. Recovery is strong throughout the decade with the economy growing at trend over the entire economic cycle.
Chart I-39, US, Total Nonfarm Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics
Most job creation in the US is by the private sector. Chart I-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 I-40, US, Total Private Payroll Jobs SA 2001-2013
Source: US Bureau of Labor Statistics
In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart I-41. Rapid growth of creation of private jobs continued throughout the 1980s.
Chart I-41, US, Total Private Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics
IA4 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 Oct 2012 to Oct 2013, not seasonally adjusted (NSA), are provided in Table I-9. Total nonfarm employment increased by 2,299,000 (row A, column Change), consisting of growth of total private employment by 2,321,000 (row B, column Change) and decrease by 22,000 of government employment (row C, column Change). Monthly average growth of private payroll employment has been 193,417, which is mediocre relative to 24 to 30 million in job stress, while total nonfarm employment has grown on average by only 191,583 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 49,000, at the monthly rate of 4,083 while private service providing employment grew by 2,053,000, at the monthly rate of 171,083. An important feature in Table I-9 is that jobs in professional and business services increased by 645,000 with temporary help services increasing by 203,000. 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 431,000 jobs in 12 months. An important characteristic is that the loss of government jobs has stabilized in federal government with loss of 96,000 jobs while states added 9,000 jobs and local government added 65,000 jobs. Local government provides the bulk of government jobs, 14.308 million, while federal government provides 2.712 million and states government 5.212 million.
Table I-9, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted, in Thousands
| Oct 2012 | Oct 2013 | Change | |
| A Total Nonfarm | 135,241 | 137,540 | 2,299 |
| B Total Private | 112,987 | 115,308 | 2,321 |
| B1 Goods Producing | 18,712 | 18,980 | 268 |
| B1a Manufacturing | 11,980 | 12,029 | 49 |
| B2 Private service providing | 94,275 | 96,328 | 2,053 |
| B2a Wholesale Trade | 5,714 | 5,798 | 84 |
| B2b Retail Trade | 14,936 | 15,303 | 367 |
| B2c Transportation & Warehousing | 4,478 | 4,530 | 52 |
| B2d Financial Activities | 7,820 | 7,911 | 91 |
| B2e Professional and Business Services | 18,239 | 18,884 | 645 |
| B2e1 Temporary help services | 2,648 | 2,851 | 203 |
| B2f Health Care & Social Assistance | 17,112 | 17,412 | 300 |
| B2g Leisure & Hospitality | 13,796 | 14,227 | 431 |
| C Government | 22,254 | 22,232 | -22 |
| C1 Federal | 2,808 | 2,712 | -96 |
| C2 State | 5,203 | 5,212 | 9 |
| C3 Local | 14,243 | 14,308 | 65 |
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 I-10 with data for Sep and Oct 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 204,000 SA total nonfarm jobs created in Oct 2013 relative to Sep 2013 actually correspond to increase of 940,000 jobs NSA, as shown in row A. The 212,000 total private payroll jobs SA created in Oct 2013 relative to Sep 2013 actually correspond to increase of 453,000 jobs NSA. The analysis of NSA job creation in the prior Table I-9 does show improvement over the 12 months ending in Oct 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 I-10, US, Employees on Nonfarm Payrolls and Selected Industry Detail, Thousands, SA and NSA
| Sep 2013 SA | Oct 2013 SA | ∆ | Sep 2013 NSA | Oct 2013 NSA | ∆ | |
| A Total Nonfarm | 136,350 | 136,554 | 204 | 136,600 | 137,540 | 940 |
| B Total Private | 114,480 | 114,692 | 212 | 114,855 | 115,308 | 453 |
| B1 Goods Producing | 18,672 | 18,707 | 35 | 18,982 | 18,980 | -2 |
| B1a Constr. | 5,823 | 5,834 | 11 | 6,055 | 6,056 | 1 |
| B Mfg | 11,967 | 11,986 | 19 | 12,033 | 12,029 | -4 |
| B2 Private Service Providing | 95,808 | 95,985 | 177 | 95,873 | 96,328 | 455 |
| B2a Wholesale Trade | 5,789 | 5,784 | -5 | 5,792 | 5,798 | 6 |
| B2b Retail Trade | 15,251 | 15,296 | 45 | 15,143 | 15,303 | 160 |
| B2c Couriers & Mess. | 536 | 537 | 1 | 525 | 525 | 0 |
| B2d Health-care & Social Assistance | 17,367 | 17,384 | 17 | 17,339 | 17,412 | 73 |
| B2De Profess. & Business Services | 18,662 | 18,706 | 44 | 18,743 | 18,884 | 141 |
| B2De1 Temp Help Services | 2,734 | 2,737 | 3 | 2,817 | 2,851 | 34 |
| B2f Leisure & Hospit. | 14,231 | 14,284 | 53 | 14,402 | 14,227 | -175 |
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 I-42, US, Output of Durable Manufacturing, 1972-2013
Source: Board of Governors of the Federal Reserve
http://www.federalreserve.gov/releases/g17/Current/default.htm
Manufacturing jobs increased 19,000 in Oct 2013 relative to Sep 2013, seasonally adjusted (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html). Manufacturing jobs not seasonally adjusted increased 49,000 from Oct 2012 to Oct 2013 or at the average monthly rate of 4,083. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production increased 0.6 percent in Sep 2013 after increasing 0.4 percent in Aug 2013 and decreasing 0.1 percent in Jul 2013, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):
“Industrial production increased 0.6 percent in September following a gain of 0.4 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 2.3 percent. Manufacturing output edged up 0.1 percent in September following a gain of 0.5 percent in August, and increased at an annual rate of 1.2 percent for the third quarter. Production at mines moved up 0.2 percent in September and advanced at an annual rate of 12.9 percent for the third quarter. The output of utilities rose 4.4 percent in September following declines in each of the previous five months. The level of the index for total industrial production in September was equal to its 2007 average and was 3.2 percent above its year-earlier level.“
In the six months ending in Sep 2013, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is much lower than growth of 3.2 percent in the 12 months ending in Sep 2013. Excluding growth of 0.6 percent in Sep 2013, growth in the remaining five months from Apr 2012 to Aug 2013 accumulated to 0.3 percent or 0.6 percent annual equivalent. Industrial production stagnated in one of the past six months and fell in two. Business equipment accumulated growth of 1.3 percent in the six months from Apr to Sep 2013 at the annual equivalent rate of 2.6 percent, which is much lower than growth of 3.7 percent in the 12 months ending in Aug 2013. Growth of business equipment accumulated 0.1 percent from Apr to Aug 2013 at the annual equivalent rate of minus 0.2 percent. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for total industry moved up 0.4 percentage point to 78.3 percent, a rate 1.9 percentage points below its long-run (1972-2012) average.” United States industry is apparently decelerating.
Manufacturing increased 0.1 percent in Sep 2013 after increasing 0.5 percent in Aug 2013 and decreasing 0.4 percent in Jul 2013 seasonally adjusted, increasing 2.4 percent not seasonally adjusted in 12 months ending in Sep 2013, as shown in Table I-11. Manufacturing grew cumulatively 0.6 percent in the six months ending in Sep 2013 or at the annual equivalent rate of 0.4 percent. Excluding the increase of 0.5 percent in Aug 2013, manufacturing accumulated growth of 0.1 percent from Apr 2013 to Aug 2013 or at the annual equivalent rate of 0.2 percent. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 into more recent months as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.2 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steadily in the past six months with some weakness at the margin. Manufacturing fell 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 21.5 percent from the trough in Apr 2009 to Sep 2013. Manufacturing output in Sep 2013 is 5.1 percent below the peak in Jun 2007. Table I-11 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.7 percent in IIQ2013. Most of US national income is in the form of services. In Oct 2013, there were 137.540 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 115.308 million NSA in Oct 2013 accounted for 83.8 percent of total nonfarm jobs of 137.540 million, of which 12.033 million, or 10.4 percent of total private jobs and 8.7 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 96.328 million NSA in Oct 2013, or 70.0 percent of total nonfarm jobs and 83.5 percent of total private-sector jobs. Manufacturing has share of 10.8 percent in US national income in IIQ2013, as shown in Table I-11. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table I-11, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR IQ2013 | % Total | SAAR | % Total | |
| National Income WCCA | 14,354.5 | 100.0 | 14,471.3 | 100.0 |
| Domestic Industries | 14,117.1 | 98.3 | 14,224.4 | 98.3 |
| Private Industries | 12,432.9 | 86.6 | 12,544.3 | 86.7 |
| Agriculture | 226.4 | 1.6 | 220.3 | 1.5 |
| Mining | 247.6 | 1.7 | 252.6 | 1.7 |
| Utilities | 209.1 | 1.5 | 216.5 | 1.5 |
| Construction | 618.2 | 4.3 | 626.4 | 4.3 |
| Manufacturing | 1568.1 | 10.9 | 1561.1 | 10.8 |
| Durable Goods | 878.8 | 6.1 | 890.3 | 6.2 |
| Nondurable Goods | 689.2 | 4.8 | 670.1 | 4.6 |
| Wholesale Trade | 870.0 | 6.1 | 875.3 | 6.0 |
| Retail Trade | 971.4 | 6.8 | 994.5 | 6.9 |
| Transportation & WH | 434.0 | 3.0 | 437.7 | 3.0 |
| Information | 496.0 | 3.5 | 504.8 | 3.5 |
| Finance, Insurance, RE | 2418.9 | 16.8 | 2437.1 | 16.8 |
| Professional, BS | 1973.6 | 13.7 | 1998.1 | 13.8 |
| Education, Health Care | 1423.7 | 9.9 | 1439.4 | 9.9 |
| Arts, Entertainment | 569.7 | 4.0 | 575.0 | 4.0 |
| Other Services | 406.1 | 2.8 | 408.3 | 2.8 |
| Government | 1684.3 | 11.7 | 1680.1 | 11.6 |
| Rest of the World | 237.4 | 1.7 | 246.8 | 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://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 I-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 I-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 = | 4,539 = |
*[(130,801x1.049)-130,801] = 6,409 thousand
**[(107,405)x1.059 – 107,405] = 6,337 thousand
Source: http://www.bls.gov/data/
IB Stagnating Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table IB-1 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, increasing from $24.08/hour in Sep 2013 to $24.10/hour in Oct 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 68.4 percent of GDP (Table I-10 and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.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), Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html
http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html
http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html http://cmpassocregulationblog.blogspot.com/2012/09/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening.html http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable.html http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Average hourly earnings seasonally adjusted changed 0.1 percent from $24.05 in Aug 2013 to $24.08 in Aug 2013. Average private weekly earnings increased $20.25 from $808.79 in Oct 2012 to $829.04 in Oct 2013 or 2.5 percent and increased from $828.35 in Sep 2013 to $829.04 in Oct 2013 or 0.1 percent. The inflation-adjusted wage bill can only be calculated for Sep, which is the most recent month for which there are estimates of the consumer price index. Earnings per hour (not-seasonally-adjusted (NSA)) rose from $23.70 in Sep 2012 to $24.19 in Sep 2013 or by 2.1 percent (http://www.bls.gov/data/; see Table IB-3 below). Data NSA are more suitable for comparison over a year. Average weekly hours NSA were 34.9 in Sep 2012 and 34.9 in Sep 2013 (http://www.bls.gov/data/; see Table IB-2 below). The wage bill increased 2.1 percent in the 12 months ending in Sep 2013:
{[(wage bill in Sep 2013)/(wage bill in Sep 2012)]-1}100 =
{[($24.19x34.9)/($23.70x34.9)]-1]}100
= {[($844.23)/($827.13)]-1}100 = 2.1%
CPI inflation was 1.2 percent in the 12 months ending in Sep 2013 (http://www.bls.gov/cpi/) for an inflation-adjusted wage-bill change of 0.9 percent :{[(1.0.21/1.012)-1]100} (see Table IB-5 below for Sep 2013). The wage bill for Oct 2013 before inflation adjustment increased 2.5 percent relative to the wage bill for Oct 2012:
{[(wage bill in Oct 2013)/(wage bill in Oct 2012)]-1}100 =
{[($24.06x34.4)/23.55x34.3)]-1]}100
= {[($827.66/$807.77)]-1}100 = 2.5%
Average hourly earnings increased 2.2 percent from Oct 2012 to Oct 2013 {[($24.06/$23.55) – 1]100 = 2.2%} while hours worked increased 0.3 percent {[(34.4/34.3) – 1]100 = 0.3%}. The increase of the wage bill is the product of the increase of hourly earnings of 2.2 percent and change of hours worked of 0.3 percent {[(1.022x1.003) -1]100 = 2.5%}.
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/2013/11/global-financial-risk-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.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 IB-1, US, Earnings per Hour and Average Weekly Hours SA
| Earnings per Hour | Oct 2012 | Aug 2013 | Sep 2013 | Oct 2013 |
| Total Private | $23.58 | $24.05 | $24.08 | $24.10 |
| Goods Producing | $24.72 | $25.26 | $25.32 | $25.35 |
| Service Providing | $23.31 | $23.77 | $23.79 | $23.80 |
| Average Weekly Earnings | ||||
| Total Private | $808.79 | $829.73 | $828.35 | $829.04 |
| Goods Producing | $991.27 | $1,023.03 | $1,025.46 | $1,024.14 |
| Service Providing | $773.89 | $791.54 | $789.83 | $792.54 |
| Average Weekly Hours | ||||
| Total Private | 34.3 | 34.5 | 34.4 | 34.4 |
| Goods Producing | 40.1 | 40.5 | 40.5 | 40.4 |
| Service Providing | 33.2 | 33.3 | 33.2 | 33.3 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Average weekly hours in Table IB-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 34.4 in Oct 2013.
Table IB-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 | 34.4 | 34.6 | 34.9 | 34.4 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-1 provides average weekly hours monthly from Mar 2006 to Sep 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 IB-1, US, Average Weekly Hours of All Employees, SA 2006-2013
Source: US Bureau of Labor Statistics
Calculations using BLS data of inflation-adjusted average hourly earnings are in Table IB-3. The final column of Table IB-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 fell 0.7 percent in the 12 months ending in Jul 2013 and increased 0.7 percent in the 12 months ending in Aug 2013. Real hourly earnings increased 0.9 percent in the 12 months ending in Oct 2013. 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/2013/11/global-financial-risk-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/world-inflation-waves-regional-economic.html) and in part because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html) originating in weak economic growth (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html).
Table IB-3, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA
| AHE ALL | 12 Month | ∆% 12 Month CPI | 12 Month | |
| 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 | $23.83 | 1.3 | 2.0 | -0.7 |
| Aug | $23.81 | 2.2 | 1.5 | 0.7 |
| Sep | $24.19 | 2.1 | 1.2 | 0.9 |
| Oct | $24.06 | 2.2 |
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 IB-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. Average hourly earnings of all employees adjusted for inflation fell 0.7 percent in the 12 months ending in Jul 2013 and increased 0.7 percent in the 12 months ending in Sep 2013. Average hourly earnings adjusted for inflation increased 0.9 percent in the 12 months ending in Sep 2013. Table IB-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 three 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 and fell 0.7 percent in the 12 months ending in Jul 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/2013/09/mediocre-and-decelerating-united-states.html).
Table IB-4, US, Average Hourly Earnings of All Employees NSA in Constant Dollars of 1982-1984
| Year | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep |
| 2006 | 10.05 | 10.11 | 9.92 | 9.89 | 9.97 | 9.88 | 10.03 | |
| 2007 | 10.22 | 10.14 | 10.18 | 10.02 | 9.99 | 10.08 | 10.03 | 10.16 |
| 2008 | 10.12 | 10.11 | 10.00 | 9.91 | 9.84 | 9.77 | 9.83 | 9.94 |
| 2009 | 10.50 | 10.47 | 10.40 | 10.32 | 10.20 | 10.23 | 10.29 | 10.30 |
| 2010 | 10.43 | 10.35 | 10.35 | 10.38 | 10.27 | 10.29 | 10.34 | 10.36 |
| 2011 | 10.41 | 10.26 | 10.22 | 10.22 | 10.12 | 10.17 | 10.10 | 10.17 |
| 2012 | 10.30 | 10.21 | 10.28 | 10.16 | 10.15 | 10.27 | 10.11 | 10.24 |
| ∆%12M | -1.1 | -0.5 | 0.6 | -0.6 | 0.3 | 1.0 | 0.1 | 0.7 |
| 2013 | 10.31 | 10.25 | 10.30 | 10.22 | 10.26 | 10.20 | 10.18 | 10.33 |
| ∆%12M | 0.1 | 0.4 | 0.2 | 0.6 | 1.1 | -0.7 | 0.7 | 0.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-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/). The economic welfare or wellbeing of United States workers deteriorated in a recovery without hiring (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html), stagnating/declining real wages and 29 million unemployed or underemployed (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html) because of mediocre economic growth (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/mediocre-and-decelerating-united-states.html).
Chart IB-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-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 and fell in Jul 2013, increasing in Aug-Sep 2013.
Chart IB-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/
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 IB-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. Average weekly earnings fell 1.0 percent in the 12 months ending in Nov 2011 and 0.3 in the 12 months ending in Dec 2011. Average weekly earnings declined 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 and fell 1.8 percent in the 12 months ending in Jul 2013. Real weekly earnings increased 1.0 percent in the 12 months ending in Aug 2013 and 0.9 percent in the 12 months ending in Sep 2013. Table I-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/2013/11/global-financial-risk-world-inflation.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/2013/10/twenty-eight-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html).
Table IB-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2013
| Year | Apr | May | Jun | Jul | Aug | Sep |
| 2006 | 349.95 | 340.12 | 342.08 | 347.97 | 341.76 | 346.19 |
| 2007 | 353.41 | 344.58 | 346.74 | 351.68 | 347.98 | 355.72 |
| 2008 | 344.13 | 340.93 | 343.40 | 337.06 | 340.18 | 341.83 |
| 2009 | 349.33 | 347.94 | 344.59 | 345.92 | 352.80 | 347.04 |
| 2010 | 351.99 | 356.97 | 350.13 | 352.02 | 358.90 | 353.27 |
| 2011 | 350.62 | 353.56 | 348.08 | 349.75 | 347.42 | 349.93 |
| 2012 | 356.68 | 348.65 | 349.28 | 357.26 | 348.93 | 357.44 |
| ∆%12M | 1.7 | -1.4 | 0.3 | 2.1 | 0.4 | 2.1 |
| 2013 | 353.13 | 350.59 | 357.96 | 350.93 | 352.25 | 360.55 |
| ∆%12M | -1.0 | 0.6 | 2.5 | -1.8 | 1.0 | 0.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart IB-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 IB-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2013
Chart IB-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/2013/10/world-inflation-waves-regional-economic.html http://cmpassocregulationblog.blogspot.com/2013/08/duration-dumping-and-peaking-valuations.html http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html http://cmpassocregulationblog.blogspot.com/2013/04/recovery-without-hiring-ten-million.html http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html http://cmpassocregulationblog.blogspot.com/2012_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
http://cmpassocregulationblog.blogspot.com/2012/09/recovery-without-hiring-world-inflation.html http://cmpassocregulationblog.blogspot.com/2012_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart IB-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 0.9 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
(4) 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 Nov 1 and daily values throughout the week ending on Nov 8, 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 Nov 1 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Nov 1, 2013”, first row “USD/EUR 1.3488 2.3% 0.7 %,” provides the information that the US dollar (USD) appreciated 2.3 percent to USD 1.3488/EUR in the week ending on Fri Nov 1 relative to the exchange rate on Fri Oct 25 and appreciated 0.7 percent relative to Thu Oct 31. 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. An 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 most important source of financial turbulence is shifting toward increasing interest rates. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3488/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Nov 1, depreciating to USD 1.3515/EUR on Mon Nov 4, 2013, or by 0.2 percent. The dollar depreciated because more dollars, $1.3515, were required on Mon Nov 4 to buy one euro than $1.3488 on Fri Nov 1. 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 1.3488/EUR on Nov 1. 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 Nov 1, to the last business day of the current week, in this case Fri Nov 8, such as appreciation of 0.9 percent to USD 1.3369/EUR by Nov 8. 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 0.9 percent from the rate of USD 1.3488/EUR on Fri Nov 1 to the rate of USD 1.3369/EUR on Fri Nov 8 {[(1.3369/1.3488) – 1]100 = -0.9%}. The dollar appreciated (denoted by positive sign) by 0.4 percent from the rate of USD 1.3420 on Thu Nov 7 to USD 1.3369/EUR on Fri Nov 8 {[(1.3369/1.3420) -1]100 = -0.4%}. 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.
Table III-I, Weekly Financial Risk Assets Nov 1 to Nov 8, 2013
| Fri Nov 1 | Mon 4 | Tue 5 | Wed 6 | Thu 7 | Fri 8 |
| USD/ EUR 1.3488 2.3% 0.7% | 1.3515 -0.2% -0.2% | 1.3475 0.1% 0.3% | 1.3514 -0.2% -0.3% | 1.3420 0.5% 0.7% | 1.3369 0.9% 0.4% |
| JPY/ USD 98.70 -1.3% -0.3% | 98.61 0.1% 0.1% | 98.50 0.2% 0.1% | 98.66 0.0% -0.2% | 98.08 0.6% 0.6% | 99.07 -0.4% -1.0% |
| CHF/ USD 0.9122 -2.2% -0.6% | 0.9098 0.3% 0.3% | 0.9136 -0.2% -0.4% | 0.9122 0.0% 0.2% | 0.9158 -0.4% -0.4% | 0.9214 -1.0% -0.6% |
| CHF/ EUR 1.2305 0.1% 0.1% | 1.2296 0.1% 0.1% | 1.2310 0.0% -0.1% | 1.2327 -0.2% -0.1% | 1.2289 0.1% 0.3% | 1.2315 -0.1% -0.2% |
| USD/ AUD 0.9439 1.0594 -1.5% -0.2% | 0.9510 1.0515 0.7% 0.7% | 0.9507 1.0519 0.7% 0.0% | 0.9527 1.0497 0.9% 0.2% | 0.9455 1.0576 0.2% -0.8% | 0.9385 1.0655 -0.6% -0.7% |
| 10Y Note 2.622 | 2.602 | 2.668 | 2.644 | 2.599 | 2.750 |
| 2Y Note 0.311 | 0.303 | 0.299 | 0.292 | 0.284 | 0.316 |
| German Bond 2Y 0.11 10Y 1.69 | 2Y 0.11 10Y 1.67 | 2Y 0.14 10Y 1.74 | 2Y 0.13 10Y 1.74 | 2Y 0.08 10Y 2.63 | 2Y 0.10 10Y 1.76 |
| DJIA 15615.55 0.3% 0.5% | 15639.12 0.2% 0.2% | 15618.22 0.0% -0.1% | 15746.88 0.8% 0.8% | 15593.98 -0.1% -1.0% | 15761.78 0.9% 1.1% |
| DJ Global 2404.86 -0.4% -0.3% | 2412.11 0.3% 0.3% | 2401.40 -0.1% -0.4% | 2415.72 0.5% 0.6% | 2391.70 -0.5% -1.0% | 2394.06 -0.4% 0.1% |
| DJ Asia Pacific 1444.72 -0.3% -0.6% | 1445.09 0.0% 0.0% | 1442.80 -0.1% -0.2% | 1446.23 0.1% 0.2% | 1434.81 -0.7% -0.8% | 1422.69 -1.5% -0.8% |
| Nikkei 14201.57 0.8% -0.9% | 14201.57 0.0% 0.0% | 14225.37 0.2% 0.2% | 14337.31 1.0% 0.8% | 14228.44 0.2% -0.8% | 14086.80 -0.8% -1.0% |
| Shanghai 2149.56 0.8% 0.4% | 2149.63 0.0% 0.0% | 2157.24 0.4% 0.4% | 2139.61 -0.5% -0.8% | 2129.40 -0.9% -0.5% | 2106.13 -2.0% -1.1% |
| DAX 9007.83 0.2% -0.3% | 9037.23 0.3% 0.3% | 9009.11 0.0% -0.3% | 9040.87 0.4% 0.4% | 9081.03 0.8% 0.4% | 9078.28 0.8% 0.0% |
| DJ UBS Comm. 123.87 -2.9% -1.1% | 123.20 -0.5% -0.5% | 122.79 -0.9% -0.3% | 123.00 -0.7% 0.2% | 122.69 -1.0% -0.3% | 123.26 -0.5% 0.5% |
| WTI $/B 94.63 -3.3% -1.7% | 94.49 -0.1% -0.1% | 93.40 -1.3% -1.2% | 94.89 0.3% 1.6% | 94.25 -0.4% -0.7% | 94.32 -0.3% 0.1% |
| Brent $/B 106.06 -1.0% -2.5% | 106.18 0.1% 0.1% | 105.40 -0.6% -0.7% | 104.90 -1.1% -0.5% | 103.44 -2.5% -1.4% | 104.96 -1.0% 1.5% |
| Gold $/OZ 1314.3 -2.7% -0.7% | 1314.5 0.0% 0.0% | 1311.5 -0.2% -0.2% | 1317.9 0.3% 0.5% | 1307.6 -0.5% -0.8% | 1287.8 -2.0% -1.5% |
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. What really matters in the statement of the Federal Open Market Committee (FOMC) on Dec 30, 2013, is interest rates of fed funds at 0 to ¼ percent for the foreseeable future, even with paring of purchases of longer term bonds for the portfolio of the Fed (http://www.federalreserve.gov/newsevents/press/monetary/20131030a.htm):
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent” (emphasis added).
Another critical concern in the statement of the FOMC on Sep 18, 2013, is on the effects of tapering expectations on interest rates (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm):
“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth” (emphasis added).
In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:
“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”
Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σy and prices σp. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).
The President of the European Central Bank (ECB) Mario Draghi explained the indefinite period of low policy rates during the press conference following the meeting on Jul 4, 2013 (http://www.ecb.int/press/pressconf/2013/html/is130704.en.html):
“Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney [Governor of the Bank of England] said in London is just a coincidence.”
The European Central Bank (ECB) lowered the policy rates on Nov 7, 2013 (http://www.ecb.europa.eu/press/pr/date/2013/html/pr131107.en.html):
“PRESS RELEASE
7 November 2013 - Monetary policy decisions
At today’s meeting 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 0.25%, starting from the operation to be settled on 13 November 2013.
- The interest rate on the marginal lending facility will be decreased by 25 basis points to 0.75%, with effect from 13 November 2013.
- The interest rate on the deposit facility will remain unchanged at 0.00%.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.”
Mario Draghi, President of the ECB, explained as follows (http://www.ecb.europa.eu/press/pressconf/2013/html/is131107.en.html):
“Based on our regular economic and monetary analyses, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.25% and the rate on the marginal lending facility by 25 basis points to 0.75%. The rate on the deposit facility will remain unchanged at 0.00%. These decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1%. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October.”
The ECB decision together with the employment situation report on Fri Nov 8, 2013, influenced revaluation of the dollar. Market expectations were of relatively easier monetary policy in the euro area.
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 15,761.78 on Fri Nov 8, 2013, which is higher by 11.3 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 11.0 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.
In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the current Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows.
Professor Ronald I. McKinnon (2013Oct27), writing on “Tapering without tears—how to end QE3,” on Oct 27, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304799404579153693500945608?KEYWORDS=Ronald+I+McKinnon), finds that the major central banks of the world have fallen into a “near-zero-interest-rate trap.” World economic conditions are weak such that exist from the zero interest rate trap could have adverse effects on production, investment and employment. The maintenance of interest rates near zero creates long-term near stagnation. The proposal of Professor McKinnon is credible, coordinated increase of policy interest rates toward 2 percent. Professor John B. Taylor at Stanford University, writing on “Economic failures cause political polarization,” on Oct 28, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303442004579121010753999086?KEYWORDS=John+B+Taylor), analyzes that excessive risks induced by near zero interest rates in 2003-2004 caused the financial crash. Monetary policy continued in similar paths during and after the global recession with resulting political polarization worldwide.
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 3.120 percent on Nov 8, 2013, and that of the ten-year sovereign bond of Italy at 4.150 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 Nov 8, 2013, the yield of the two-year Treasury increased to 0.316 percent and that of the ten-year Treasury increased to 2.750 percent while the two-year bond of Germany decreased to 0.10 percent and the ten-year increased to 1.76 percent; and the dollar appreciated to USD 1.3369/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 2.750 percent is higher than consumer price inflation of 1.2 percent in the 12 months ending in Sep 2013 (http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html) and the expectation of higher inflation if risk aversion diminishes. The one-year Treasury yield of 0.112 percent is well below the 12-month consumer price inflation of 1.2 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 | |
| 11/8/13 | 0.316 | 2.750 | 0.10 | 1.76 | 1.3369 |
| 11/1/13 | 0.311 | 2.622 | 0.11 | 1.69 | 1.3488 |
| 10/25/13 | 0.305 | 2.507 | 0.18 | 1.75 | 1.3804 |
| 10/18/13 | 0.321 | 2.588 | 0.17 | 1.83 | 1.3686 |
| 10/11/13 | 0.344 | 2.688 | 0.18 | 1.86 | 1.3543 |
| 10/4/13 | 0.335 | 2.645 | 0.17 | 1.84 | 1.3557 |
| 9/27/13 | 0.335 | 2.626 | 0.16 | 1.78 | 1.3523 |
| 9/20/13 | 0.333 | 2.734 | 0.21 | 1.94 | 1.3526 |
| 9/13/13 | 0.433 | 2.890 | 0.22 | 1.97 | 1.3297 |
| 9/6/13 | 0.461 | 2.941 | 0.26 | 1.95 | 1.3179 |
| 8/23/13 | 0.401 | 2.784 | 0.23 | 1.85 | 1.3221 |
| 8/23/13 | 0.374 | 2.818 | 0.28 | 1.93 | 1.3380 |
| 8/16/13 | 0.341 | 2.829 | 0.22 | 1.88 | 1.3328 |
| 8/9/13 | 0.30 | 2.579 | 0.16 | 1.68 | 1.3342 |
| 8/2/13 | 0.299 | 2.597 | 0.15 | 1.65 | 1.3281 |
| 7/26/13 | 0.315 | 2.565 | 0.15 | 1.66 | 1.3279 |
| 7/19/13 | 0.300 | 2.480 | 0.08 | 1.52 | 1.3141 |
| 7/12/13 | 0.345 | 2.585 | 0.10 | 1.56 | 1.3068 |
| 7/5/13 | 0.397 | 2.734 | 0.11 | 1.72 | 1.2832 |
| 6/28/13 | 0.357 | 2.486 | 0.19 | 1.73 | 1.3010 |
| 6/21/13 | 0.366 | 2.542 | 0.26 | 1.72 | 1.3122 |
| 6/14/13 | 0.276 | 2.125 | 0.12 | 1.51 | 1.3345 |
| 6/7/13 | 0.304 | 2.174 | 0.18 | 1.54 | 1.3219 |
| 5/31/13 | 0.299 | 2.132 | 0.06 | 1.50 | 1.2996 |
| 5/24/13 | 0.249 | 2.009 | 0.00 | 1.43 | 1.2932 |
| 5/17/13 | 0.248 | 1.952 | -0.03 | 1.32 | 1.2837 |
| 5/10/13 | 0.239 | 1.896 | 0.05 | 1.38 | 1.2992 |
| 5/3/13 | 0.22 | 1.742 | 0.00 | 1.24 | 1.3115 |
| 4/26/13 | 0.209 | 1.663 | 0.00 | 1.21 | 1.3028 |
| 4/19/13 | 0.232 | 1.702 | 0.02 | 1.25 | 1.3052 |
| 4/12/13 | 0.228 | 1.719 | 0.02 | 1.26 | 1.3111 |
| 4/5/13 | 0.228 | 1.706 | 0.01 | 1.21 | 1.2995 |
| 3/29/13 | 0.244 | 1.847 | -0.02 | 1.29 | 1.2818 |
| 3/22/13 | 0.242 | 1.931 | 0.03 | 1.38 | 1.2988 |
| 3/15/13 | 0.246 | 1.992 | 0.05 | 1.46 | 1.3076 |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 3/1/13 | 0.236 | 1.842 | 0.03 | 1.41 | 1.3020 |
| 2/22/13 | 0.252 | 1.967 | 0.13 | 1.57 | 1.3190 |
| 2/15/13 | 0.268 | 2.007 | 0.19 | 1.65 | 1.3362 |
| 2/8/13 | 0.252 | 1.949 | 0.18 | 1.61 | 1.3365 |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.bloomberg.com/markets/
Appendix: Prior Risk Determining Events. Current risk analysis concentrates on deciphering what the Federal Open Market Committee (FOMC) may decide on quantitative easing. The week of May 24 was dominated by the testimony of Chairman Bernanke to the Joint Economic Committee of the US Congress on May 22, 2013 (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm), followed by questions and answers and the release on May 22, 2013 of the minutes of the meeting of the Federal Open Market Committee (FOMC) from Apr 30 to May 1, 2013 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm). Monetary policy emphasizes communication of policy intentions to avoid that expectations reverse outcomes in reality (Kydland and Prescott 1977). Jon Hilsenrath, writing on “In bid for clarity, Fed delivers opacity,” on May 23, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath), analyzes discrepancies in communication by the Fed. The annotated chart of values of the Dow Jones Industrial Average (DJIA) during trading on May 23, 2013 provided by Hinselrath, links the prepared testimony of Chairman Bernanke at 10:AM, following questions and answers and the release of the minutes of the FOMC at 2PM. Financial markets strengthened between 10 and 10:30AM on May 23, 2013, perhaps because of the statement by Chairman Bernanke in prepared testimony (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm):
“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.”
In that testimony, Chairman Bernanke (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm) also analyzes current weakness of labor markets:
“Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.”
Hilsenrath (op. cit. http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath) analyzes the subsequent decline of the market from 10:30AM to 10:40AM as Chairman Bernanke responded questions with the statement that withdrawal of stimulus would be determined by data but that it could begin in one of the “next few meetings.” The DJIA recovered part of the losses between 10:40AM and 2PM. The minutes of the FOMC released at 2PM on May 23, 2013, contained a phrase that troubled market participants (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm): “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.” The DJIA closed at 15,387.58 on May 21, 2013 and fell to 15,307.17 at the close on May 22, 2013, with the loss of 0.5 percent occurring after release of the minutes of the FOMC at 2PM when the DJIA stood at around 15,400. The concern about exist of the Fed from stimulus affected markets worldwide as shown in declines of equity indexes in Table III-1 with delays because of differences in trading hours. This behavior shows the trap of unconventional monetary policy with no exit from zero interest rates without risking financial crash and likely adverse repercussions on economic activity.
Financial markets worldwide were affected by the reduction of policy rates of the European Central Bank (ECB) on May 2, 2013. (http://www.ecb.int/press/pr/date/2013/html/pr130502.en.html):
“2 May 2013 - Monetary policy decisions
At today’s meeting, which was held in Bratislava, the Governing Council of the ECB took the following monetary policy decisions:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.50%, starting from the operation to be settled on 8 May 2013.
- The interest rate on the marginal lending facility will be decreased by 50 basis points to 1.00%, with effect from 8 May 2013.
- The interest rate on the deposit facility will remain unchanged at 0.00%.”
Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:
- Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
- Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.
The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Alkman Granitsas, writing on “Central bank details losses at Bank of Cyprus,” on Mar 30, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324000704578392502889560768.html), analyzes the impact of the agreement with the €10 billion agreement with IMF and the European Union on the banks of Cyprus. The recapitalization plan provides for immediate conversion of 37.5 percent of all deposits in excess of €100,000 to shares of special class of the bank. An additional 22.5 percent will be frozen without interest until the plan is completed. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans.
Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields together with the overnight fed funds rate, and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for Jan 2, 1962, are 2.75 percent for the fed fund rates and 4.06 percent for the ten-year Treasury constant maturity. On July 31, 2001, the yields in Chart III-1A 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 Nov 7, 2013, with the one-month yield at 0.04 percent, the two-year at 0.29 percent, the ten-year at 2.63 percent, the fed funds rate at 0.08 percent and the corporate Baa bond at 5.33 percent. There is an evident increase in the yields of the 10-year Treasury constant maturity and the Moody’s Baa corporate bond with marginal reduction.
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, Jan 2, 1962-Nov 7, 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. In IQ1980, gross private domestic investment in the US was $951.6 billion of 2009 dollars, growing to $1,143.0 billion in IVQ1986 or 20.1 percent. Real gross private domestic investment in the US decreased 3.1 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,524.9 billion in IIQ2013. Real private fixed investment fell 4.9 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,458.4 billion in IIQ2013. Growth of real private investment in is mediocre for all but four quarters from IIQ2011 to IQ2012 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Corporate profits with IVA and CCA fell $26.6 billion in IQ2013 after increasing $34.9 billion in IVQ2012 and $13.9 billion in IIIQ2012. Corporate profits with IVA and CCA rebounded with $66.8 billion in IIQ2013. Profits after tax with IVA and CCA fell $1.7 billion in IQ2013 after increasing $40.8 billion in IVQ2012 and $4.5 billion in IIIQ2012. In IIQ2013, profits after tax with IVA and CCA increased $56.9 billion. Anticipation of higher taxes in the “fiscal cliff” episode caused increase of $120.9 billion in net dividends in IVQ2012 followed with adjustment in the form of decrease of net dividends by $103.8 billion in IQ2013, rebounding with $273.5 billion in IIQ2013. There is similar decrease of $80.1 billion in undistributed profits with IVA and CCA in IVQ2012 followed by increase of $102.1 billion in IQ2013 and decline of $216.6 billion in IIQ2013. Undistributed profits of US corporations swelled 263.4 percent from $107.7 billion IQ2007 to $391.4 billion in IIQ2013 and changed signs from minus $55.9 billion in billion in IVQ2007 (Section IA2). In IQ2013, corporate profits with inventory valuation and capital consumption adjustment fell $26.6 billion relative to IVQ2012, from $2047.2 billion to $2020.6 billion at the quarterly rate of minus 1.3 percent. In IIQ2013, corporate profits with IVA and CCA increased $66.8 billion from $2020.6 billion in IQ2013 to $2087.4 billion at the quarterly rate of 3.3 percent (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. The investment decision of US business is fractured. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
![clip_image003[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZhB9DavyY7Uij70d3QEMl2Z4VgC_sT3pPqpim3N_l43vYM_0xGQjPVWVmb67zTQF5fCu4XVQL0wXhHeCblIj1dsZKtyrerO-gIi12CFOGsEp7SDWq_daRY_p5Ysa4Wat_8dISFmytEqI/?imgmax=800)
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
declines.
There was mixed performance in equity indexes with several indexes in Table III-1 decreasing in the week ending on Nov 8, 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 1.1 percent on Nov 8, increasing 0.9 percent in the week. Germany’s Dax changed 0.0 percent on Fri Nov 8 and increased 0.8 percent in the week. Dow Global increased 0.1 percent on Nov 8 and decreased 0.4 percent in the week. Japan’s Nikkei Average decreased 1.0 percent on Nov 8 and decreased 0.8 percent in the week as the yen continues oscillating but relatively weaker and the stock market gains in expectations of success of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM decreased 0.8 percent on Nov 8 and decreased 1.5 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 2106.13 on Oct Nov 8 for decrease of 1.1 percent and decrease of 2.0 percent in the week of Nov 8. There is deceleration with oscillations of the world economy that could affect corporate revenue and equity valuations, causing fluctuations in equity markets with increases during favorable risk appetite.
Commodities were weaker in the week of Nov 8, 2013. The DJ UBS Commodities Index increased 0.5 percent on Fri Nov 8 and decreased 0.5 percent in the week, as shown in Table III-1. WTI decreased 0.3 percent in the week of Nov 8 while Brent decreased 1.0 percent in the week. Gold decreased 1.5 percent on Fri Nov 8 and decreased 2.0 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 €740,153 million on Nov 1, 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 €1,333,507 million in the statement of Nov 1, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €90,420 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Nov 1, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 343,919 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 244,795 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 22,715 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 21,467 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 740,153 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 80,406 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 593,354 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 28,328 |
| 9 Other Assets | 278,719 | 336,574 | 239,794 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,314,393 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,333,507 |
| Capital and Reserves | 78,143 | 81,481 | 90,420 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.europa.eu/press/pr/wfs/2013/html/fs131105.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-Aug 2013. Exports to the non-European Union area with share of 45.8 percent in Italy’s total exports are growing at 2.3 percent in Jan-Aug 2013 relative to Jan-Aug 2012 while those to EMU are growing at minus 3.2 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Aug 2013 | Exports | ∆% Jan-Aug 2013/ Jan-Aug 2012 | Imports | ∆% Jan-Aug 2013/ Jan-Aug 2012 |
| EU | 54.2 | -2.4 | 53.2 | -2.5 |
| EMU 17 | 40.5 | -3.2 | 42.7 | -2.7 |
| France | 11.1 | -2.9 | 8.3 | -5.9 |
| Germany | 12.5 | -3.2 | 14.6 | -6.5 |
| Spain | 4.7 | -7.5 | 4.4 | -3.4 |
| UK | 4.9 | 1.9 | 2.5 | -0.9 |
| Non EU | 45.8 | 2.3 | 46.8 | -10.7 |
| Europe non EU | 13.4 | -1.2 | 11.0 | 5.5 |
| USA | 6.8 | -1.6 | 3.3 | -14.6 |
| China | 2.3 | 9.8 | 6.5 | -10.0 |
| OPEC | 5.7 | 8.1 | 10.8 | -26.3 |
| Total | 100.0 | -0.3 | 100.0 | -6.4 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/101000
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €589 million with the 17 countries of the euro zone (EMU 17) in Aug 2013 and cumulative deficit of €1609 million in Jan-Aug 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of €5057 million in Jan-Aug 2013 with Europe non European Union, the trade surplus of €10,003 million with the US and trade surplus with non-European Union of €11,063 million in Jan-Aug 2013. There is significant rigidity in the trade deficits in Jan-Aug 2013 of €9127 million with China and €5475 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 Aug 2013 Millions of Euro | Trade Balance Cumulative Jan-Aug 2013 Millions of Euro |
| EU | 392 | 8,164 |
| EMU 17 | -589 | -1,609 |
| France | 493 | 8,330 |
| Germany | -245 | -2,520 |
| Spain | 13 | 594 |
| UK | 773 | 6,530 |
| Non EU | 566 | 11,063 |
| Europe non EU | 399 | 5,057 |
| USA | 1,074 | 10,003 |
| China | -1,062 | -9,127 |
| OPEC | -1,109 | -5,475 |
| Total | 958 | 19,227 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/101000
Growth rates of Italy’s trade and major products are in Table III-5 for the period Jan-Aug 2013 relative to Jan-Aug 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 16.7 percent and minus 10.7 percent for durable goods. The higher rate of growth of exports of minus 0.3 percent in Jan-Aug 2013/Jan-Aug 2012 relative to imports of minus 6.4 percent may reflect weak demand in Italy with GDP declining during eight consecutive quarters from IIIQ2011 through IIQ2013 together with softening commodity prices.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 29.3 | 6.1 | 25.6 | 0.4 |
| Durable | 5.8 | 1.8 | 2.9 | -10.7 |
| Non-Durable | 23.5 | 7.1 | 22.7 | 1.8 |
| Capital Goods | 31.6 | 1.1 | 19.5 | -5.4 |
| Inter- | 33.6 | -3.8 | 32.6 | -5.2 |
| Energy | 5.5 | -20.2 | 22.3 | -16.7 |
| Total ex Energy | 94.5 | 0.8 | 77.7 | -3.4 |
| Total | 100.0 | -0.3 | 100.0 | -6.4 |
Note: % Share for 2012 total trade.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/101000
Table III-6 provides Italy’s trade balance by product categories in Aug 2013 and cumulative Jan-Aug 2013. Italy’s trade balance excluding energy generated surplus of €5355 million in Aug 2013 and €55,973 million cumulative in Jan-Aug 2013 but the energy trade balance created deficit of €4397 million in Aug 2013 and cumulative €36,746 million in Jan-Aug 2013. The overall surplus in Aug 2013 was €958 million with cumulative surplus of €19,227 million in Jan-Aug 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
| Aug 2013 | Cumulative Jan-Aug 2013 | |
| Consumer Goods | 1,383 | 14,544 |
| Durable | 769 | 8,467 |
| Nondurable | 614 | 6,077 |
| Capital Goods | 3,141 | 35,569 |
| Intermediate Goods | 831 | 5,860 |
| Energy | -4,397 | -36,746 |
| Total ex Energy | 5,355 | 55,973 |
| Total | 958 | 19,227 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/101000
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/2013/02/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2013.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2013 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 73,454 | ||
| Euro Zone | 12,685 | -0.4 | 74.9 |
| Portugal | 219 | 0.1 | 119.3 |
| Ireland | 221 | -3.3 | 105.5 |
| Greece | 243 | -- | 172.6 |
| Spain | 1,356 | -3.7 | 80.7 |
| Major Advanced Economies G7 | 34,068 | -3.8 | 91.5 |
| United States | 16,724 | -3.6 | 87.4 |
| UK | 2,490 | -4.7 | 84.8 |
| Germany | 3,593 | 1.7 | 56.3 |
| France | 2,739 | -2.0 | 87.2 |
| Japan | 5,007 | -8.8 | 139.9 |
| Canada | 1,825 | -2.8 | 36.5 |
| Italy | 2,068 | 2.0 | 110.5 |
| China | 8,939 | -2.5* | 22.9** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/02/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 $4411.3 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 $4293.3 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 $8704.6 billion, which would be equivalent to 137.5 percent of their combined GDP in 2013. Under this arrangement, the entire debt of selected members 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 242.3 percent if including debt of France and 175.8 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
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 | 9,501.1 | ||
| B Germany | 2,022.9 | $8704.6 as % of $3593 =242.3% $6316.2 as % of $3593 =175.8% | |
| C France | 2,388.4 | ||
| B+C | 4,411.3 | GDP $6,332.0 Total Debt $8704.6 Debt/GDP: 137.5% | |
| D Italy | 2,285.1 | ||
| E Spain | 1,094.3 | ||
| F Portugal | 261.3 | ||
| G Greece | 419.4 | ||
| H Ireland | 233.2 | ||
| Subtotal D+E+F+G+H | 4,293.3 |
Source: calculation with IMF data IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/02/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 Aug 2013. German exports to other European Union (EU) members are 55.2 percent of total exports in Aug 2013 and 57.0 percent in cumulative Jan-Aug 2013. Exports to the euro area are 34.2 percent in Aug and 36.8 percent cumulative in Jan-Aug. Exports to third countries are 44.8 percent of the total in Aug and 43.0 percent cumulative in Jan-Aug. There is similar distribution for imports. Exports to non-euro countries are decreasing 3.5 percent in the 12 months ending in Aug 2013, increasing 1.0 percent cumulative in Jan-Aug 2013 while exports to the euro area are decreasing 4.1 percent in the 12 months ending in Aug 2013 and decreasing 3.1 percent cumulative in Jan-Aug 2013. Exports to third countries, accounting for 44.8 percent of the total in Aug 2013, are decreasing 7.2 percent in the 12 months ending in Aug 2013 and decreasing 0.3 percent cumulative in Jan-Aug 2013, accounting for 43.0 percent of the cumulative total in Jan-Aug 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 ∆%
| Aug 2013 | Aug 12-Month | Cumulative Jan-Aug 2012 € Billions | Cumulative Jan-Aug 2013/ | |
| Total | 85.3 | -5.4 | 726.1 | -1.1 |
| A. EU | 47.1 % 55.2 | -3.9 | 414.1 % 57.0 | -1.7 |
| Euro Area | 29.2 % 34.2 | -4.1 | 267.5 % 36.8 | -3.1 |
| Non-euro Area | 17.9 % 21.0 | -3.5 | 146.6 % 20.2 | 1.0 |
| B. Third Countries | 38.2 % 44.8 | -7.2 | 312.0 % 43.0 | -0.3 |
| Total Imports | 72.2 | -2.2 | 598.9 | -1.4 |
| C. EU Members | 44.7 % 61.9 | -0.9 | 385.4 % 64.4 | 0.0 |
| Euro Area | 30.7 % 42.3 | -2.8 | 269.2 % 44.9 | -0.8 |
| Non-euro Area | 14.1 % 19.5 | 3.5 | 116.2 % 19.4 | 1.8 |
| D. Third Countries | 27.5 % 38.1 | -4.3 | 213.5 % 35.6 | -3.8 |
Notes: Total Exports = A+B; Total Imports = C+D
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/10/PE13_333_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:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
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