Global Financial Instability, Recovery without Hiring, Collapse of United States Dynamism of Income Growth and Employment Creation, World Cyclical Slow Growth and Global Recession Risk: Part IV

 

Global Financial Instability, Recovery without Hiring, Collapse of United States Dynamism of Income Growth and Employment Creation, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014

Executive Summary

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

IA4 Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and

Middle-Age Unemployment

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

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

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

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

	GDP	CPI	PPI	UNE
US	2.6	1.1	1.3 FD 0.9	6.7
Japan	2.6	1.5	1.7	3.6
China	7.7	2.4	-2.3
UK	2.7	1.7* CPIH 1.6	0.5 output 1.1** input -5.7	7.2
Euro Zone	0.5	0.7	-1.7	11.9
Germany	1.4	1.0	-0.9	5.1
France	0.8	1.1	-1.8	10.4
Nether-lands	0.9	0.4	-3.1	7.3
Finland	-0.5	1.6	-0.7	8.4
Belgium	1.0	1.0	-4.2	8.5
Portugal	1.6	-0.1	-1.5	15.3
Ireland	3.1	0.1	1.1	11.9
Italy	-0.9	0.4	-1.7	13.0
Greece	-2.3	-0.9	-3.5	27.5
Spain	-0.1	0.1	-2.9	25.6

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

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2014/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2014/index.html

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.6 percent in IVQ2013 relative to IVQ2012 (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html, Table 8 in http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp4q13_3rd.pdf). Japan’s GDP grew 0.2 percent in IVQ2013 relative to IIIQ2013 and 2.6 percent relative to a year earlier. Japan’s GDP grew at the seasonally adjusted annual rate (SAAR) of 0.7 percent in IVQ2013 (http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). The UK grew at 0.7 percent in IVQ2013 relative to IIIQ2013 and GDP increased 2.7 percent in IVQ2013 relative to IVQ2012 (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html). The Euro Zone grew at 0.2 percent in IVQ2013 and 0.5 percent in IVQ2013 relative to IVQ2012 (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 6.7 percent in the US but 17.2 percent for unemployment/underemployment or job stress of 28.2 million (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html), 3.6 percent for Japan (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html), 7.2 percent for the UK with high rates of unemployment for young people (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.1 percent in the US, 1.5 percent for Japan, 2.4 percent for China, 0.7 percent for the Euro Zone and 1.7 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. Six key interrelated vulnerabilities in the world economy have been causing global financial turbulence. (1) Sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). (2) The tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment, high debt and political developments in a decennial transition. (3) Slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html), weak hiring with the loss of 10 million full-time jobs (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html). (4) The timing, dose, impact and instruments of normalizing monetary and fiscal policies (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies. (5) The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 had repercussions throughout the world economy. Japan has share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.

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

Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):

“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.

Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.

The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”

Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:

“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”

The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.”

Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

Unconventional monetary policy will remain in perpetuity, or QE→∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE→∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at around 2.3 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that US economic growth has been at only 2.4 percent on average in the cyclical expansion in the 18 quarters from IVQ2009 to IVQ2013. 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) and the second estimate of GDP for IVQ2013 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp4q13_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth under trend in the entire cycle from IVQ2007 to IV2013 would have accumulated to 20.3 percent. GDP in IVQ2013 would be $18,040.3 billion if the US had grown at trend, which is higher by $2,098.0 billion than actual $15,942.3 billion. There are about two trillion dollars of GDP less than under trend, explaining the 28.2 million unemployed or underemployed equivalent to actual unemployment of 17.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html). US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,942.3 billion in IVQ2013 or 6.3 percent at the average annual equivalent rate of 1.0 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 192,000 in Mar 2014 and private payroll employment rose 192,000. The average number of nonfarm jobs created from Mar 2012 to Mar 2013 was 168,750, using seasonally adjusted data, while the average number of nonfarm jobs created from Mar 2013 to Mar 2014 was 187,167, or increase by 10.9 percent. The average number of private jobs created in the US from Mar 2012 to Mar 2013 was 175,167, using seasonally adjusted data, while the average from Mar 2013 to Mar 2014 was 188,750, or increase by 7.8 percent. This blog calculates the effective labor force of the US at 162.187 million in Mar 2013 and 163.685 million in Mar 2014 (Table I-4), for growth of 1.498 million at average 124,833 per month. The difference between the average increase of 188,750 new private nonfarm jobs per month in the US from Mar 2013 to Mar 2014 and the 124,833 average monthly increase in the labor force from Mar 2013 to Mar 2014 is 63,917 monthly new jobs net of absorption of new entrants in the labor force. There are 28.218 million in job stress in the US currently. Creation of 63,917 new jobs per month net of absorption of new entrants in the labor force would require 441 months to provide jobs for the unemployed and underemployed (28.218 million divided by 63,917) or 37 years (502 divided by 12). The civilian labor force of the US in Mar 2014 not seasonally adjusted stood at 155.627 million with 10.537 million unemployed or effectively 18.595 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 163.685 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.3 years (1 million divided by product of 63,917 by 12, which is 767,004). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.781 million (0.05 times labor force of 155.627 million) for new net job creation of 2.756 million (10.537 million unemployed minus 7.781 million unemployed at rate of 5 percent) that at the current rate would take 3.6 years (2.756 million divided by 0.767004). Under the calculation in this blog, there are 18.595 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.685 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 11.257 million jobs net of labor force growth that at the current rate would take 13.6 years (18.595 million minus 0.05(163.685 million) = 10.411 million divided by 0.767004, 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 Mar 2014 was 145.090 million (NSA) or 2.225 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 247.258 million in Mar 2014 or by 15.300 million. The number employed fell 1.5 percent from Jul 2007 to Mar 2014 while population increased 6.6 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 current interest in past theories of “secular stagnation.” Alvin H. Hansen (1939, 4, 7; see Hansen 1938, 1941; for an early critique see Simons 1942) argues:

“Not until the problem of full employment of our productive resources from the long-run, secular standpoint was upon us, were we compelled to give serious consideration to those factors and forces in our economy which tend to make business recoveries weak and anaemic (sic) and which tend to prolong and deepen the course of depressions. This is the essence of secular stagnation-sick recoveries which die in their infancy and depressions which feed on them-selves and leave a hard and seemingly immovable core of unemployment. Now the rate of population growth must necessarily play an important role in determining the character of the output; in other words, the com-position of the flow of final goods. Thus a rapidly growing population will demand a much larger per capita volume of new residential building construction than will a stationary population. A stationary population with its larger proportion of old people may perhaps demand more personal services; and the composition of consumer demand will have an important influence on the quantity of capital required. The demand for housing calls for large capital outlays, while the demand for personal services can be met without making large investment expenditures. It is therefore not unlikely that a shift from a rapidly growing population to a stationary or declining one may so alter the composition of the final flow of consumption goods that the ratio of capital to output as a whole will tend to decline.”

The argument that anemic population growth causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced currently as in the late 1930s (for early dissent see Simons 1942). There is currently population growth in the ages of 16 to 24 years but not enough job creation and discouragement of job searches for all ages (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html).

Second, the US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth under trend in the entire cycle from IVQ2007 to IV2013 would have accumulated to 20.3 percent. GDP in IVQ2013 would be $18,040.3 billion if the US had grown at trend, which is higher by $2,098.0 billion than actual $15,942.3 billion. There are about two trillion dollars of GDP less than under trend, explaining the 29.1 million unemployed or underemployed equivalent to actual unemployment of 17.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,942.3 billion in IVQ2013 or 6.3 percent at the average annual equivalent rate of 1.0 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011, 2.8 percent in 2012 and 1.9 percent in 2013. The following calculations show that actual growth is around 2.2 to 2.5 percent per year. The rate of growth of 1.0 percent in the entire cycle from 2007 to 2013 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

1. Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2013 and at 3.2 percent from 1947 to 2013. There were periodic contractions or recessions in this period but the economy grew at faster rates in the subsequent expansions, maintaining long-term economic growth at trend.
2. Whole Cycles. Long-term growth was around 3.0 percent per year during entire cycles including contractions and expansions. The average growth rate of GDP was 3.2 percent per year in the entire cycle from 1980 to 1989 but only 1.0 percent in the entire cycle from 2007 to 2013.
3. Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.7 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IVQ1985 was 5.9 percent and 5.0 percent from IQ1983 to IIQ1987. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IVQ2013 was only 2.4 percent. The US appears to have lost its dynamism of income growth and employment creation.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2013	3.3
1947-2013	3.2
Whole Cycles
1980-1989	3.2
2006-2013	1.1
2007-2013	1.0
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987	5.9 5.7 5.4 5.2 5.0 5.0
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IVQ2013	2.4
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2013	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2013	1.3	0.5

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

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 2.3 to 2.6 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Eight Quarters. GDP growth in the four quarters of 2012 and the four quarters of 2013 accumulated to 4.6 percent. This growth is equivalent to 2.2 percent per year, obtained by dividing GDP in IVQ2013 of $15,942.3 billion by GDP in IVQ2011 of $15,242.1 billion and compounding by 4/8: {[($15,942.3/$15,242.1)^4/8 -1]100 = 2.3 percent.

2. Average Annual Growth in the Four Quarters of 2013. GDP growth in the four quarters of 2013 accumulated to 2.6 percent that is equivalent to 2.6 percent in a year. This is obtained by dividing GDP in IVQ2013 of $15,942.3 billion by GDP in IVQ2012 of $15,539.6 billion and compounding by 4/4: {[($15,942.3/$15,539.6)^4/4 -1]100 = 2.6%}. The US economy grew 2.6 percent in IVQ2013 relative to the same quarter a year earlier in IVQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is just at the borderline of contraction. The rate of growth of GDP in the third estimate of IIIQ2013 is 4.1 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.67 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 2.43 percent, or 0.6 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.1 percent {[(1.003)(1.006)(1.006)(1.007)^4/4-1]100 = 2.2%}, compounding the quarterly rates and converting into annual equivalent.

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IVQ2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,679.7	4.6	0.6	1.6
IIIQ2013	15,839.3	5.6	1.0	2.0
IVQ2013	15,942.3	6.3	0.7	2.6
Cumulative ∆% IQ2012 to IVQ2013	4.6		4.6
Annual Equivalent ∆%	2.3		2.3

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

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE→∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at its meeting on Mar 19, 2014 with symbolic reduction of purchases of securities for the Fed’s balance sheet (http://www.federalreserve.gov/newsevents/press/monetary/20140319a.htm):

“Release Date: March 19, 2014

For immediate release

Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”

There are several important issues in this statement.

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

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

1. Open-ended Quantitative Easing or QE_∞ with Symbolic Tapering. Earlier programs are continued with an additional lower open-ended $55 billion of bond purchases per month, increasing the stock of $3,830,311 million securities held outright and bank reserves deposited at the Fed of $2,525,773 million (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1): “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.”
2. New Advance Guidance.” Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored (emphasis added).”
3. Policy Commitment with Unemployment Rate. “With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.

Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases to $55 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Mar 19, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140319a.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 remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” (emphasis added).

How long is “considerable time”? At the press conference following the meeting on Mar 19, 2014, Chair Yellen answered a question of Jon Hilsenrath of the Wall Street Journal explaining “In particular, the Committee has endorsed the view that it anticipates that will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates. And of course on our present path, well, that's not utterly preset. We would be looking at next, next fall. So, I think that's important guidance” (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140319.pdf). Many focused on “next fall,” ignoring that the path of increasing rates is not “utterly preset.”

At a speech on Mar 31, 2014, Chair Yellen analyzed labor market conditions as follows (http://www.federalreserve.gov/newsevents/speech/yellen20140331a.htm):

“And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.

Let me explain what I mean by that word "slack" and why it is so important.

Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. With 6.7 percent unemployment, it might seem that there must be a lot of slack in the U.S. economy, but there are reasons why that may not be true.”

There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful? Will the FOMC increase purchases of mortgage-backed securities if mortgage rates increase?

In testimony on the Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, US House of Representatives, on Feb 11, 2014, Chair Janet Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20140211a.htm):

“Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability.  If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. That said, purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.  In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal. I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level (emphasis added).”

At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states needs and intentions of policy:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differfrom each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (10

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness. Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). If there were an infallible science of central banking, models and forecasts would provide accurate information to policymakers on the future course of the economy in advance. Such forewarning is essential to central bank science because of the long lag between the actual impulse of monetary policy and the actual full effects on income and prices many months and even years ahead (Romer and Romer 2004, Friedman 1961, 1953, Culbertson 1960, 1961, Batini and Nelson 2002). The transcripts of the Fed meetings in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm) analyzed by Jon Hilsenrath demonstrate that Fed policymakers frequently did not understand the current state of the US economy in 2008 and much less the direction of income and prices. The conclusion of Friedman (1953) is that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This is a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

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 Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination.

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 exit 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.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Dec 18, 2013. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IVQ2013 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html). The Bureau of Economic Analysis provides the estimate of IVQ2013 GDP (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in Section IV (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html). The report on “Personal Income and Outlays” on Mar 28, 2014 (http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for Mar 2014 was released on Apr 4, 2014 (http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). “The longer-run projections are the rates of growth, unemployment, and inflation to which a policymaker expects the economy to converge over time—maybe in five or six years—in the absence of further shocks and under appropriate monetary policy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf).

It is instructive to focus on 2013, 2014 and 2015 because 2016 and longer term are too far away, and there is not much information even on what will happen in 2013-2015 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Mar 19, 2014 and the second row “PR” the projection of the Dec 18, 2013 meeting. There are three changes in the view.

1. Growth “∆% GDP.” The FOMC has changed the forecast of GDP growth in 2014. The FOMC decreased GDP growth in 2014 from 2.8 to 3.2 percent at the meeting in Dec 2013 to 2.8 to 3.0 percent at the meeting in Mar 2014.

2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment for 2014 from 6.3 to 6.6 percent at the meeting on Dec 18, 2013 to 6.1 to 6.3 percent at the meeting on Mar 19, 2014. The projection for 2015 decreased to the range of 5.6 to 5.9 in Mar 2014 from 5.8 to 6.1 in Dec 2013. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 5.2 to 5.6 percent in 2016 after the meeting on Mar 19, 2013.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation for 2014 from 1.4 to 1.6 percent at the meeting on Dec 18, 2013 to 1.5 to 1.6 percent at the meeting on Mar 19, 2014. There are no projections exceeding 2.0 percent in the central tendency but some in the range reach 2.4 percent in 2015. The longer run projection is at 2.0 percent.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2014, not changing from 1.3 to 1.8 percent at the meeting on Dec 18, 2013 to 1.3 to 1.8 percent at the meeting Mar 19, 2014. In 2015, there is minor change in the projection from 1.5 to 2.3 percent at the meeting on Dec 18, 2013 to 1.5 to 2.4 percent on Mar 19, 2014. The rate of change of the core PCE is below 2.0 percent in the central tendency with 2.4 percent at the top of the range in 2015.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Dec 18, 2013 and Mar 19, 2014 

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2014  Dec 2013 PR	2.8 to 3.0 2.8 to 3.2	6.1 to 6.3 6.3 to 6.6	1.5 to 1.6 1.4 to 1.6	1.4 to 1.6 1.4 to 1.6
2015 Dec PR	3.0 to 3.2 3.0 to 3.4	5.6 to 5.9 5.8 to 6.1	1.5 to 2.0 1.5 to 2.0	1.7 to 2.0 1.6 to 2.0
2016 Dec PR	2.5 to 3.0 2.5 to 3.2	5.2 to 5.6 5.3 to 5.8	1.7 to 2.0 1.7 to 2.0	1.8 to 2.0 1.8 to 2.0
Longer Run Dec PR	2.2 to 2.3 2.2 to 2.4	5.2 to 5.6 5.2 to 5.8	2.0 2.0
Range
2014 Dec PR	2.1 to 3.0 2.2 to 3.3	6.0 to 6.5 6.2 to 6.7	1.3 to 1.8 1.3 to 1.8	1.3 to 1.8 1.3 to 1.8
2015 Dec PR	2.2 to 3.5 2.2 to 3.6	5.4 to 5.9 5.5 to 6.2	1.5 to 2.4 1.4 to 2.3	1.5 to 2.4 1.5 to 2.3
2016 Dec PR	2.2 to 3.4 2.1 to 3.5	5.1 to 5.8 5.0 to 6.0	1.6 to 2.0 1.6 to 2.2	1.6 to 2.0 1.6 to 2.2
Longer Run Dec PR	1.8 to 2.4 1.8 to 2.5	5.2 to 6.0 5.2 to 6.0	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

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

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

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

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

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

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

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

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

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2014, 2015, 2016 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf). The rate would still remain at 0 to ¼ percent in 2014 for 15 participants with one expecting the rate to be in the range of 0.5 to 1.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels. For 2015, 2 participants expect 0 to 0.25 percent, 4 participants expect the rate to remain between 0.5 and 1.0 percent, 7 to be between 1.0 and 1.5 percent, one between 1 and 2 percent and 3 between 2 and 3 percent. For 2016, one participant expects the rate between 0.5 and 1 percent, 6 between 1 and 2 percent, 9 between 2 and 3 percent and 4 between 3 and 4.5 percent. In the long term, all 16 participants expect the fed funds rate in the range of 3.0 to 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board

Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 19, 2014

	0 to 0.25	0.5 to 1.0	1.0 to 1.5	1.0 to 2.0	2.0 to 3.0	3.0 to 4.5
2014	15	1
2015	2	4	7	1	3
2016		1		6	9	4
Longer Run						16

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2014 to 2016. It is evident from Table IV-4 that the prevailing view of the FOMC is for interest rates to continue at low levels until 2015. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2. The FOMC states that rates will continue to be low even after return of the economy to potential growth.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal

Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 19, 2014

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

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

Inflation in advanced economies has been fluctuating in waves at the production level with alternating surges and moderation of commodity price shocks. Table IV-5 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI changed 0.0 percent in Mar 2014 and increased 1.7 percent in 12 months. Measured by 12-month rates, CGPI inflation increased from minus 0.2 percent in Jul 2010 to a high of 2.2 percent in Jul-Aug 2011, 2.3 percent in Aug 2013 and 2.6 percent in Nov 2013. Calendar-year inflation is 1.3 percent for 2013. Calendar-year inflation for 2012 is minus 0.9 percent and 1.5 percent for 2011, which is the highest after declines in 2009 and 2010 but lower than 4.6 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows waves similar to those in other indices around the world (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). In the first wave, annual equivalent inflation reached 5.8 percent in Jan-Apr 2011, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent inflation of minus 1.2 percent in May-Jun 2011. In the third wave, renewed risk aversion caused annual equivalent decline of the CGPI of minus 2.1 percent in Jul-Nov 2011. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Dec 2011 to Jan 2012. In the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 2.0 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation dropped to minus 5.5 percent in May-Jul 2012. In the seventh wave, annual equivalent inflation jumped to 2.4 percent in Aug-Sep 2012. In the eighth wave, annual equivalent inflation was minus 3.0 percent in Oct-Nov 2012 in a new round of risk aversion. In the ninth wave, annual equivalent inflation returned at 3.3 percent in Dec 2012-Sep 2013. In the eleventh wave, annual equivalent inflation was minus 0.6 percent in Oct-Nov 2013. In the twelfth wave, annual equivalent inflation was 2.4 percent from Dec 2013 to Jan 2014. In the thirteenth wave, annual equivalent inflation was minus 0.6 percent in Feb-Mar 2014.

Table IV-5, Japan, Corporate Goods Price Index (CGPI) ∆%

	Month	Year
Mar 2014	0.0	1.7
Feb	-0.1	1.8
AE ∆% Feb-Mar	-0.6
Jan	0.1	2.4
Dec 2013	0.3	2.5
AE ∆% Dec-Jan	2.4
Nov	0.0	2.6
Oct	-0.1	2.5
AE ∆% Oct-Nov	-0.6
Sep	0.2	2.2
Aug	0.2	2.3
Jul	0.6	2.2
Jun	0.0	1.2
May	0.1	0.6
Apr	0.4	0.1
Mar	0.1	-0.5
Feb	0.5	-0.1
Jan	0.2	-0.4
Dec 2012	0.4	-0.7
AE ∆% Dec-Sep	3.3
Nov	-0.1	-1.1
Oct	-0.4	-1.1
AE ∆% Oct-Nov	-3.0
Sep	0.3	-1.5
Aug	0.1	-2.0
AE ∆% Aug-Sep	2.4
Jul	-0.4	-2.2
Jun	-0.6	-1.5
May	-0.4	-0.9
AE ∆% May-Jul	-5.5
Apr	-0.2	-0.7
Mar	0.5	0.3
Feb	0.2	0.4
AE ∆% Feb-Apr	2.0
Jan	-0.1	0.3
Dec 2011	0.0	0.8
AE ∆% Dec-Jan	-0.6
Nov	-0.1	1.3
Oct	-0.8	1.3
Sep	-0.2	2.0
Aug	-0.1	2.2
Jul	0.3	2.2
AE ∆% Jul-Nov	-2.1
Jun	0.0	1.9
May	-0.2	1.6
AE ∆% May-Jun	-1.2
Apr	0.8	1.8
Mar	0.6	1.3
Feb	0.1	0.7
Jan	0.4	0.6
AE ∆% Jan-Apr	5.8
Dec 2010	0.5	1.2
Nov	-0.1	0.9
Oct	-0.1	0.9
Sep	0.0	-0.1
Aug	-0.1	0.0
Jul	0.0	-0.2
Calendar Year
2013		1.3
2012		-0.9
2011		1.5
2010		-0.1
2009		-5.3
2008		4.6

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Chart IV-1 of the Bank of Japan provides year-on-year percentage changes of the domestic and services Corporate Goods Price Index (CGPI) of Japan from 1970 to 2014. Percentage changes of inflation of services are not as sharp as for goods. Japan had the same sharp waves of inflation during the 1970s as in the US (see Chart IV-26 and associated table at http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).). Behavior of the CGPI of Japan in the 1970s mirrors the Great Inflation episode in the United States with waves of inflation rising to two digits. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation also collapsed in the beginning of the 1980s because of tight monetary policy in the US with focus on inflation instead of on the gap of actual relative to potential output. The areas in shade correspond to the dates of cyclical recessions. The salient event is the sharp rise of inflation of the domestic goods CGPI in 2008 during the global recession that was mostly the result of carry trades from fed funds rates collapsing to zero to long positions in commodity futures in an environment of relaxed financial risk appetite. The panic of toxic assets in banks to be withdrawn by the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009) drove unusual risk aversion with unwinding of carry trades of exposures in commodities and other risk financial assets. Carry trades returned once TARP was clarified as providing capital to financial institutions and stress tests verified the soundness of US banks. The return of carry trades explains the rise of CGPI inflation after mid-2009. Inflation of the CGPI fluctuated with zero interest rates in alternating episodes of risk aversion and risk appetite.

Chart IV-1, Japan, Domestic Corporate Goods Price and Services Index, Year-on-Year Percentage Change, 1970-2014

Notes: Blue: Domestic Corporate Goods Price Index All Commodities; Red: Corporate Price Services Index

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html#

There is similar behavior of year-on-year percentage changes of the US producer price index from 1970 to 2014 in Chart IV-2 of the US Bureau of Labor Statistics as in Chart IV-3 with the domestic goods CGPI. The behavior of the CGPI of Japan in the 1970s is quite similar to that of the US PPI. The US producer price index increased together with the CGPI driven by the period of one percent fed funds rates from 2003 to 2004 inducing carry trades into commodity futures and other risk financial assets and the slow adjustment in increments of 25 basis points at every FOMC meeting from Jun 2004 to Jun 2006. There is also the same increase in inflation in 2008 during the global recession followed by collapse because of unwinding positions during risk aversion and new rise of inflation during risk appetite.

Chart IV-2, US, Producer Price Index Finished Goods, Year-on-Year Percentage Change, 1970-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

Finer detail is provided by Chart IV-3 of the domestic CGPI from 2008 to 2014. The CGPI rose almost vertically in 2008 as the collapse of fed funds rates toward zero drove exposures in commodities and other risk financial assets because of risk appetite originating in the belief that the financial crisis was restricted to structured financial products and not to contracts negotiated in commodities and other exchanges. The panic with toxic assets in banks to be removed by TARP (Cochrane and Zingales 2009) caused unwinding carry trades in flight to US government obligations that drove down commodity prices and price indexes worldwide. Apparent resolution of the European debt crisis of 2010 drove risk appetite in 2011 with new carry trades from zero fed funds rates into commodity futures and other risk financial assets. Domestic CGPI inflation returned in waves with upward slopes during risk appetite and downward slopes during risk aversion. Yen devaluation promoted by monetary and fiscal policy translates imported inputs in higher domestic prices.

Chart IV-3, Japan, Domestic Corporate Goods Price Index, Monthly, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

There is similar behavior of the US producer price index from 2008 to 2014 in Chart IV-4 as in the domestic CGPI in Chart IV-3. A major difference is the strong long-term trend in the US producer price index with oscillations originating mostly in bouts of risk aversion such as the downward slope in the final segment in Chart IV-4 followed by increasing slope during periods of risk appetite. Carry trades from zero interest rates to commodity futures and other risk financial assets drive the upward trend of the US producer price index while oscillations originate in alternating episodes of risk aversion and risk appetite.

Chart IV-4, US, Producer Price Index Finished Goods, Monthly, 2008-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-3 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart IV-5 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 104.9 in Jun 2009 to 94.0 in Jan 2012 or minus 10.4 percent and increased to 109.1 in Mar 2014 for a gain of 16.1 percent relative to Jan 2012 and 4.0 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials.

Chart IV-5, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-5A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 97.9 in Jun 2009 to 103.1 in Apr 2012 or 5.3 percent but dropped to 100.2 in Apr 2013 or minus 2.8 percent relative to Apr 2012 and gained 0.7 percent to 98.6 in Mar 2014 relative to Jun 2009.

Chart IV-5A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart IV-6 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates. The index increases with carry trades from zero interest rates into commodity futures and declines during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan (for the relation of terms of trade and growth see Pelaez (1979, 1976a)). The import corporate goods price index on the yen basis increased from 93.5 in Jun 2009 to 113.1 in Apr 2012 or 21.0 percent and to 127.4 in Mar 2014 or gain of 12.6 percent relative to Apr 2012 and 36.3 percent relative to Jun 2009.

Chart IV-6, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-6A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 86.2 in Jun 2009 to 119.5 in Apr 2012 or 38.6 percent and to 113.4 in Mar 2014 or minus 5.1 percent relative to Apr 2012 and gain of 31.6 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency increased 0.7 percent from Jun 2009 to Mar 2014 while the import corporate goods price index increased 31.6 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.6 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.

Chart IV-6A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Table IV-6 provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Mar 2014. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Mar 2014, the export index on the contract currency basis decreased 0.6 percent and decreased 5.5 percent on the yen basis. For the entire period from Jan 2008 to Mar 2014, the import price index increased 12.6 percent on the contract currency basis and increased 7.1 percent on the yen basis. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.

Table IV-6, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis

Month	Exports Contract Currency	Exports Yen	Imports Contract Currency	Imports Yen
2008/01	99.2	115.5	100.7	119.0
2008/02	99.8	116.1	102.4	120.6
2008/03	100.5	112.6	104.5	117.4
2008/04	101.6	115.3	110.1	125.2
2008/05	102.4	117.4	113.4	130.4
2008/06	103.5	120.7	119.5	140.3
2008/07	104.7	122.1	122.6	143.9
2008/08	103.7	122.1	123.1	147.0
2008/09	102.7	118.3	117.1	137.1
2008/10	100.2	109.6	109.1	121.5
2008/11	98.6	104.5	97.8	105.8
2008/12	97.9	100.6	89.3	93.0
2009/01	98.0	99.5	85.6	88.4
2009/02	97.5	100.1	85.7	89.7
2009/03	97.3	104.2	85.2	93.0
2009/04	97.6	105.6	84.4	93.0
2009/05	97.5	103.8	84.0	90.8
2009/06	97.9	104.9	86.2	93.5
2009/07	97.5	103.1	89.2	95.0
2009/08	98.3	104.4	89.6	95.8
2009/09	98.3	102.1	91.0	94.7
2009/10	98.0	101.2	91.0	94.0
2009/11	98.4	100.8	92.8	94.8
2009/12	98.3	100.7	95.4	97.5
2010/01	99.4	102.2	97.0	100.0
2010/02	99.7	101.6	97.6	99.8
2010/03	99.7	101.8	97.0	99.2
2010/04	100.5	104.6	99.9	104.6
2010/05	100.7	102.9	101.7	104.9
2010/06	100.1	101.6	100.0	102.3
2010/07	99.4	99.0	99.9	99.8
2010/08	99.1	97.3	99.5	97.5
2010/09	99.4	97.0	100.0	97.2
2010/10	100.1	96.4	100.5	95.8
2010/11	100.7	97.4	102.6	98.2
2010/12	101.2	98.3	104.4	100.6
2011/01	102.1	98.6	107.2	102.6
2011/02	102.9	99.5	109.0	104.3
2011/03	103.5	99.6	111.8	106.3
2011/04	104.1	101.7	115.9	111.9
2011/05	103.9	99.9	118.8	112.4
2011/06	103.8	99.3	117.5	110.5
2011/07	103.6	98.3	118.3	110.2
2011/08	103.6	96.6	118.6	108.1
2011/09	103.7	96.1	117.0	106.2
2011/10	103.0	95.2	116.6	105.6
2011/11	101.9	94.8	115.4	105.4
2011/12	101.5	94.5	116.1	106.2
2012/01	101.8	94.0	115.0	104.2
2012/02	102.4	95.8	115.8	106.4
2012/03	102.9	99.2	118.3	112.9
2012/04	103.1	98.7	119.5	113.1
2012/05	102.3	96.3	118.1	109.8
2012/06	101.4	95.0	115.2	106.7
2012/07	100.6	94.0	112.0	103.5
2012/08	100.9	94.1	112.4	103.6
2012/09	101.0	94.1	114.7	105.2
2012/10	101.1	94.7	113.8	105.2
2012/11	100.9	95.9	113.2	106.5
2012/12	100.7	98.0	113.4	109.5
2013/01	101.0	102.4	113.8	115.4
2013/02	101.5	105.9	114.8	120.2
2013/03	101.3	106.6	115.1	122.0
2013/04	100.2	107.5	114.1	123.8
2013/05	99.6	109.1	112.6	125.3
2013/06	99.2	106.1	112.0	121.2
2013/07	99.1	107.5	111.6	122.8
2013/08	99.0	106.1	111.7	121.2
2013/09	99.0	107.2	112.9	123.9
2013/10	99.2	106.7	113.0	122.8
2013/11	99.1	108.0	113.1	124.9
2013-12	99.1	110.4	113.8	129.0
2014-01	99.2	110.7	114.4	130.1
2014-02	98.9	109.3	113.8	127.7
2014-03	98.6	109.1	113.4	127.4

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Chart IV-7 provides the monthly corporate goods price index (CGPI) of Japan from 1970 to 2014. Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from policy interest rates rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Chart IV-26 and associated table at http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).

Chart IV-7, Japan, Domestic Corporate Goods Price Index, Monthly, 1970-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

The producer price index of the US from 1970 to 2014 in Chart IV-8 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.

Chart IV-8, US, Producer Price Index Finished Goods, Monthly, 1970-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-7. Petroleum and coal with weight of 5.7 percent increased 0.5 percent in Mar 2014 and increased 5.6 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.1 percent, decreased 0.1 percent in Mar 2014 and decreased 0.2 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income (for analysis of terms of trade and growth see Pelaez (1979, 1976a). There are now inflation effects of the intentional policy of devaluing the yen.

Table IV-7, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%

Mar 2014	Weight	Month ∆%	12 Month ∆%
Total	1000.0	0.0	1.7
Food, Beverages, Tobacco, Feedstuffs	137.5	0.0	0.6
Petroleum & Coal	57.4	0.5	5.6
Production Machinery	30.8	-0.1	-0.2
Electronic Components	31.0	-0.1	-2.4
Electric Power, Gas & Water	52.7	0.9	12.6
Iron & Steel	56.6	-0.1	5.2
Chemicals	92.1	-0.2	1.9
Transport Equipment	136.4	-0.1	-0.4

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1403.pdf

http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1402.pdf

Percentage point contributions to change of the corporate goods price index (CGPI) in Feb 2014 are provided in Table IV-8 divided into domestic, export and import segments. In the domestic CGPI, changing 0.0 percent in Mar 2014, the energy shock is evident in the contribution of 0.04 percentage points by petroleum and coal products in new carry trades of exposures in commodity futures. The exports CGPI decreased 0.3 percent on the basis of the contract currency with deduction of 0.06 percentage points by electric and electronic products. The imports CGPI decreased 0.4 percent on the contract currency basis. Petroleum, coal and natural gas products deducted 0.34 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide.

Table IV-8, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index

Groups Mar 2014	Contribution to Change Percentage Points
A. Domestic Corporate Goods Price Index	Monthly Change:  0.0%
Electric Power, Gas & Water	0.06
Petroleum & Coal Products	0.04
Information & Communications Equipment	0.01
Scrap & Waste	-0.06
Nonferrous Metals	-0.05
Chemicals & Related Products	-0.02
Agriculture, Forestry & Fishery Products	-0.01
B. Export Price Index	Monthly Change:    -0.3 % contract currency
Chemicals & Related Products	-0.10
Other Primary Products & Manufactured Goods	-0.06
General Purpose, Production & Business Oriented Machinery	-0.06
Electric & Electronic Products	-0.06%
Metals & Related Products	-0.04
C. Import Price Index	Monthly Change: -0.4% contract currency basis
Petroleum, Coal & Natural Gas	-0.34
Metals & Related Products	-0.11
Chemicals & Related Products	-0.04
Foodstuffs & Feedstuffs	0.11

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1403.pdf

China is experiencing similar inflation behavior as the advanced economies in several prior months in the form of declining commodity prices but differs in decreasing inflation of producer prices relative to a year earlier. As shown in Table IV-9, inflation of the price indexes for industry in Mar 2014 is minus 0.3 percent; 12-month inflation is minus 2.3 percent in Mar; and cumulative inflation in Jan-Mar 2014 relative to Jan-Mar 2013 is minus 2.0 percent. Inflation of segments in Mar 2013 in China is provided in Table IV-9 in column “Month Mar 2014 ∆%.” There were decreases of prices of mining & quarrying of 1.0 percent in Mar and decrease of 6.7 percent in 12 months. Prices of consumer goods changed 0.0 percent in Mar and decreased 0.2 percent in 12 months. Prices of inputs in the purchaser price index decreased 0.5 percent in Mar and declined 2.5 percent in 12 months. Fuel and power decreased 0.3 percent in Feb and declined 3.1 percent in 12 months. An important category of inputs for exports is textile raw materials, decreasing 0.2 percent in Mar and decreasing 0.6 percent in 12 months.

Table IV-9, China, Price Indexes for Industry ∆%

	Month Mar 2014 ∆%	12-Month Mar 2014 ∆%	Jan-Mar 2014/Jan-Mar 2013 ∆%
I Producer Price Indexes	-0.3	-2.3	-2.0
Means of Production	-0.4	-3.0	-2.5
Mining & Quarrying	-1.0	-6.7	-5.4
Raw Materials	-0.5	-3.8	-3.2
Processing	-0.3	-2.2	-1.9
Consumer Goods	0.0	-0.2	-0.3
Food	-0.1	-0.2	-0.2
Clothing	0.0	0.8	0.8
Daily Use Articles	0.2	-0.1	-0.3
Durable Consumer Goods	0.0	-0.9	-1.1
II Purchaser Price Indexes	-0.5	-2.5	-2.1
Fuel and Power	-0.3	-3.1	-2.5
Ferrous Metals	-0.9	-5.2	-4.1
Nonferrous Metals	-1.6	-7.4	-6.7
Chemical Raw Materials	-0.5	-2.6	-2.2
Wood & Pulp	-0.1	-0.8	-0.5
Building Materials	-0.4	0.6	0.6
Other Industrial Raw Materials	-0.2	-1.3	-1.2
Agricultural	-0.6	-1.0	-0.8
Textile Raw Materials	-0.2	-0.6	-0.3
III Producer Price Indices of Major Industries	-2.0	-11.6	-10.4

Source: National Bureau of Statistics of China

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

China’s producer price inflation follows waves similar to those around the world but with declining trend since May 2012, as shown in Table IV-10. In the first wave, annual equivalent inflation was 6.4 percent in Jan-Jun 2011, driven by carry trades from zero interest rates to commodity futures. In the second wave, risk aversion unwound carry trades, resulting in annual equivalent inflation of minus 3.1 percent in Jul-Nov 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 2.4 percent in Dec 2011-Jan 2012. In the fourth wave, new carry trades resulted in annual equivalent inflation of 2.4 percent in Feb-Apr 2012. In the fifth wave, annual equivalent inflation is minus 5.8 percent in May-Sep 2012. There are declining producer prices in China in Aug-Sep 2012 in contrast with increases worldwide. In a sixth wave, producer prices increased 0.2 percent in Oct 2012, which is equivalent to 2.4 percent in a year. In an eighth wave, annual equivalent inflation was minus 1.2 percent in Nov-Dec 2012. In the ninth wave, annual equivalent inflation in Jan-Feb 2013 is 2.4 percent. In the tenth wave, annual equivalent inflation was minus 4.9 percent in Mar-Jul 2013. In the eleventh wave, annual equivalent inflation was 1.8 percent in Aug-Sep 2013. In the twelfth wave, annual equivalent inflation was minus 1.2 percent in Oct 2013-Mar 2014.

Table IV-10, China, Month and 12-Month Rate of Change of Producer Price Index, ∆%

	12-Month ∆%	Month ∆%
Mar 2014	-2.3	-0.3
Feb	-2.0	-0.2
Jan	-1.6	-0.1
Dec 2013	-1.4	0.0
Nov	-1.4	0.0
Oct	-1.5	0.0
AE ∆% Oct-Mar		-1.2
Sep	-1.3	0.2
Aug	-1.6	0.1
AE ∆% Aug-Sep		1.8
Jul	-2.3	-0.3
Jun	-2.7	-0.6
May	-2.9	-0.6
Apr	-2.6	-0.6
Mar	-1.9	0.0
AE ∆% Mar-Jul		-4.9
Feb	-1.6	0.2
Jan	-1.6	0.2
AE ∆% Jan-Feb		2.4
Dec 2012	-1.9	-0.1
Nov	-2.2	-0.1
AE ∆% Nov-Dec		-1.2
Oct	-2.8	0.2
AE ∆% Oct		2.4
Sep	-3.6	-0.1
Aug	-3.5	-0.5
Jul	-2.9	-0.8
Jun	-2.1	-0.7
May	-1.4	-0.4
AE ∆% May-Sep		-5.8
Apr	-0.7	0.2
Mar	-0.3	0.3
Feb	0.0	0.1
AE ∆% Feb-Apr		2.4
Jan	0.7	-0.1
Dec 2011	1.7	-0.3
AE ∆% Dec-Jan		-2.4
Nov	2.7	-0.7
Oct	5.0	-0.7
Sep	6.5	0.0
Aug	7.3	0.1
Jul	7.5	0.0
AE ∆% Jul-Nov		-3.1
Jun	7.1	0.0
May	6.8	0.3
Apr	6.8	0.5
Mar	7.3	0.6
Feb	7.2	0.8
Jan	6.6	0.9
AE ∆% Jan-Jun		6.4
Dec 2010	5.9	0.7

AE: Annual Equivalent

Source: National Bureau of Statistics of China

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

Chart IV-9 of the National Bureau of Statistics of China provides monthly and 12-month rates of inflation of the price indexes for the industrial sector. Negative monthly rates in Oct, Nov, Dec 2011, Jan, Mar, Apr, May, Jun, Jul, Aug, Sep, Nov and Dec 2012 pulled down the 12-month rates to 5.0 percent in Oct 2011, 2.7 percent in Nov, 1.7 percent in Dec, 0.7 percent in Jan 2012, 0.0 percent in Feb, minus 0.3 percent in Mar, minus 0.7 percent in Apr, minus 1.4 percent in May, 2.1 in Jun, minus 2.9 percent in Jul, minus 3.5 percent in Aug, minus 3.6 percent in Sep. The increase of 0.2 percent in Oct 2012 pulled up the 12-month rate to minus 2.8 percent and the rate eased to minus 2.2 percent in Nov 2012 and minus 1.9 percent in Dec 2012. Increases of 0.2 percent in Jan and Feb 2013 pulled the 12-month rate to minus 1.6 percent while no change in Mar 2013 brought down the 12-month rate to minus 1.9 percent. Declines of prices of 0.6 percent in Apr, May and Jun 2013 pushed the 12-month rate to minus 2.7 percent. Producer prices fell 2.3 percent in the 12 months ending in Jul 2013 and minus 1.6 percent in Aug 2013 with increase of 0.1 percent in the month of Aug 2013. Producer price inflation was minus 1.3 percent in the 12 months ending in Sep 2013 and minus 1.5 percent in the 12 months ending in Oct 2013. Producer price inflation was minus 1.4 percent in the 12 months ending in Nov 2013 and minus 1.4 percent in the 12 months ending in Dec 2013. Producer price inflation was minus 1.6 percent in the 12 months ending in Jan 2014 and minus 2.0 percent in the 12 months ending in Feb 2014. In Mar 2014, producer price inflation was minus 0.3 percent and minus 2.3 percent in 12 months.

Chart IV-9, China, Producer Prices for the Industrial Sector Month and 12 Months ∆%

Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/

Chart IV-10 of the National Bureau of Statistics of China provides monthly and 12-month inflation of the purchaser product indices for the industrial sector. Decreasing monthly inflation with four successive contractions from Oct 2011 to Jan 2012 and May-Aug 2012 pulled down the 12-month rate to minus 4.1 percent in Aug and Sep. Consecutive increases of 0.1 percent in Sep and Oct 2012 raised the 12-month rate to minus 3.3 percent in Oct 2012. The rate eased to minus 2.8 in Nov 2012 with decrease of 0.2 percent in Nov 2012 and minus 2.4 percent in Dec 2012 with monthly decrease of 0.1 percent. Increase of 0.3 percent in Jan 2013 and 0.2 in Feb 2013 pulled the 12-month rate to minus 1.9 percent. Decrease of prices of 0.1 percent in Mar 2013 brought down the 12-month rate to minus 2.0 percent. Declining prices of 0.6 percent in Apr and May 2013 and 0.5 percent in Jun 2013 pushed down the 12-month rate to minus 2.6 percent. The index fell 2.2 percent in the 12 months ending in Jul 2013 and 1.6 percent in the 12 months ending in Aug 2013. The index fell 1.6 percent in the 12 months ending in Sep 2013 and 1.6 percent in the 12 months ending in Oct 2013. Purchaser price inflation was minus 1.5 percent in the 12 months ending in Nov 2013 and minus 1.4 percent in the 12 months ending in Dec 2013. Purchaser price inflation was minus 1.7 percent in the 12 months ending in Jan 2014 and minus 2.1 percent in the 12 months ending in Feb 2014. In Mar 2014, inflation of the purchaser price index was minus 0.5 percent and minus 2.5 percent in 12 months.

Chart IV-10, China, Purchaser Product Indices for Industrial Sector, Month and 12 Months ∆%

Source: National Bureau of Statistics of China

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

China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in Mar 2014 was minus 0.5 percent and 2.4 percent in 12 months, as shown in Table IV-11. Food prices decreased 1.6 percent in Mar 2014, increasing 2.7 percent in 12 months ending in Mar 2014 and 3.5 percent in Jan-Mar 2014 relative to a year earlier. Food prices increased 2.4 percent in Jan 2014, 3.7 percent in 12 months and 3.7 percent in the cumulative Jan 2014 relative to a year earlier. Food prices fell 0.2 percent in Nov 2013, increasing 5.9 percent in 12 months and 4.7 percent in the cumulative to Nov 2013 relative to a year earlier. Food prices decreased 0.4 percent in Oct 2013, increasing 6.5 percent in 12 months in adjustment to sharp increase in Sep 2013. Adjustment from the prior shock had occurred in May with decline of food prices by 1.6 percent and increase of 3.8 percent in 12 months and 3.8 percent in Jan-May 2013 relative to a year earlier. Another area of concern is housing inflation, which was 0.2 percent in Jan and increased 2.8 percent in 12 months. House inflation was 0.3 percent in Feb 2014 and 2.8 percent in 12 months. House inflation was 0.2 percent in Mar 2014 and 2.5 percent in 12 months. Prices of services decreased 0.1 percent in Mar and gained 2.8 percent in 12 months.

Table IV-11, China, Consumer Price Index

2014	Mar 2014 Month   ∆%	Mar 2014 12-Month  ∆%	Jan-Mar 2014   ∆%/ Jan-Mar 2013
Consumer Prices	-0.5	2.4	2.3
Urban	-0.5	2.5	2.4
Rural	-0.6	2.1	2.0
Food	-1.6	4.1	3.5
Non-food	0.1	1.5	1.7
Consumer Goods	-0.6	2.2	1.9
Services	-0.1	2.8	3.1
Excluding Food and Energy	0.1	1.7	1.8
Commodity Categories:
Food	-1.6	4.1	3.5
Tobacco, Liquor	0.1	-0.7	-0.7
Clothing	0.7	2.3	2.2
Household	0.0	1.2	1.3
Healthcare & Personal Articles	0.1	1.2	1.1
Transportation & Communication	-0.3	-0.4	-0.2
Recreation, Education, Culture & Services	-0.4	2.1	2.5
Residence	0.2	2.5	2.7

Source: National Bureau of Statistics of China

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

Month and 12-month rates of change of consumer prices are provided in Table IV-12. There are waves of consumer price inflation in China similar to those around the world (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). In the first wave, consumer prices increased at the annual equivalent rate of 8.3 percent in Jan-Mar 2011, driven by commodity price increases resulting from unconventional monetary policy of zero interest rates. In the second wave, risk aversion unwound carry trades with annual equivalent inflation falling to the rate of 2.0 percent in Apr-Jun 2011. In the third wave, inflation returned at 2.9 percent with renewed interest in commodity exposures in Jul-Nov 2011. In the fourth wave, inflation returned at a high 5.8 percent annual equivalent in Dec 2011 to Mar 2012. In the fifth wave, annual equivalent inflation was minus 3.9 percent in Apr to Jun 2012. In the sixth wave, annual equivalent inflation rose to 4.1 percent in Jul-Sep 2012. In the seventh wave, inflation was minus 1.2 percent annual equivalent in Oct 2012 and 0.0 percent in Oct-Nov 2012. In the eighth wave, annual equivalent inflation was 12.2 percent in Dec 2012-Feb 2013 primarily because of winter weather that caused increases in food prices. In the ninth wave, collapse of food prices resulted in annual equivalent inflation of minus 10.3 percent in Mar 2013. In the tenth wave, annual equivalent inflation returned at 2.4 percent in Apr 2013. In the eleventh wave, annual equivalent inflation was minus 3.5 percent in May-Jun 2013. In the twelfth wave, inflation rose at annual equivalent 4.6 percent in Jul-Oct 2013 with sharp increase of food prices in Sep 2013. In the thirteenth wave, annual equivalent inflation was minus 1.2 percent in Nov 2013. In the fourteenth wave, annual equivalent inflation was 7.4 percent in Dec 2013-Feb 2014. In the fifteenth wave, annual inflation was minus 5.8 percent in Mar 2014. Inflation volatility originating in unconventional monetary policy clouds investment and consumption decisions by business and households. There is local problem in China with food prices.

Table IV-12, China, Month and 12-Month Rates of Change of Consumer Price Index ∆%

	Month ∆%	12-Month ∆%
Mar 2014	-0.5	2.4
AE ∆% Mar	-5.8
Feb	0.5	2.0
Jan	1.0	2.5
Dec 2013	0.3	2.5
AE ∆% Dec-Feb	7.4
Nov	-0.1	3.0
AE ∆% Nov	-1.2
Oct	0.1	3.2
Sep	0.8	3.1
Aug	0.5	2.6
Jul	0.1	2.7
AE ∆% Jul-Oct	4.6
Jun	0.0	2.7
May	-0.6	2.1
AE ∆% May-Jun	-3.5
Apr	0.2	2.4
AE ∆% Apr	2.4
Mar 2013	-0.9	2.1
AE ∆% Mar	-10.3
Feb	1.1	3.2
Jan	1.0	2.0
Dec 2012	0.8	2.5
AE ∆% Dec-Feb	12.2
Nov	0.1	2.0
Oct	-0.1	1.7
AE ∆% Oct-Nov	0.0
Sep	0.3	1.9
Aug	0.6	2.0
Jul	0.1	1.8
AE ∆% Jul-Sep	4.1
Jun	-0.6	2.2
May	-0.3	3.0
Apr	-0.1	3.4
AE ∆% Apr to Jun	-3.9
Mar	0.2	3.6
Feb	-0.1	3.2
Jan	1.5	4.5
Dec 2011	0.3	4.1
AE ∆% Dec to Mar	5.8
Nov	-0.2	4.2
Oct	0.1	5.5
Sep	0.5	6.1
Aug	0.3	6.2
Jul	0.5	6.5
AE ∆% Jul to Nov	2.9
Jun	0.3	6.4
May	0.1	5.5
Apr	0.1	5.3
AE ∆% Apr to Jun	2.0
Mar	-0.2	5.4
Feb	1.2	4.9
Jan	1.0	4.9
AE ∆% Jan to Mar	8.3
Dec 2010	0.5	4.6

AE: Annual Equivalent

Source: National Bureau of Statistics of China

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

Chart IV-11 of the National Bureau of Statistics of China provides monthly and 12-month rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates. Consumer prices fell 0.2 percent in Nov 2011 after increasing only 0.1 percent in Oct but increased 0.3 percent in Dec and a high 1.5 percent in Jan 2012, declining 0.1 percent in Feb, rising 0.2 percent in Mar and declining 0.1 percent in Apr, 0.3 percent in May and 0.6 percent in Jun 2012 but increasing 0.1 percent in Jul, 0.6 percent in Aug 2012 and 0.3 percent in Sep 2012. Consumer prices fell 0.1 percent in Oct 2012. The decline of 0.1 percent in Feb 2012 pulled down the 12-month rate to 3.2 percent, which bounced back to 3.6 percent in Mar with the monthly increase of 0.2 percent and fell to 2.2 percent in Jun with increasing pace of monthly decline from Apr to Jun 2012. Even with increase of 0.1 percent in Jul 2012, consumer price inflation in 12 months fell to 1.8 percent in Jul 2012 but bounced back to 2.0 percent with increase of 0.6 percent in Aug. In Sep, increase of 0.3 percent still maintained 12-month inflation at 1.9 percent. The decline of 0.1 percent in Oct 2012 pulled down the 12-month rate to 1.7 percent, which is the lowest in Chart IV-3. Increase of 0.1 percent in Nov 2012 pulled up the 12-month rate to 2.0 percent. Abnormal increase of 0.8 percent in Dec 2012 because of winter weather pulled up the 12-month rate to 2.5 percent. Even with increase of 1.0 percent in Jan 2013 12-month inflation fell to 2.0 percent. Inflation of 1.1 percent in Feb 2013 pulled the 12-month rate to 3.2 percent. Collapse of food prices with decline of consumer prices by 0.9 percent in Mar 2013 brought down the 12-month rate to 2.1 percent. Renewed inflation of 0.2 percent in Apr 2013 raised the 12-month rate to 2.4 percent. Decline of inflation by 0.6 percent in May reduced 12-month inflation to 2.1 percent. Inflation rose to 2.7 percent in the 12 months ending in Jun 2013 with unchanged monthly inflation. Consumer prices increased 0.1 percent in Jul 2013 and 2.7 percent in 12 months. In combination of increases of food prices and other prices, inflation returned with 0.5 percent in Aug 2013 and 2.6 percent in 12 months. Consumer prices increased 0.8 percent in Sept 2013 and 3.1 percent in 12 months with increase in food prices of 1.5 in the month of Sep 2013. Consumer prices increased 0.1 percent in Oct 2013 and 3.2 percent in 12 months. Consumer prices fell 0.1 percent in Nov 2013 and increased 3.0 percent in 12 months. Consumer prices increased 0.3 percent in Dec 2013 and increased 2.5 percent in 12 months. Consumer prices increased 1.0 percent in Jan 2014 and 2.5 percent in 12 months. In Feb 2014, consumer prices increased 0.5 percent and 2.0 percent in 12 months. Consumer prices fell 0.5 percent in Mar 2014 and increased 2.4 percent in 12 months.

Chart IV-11, China, Consumer Prices ∆% Month and 12 Months

Source: National Bureau of Statistics of China

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

The estimate of consumer price inflation in Germany in Table IV-13 is 1.0 percent in 12 months ending in Mar 2014, 0.3 percent NSA (not seasonally adjusted) in Mar 2014 relative to Feb 2014 and 0.0 percent CSA in Mar 2014 relative to Feb 2014 (calendar and seasonally adjusted). There are waves of consumer price inflation in Germany similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). In the first wave, annual equivalent inflation was 3.0 percent in Feb-Apr 2011 NSA and 2.4 percent SA during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent NSA and 3.0 percent SA in May-Jun 2011 because of risk aversion caused by the European sovereign debt event. In the third wave, annual equivalent consumer price inflation was 1.7 percent NSA and 1.9 percent SA in Jul-Nov 2011 because of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 0.6 percent NSA and 1.8 percent SA in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 4.5 percent NSA and 2.4 percent SA in Feb-Apr 2012 during another energy-commodity carry trade shock. In the sixth wave, annual equivalent inflation in May-Jun 2012 is minus 1.2 percent NSA and 0.6 percent SA. In the seventh wave, annual equivalent inflation NSA is 4.9 percent in Jul-Aug 2012 and 3.0 percent SA. In the eighth wave in Sep-Dec 2012, annual equivalent inflation is 1.5 percent NSA and 1.5 percent SA. In the ninth wave, annual equivalent inflation fell to minus 5.8 percent NSA in Jan 2013 and 0.0 percent SA. In the eleventh wave, annual equivalent inflation rose to 6.8 percent NSA in Feb-Mar 2013 and 1.2 percent CSA. In the twelfth wave, annual equivalent inflation in Apr fell to minus 5.8 percent NSA and 0.0 percent SA in reversal of carry trades into commodity futures. In the thirteenth wave, annual equivalent inflation returned at 4.1 percent in May-Jul 2013 NSA and 3.2 percent SA. In the fourteenth wave, annual equivalent inflation was nil NSA and 0.0 percent CSA in Aug-Sep 2013. In the fifteenth wave, annual equivalent inflation was minus 2.4 percent NSA in Oct 2013 and 0.0 percent CASA. In the sixteenth wave, annual equivalent inflation was 3.7 percent NSA and 2.4 percent CSA in Nov-Dec 2013. In the seventeenth wave, annual equivalent inflation was minus 7.0 percent in Jan 2014 and 0.0 percent
CSA. In the eighteenth wave, annual equivalent inflation returned at 4.9 percent in Feb-Mar 2014 and 0.0 percent CSA. Under unconventional monetary policy of zero interest rates and quantitative easing, inflation becomes highly volatile during alternative shocks of risk aversion and risk appetite, preventing sound investment and consumption decisions.

Table IV-13, Germany, Consumer Price Index ∆%

	12-Month ∆%	Month ∆% NSA	Month ∆% CSA
Mar 2014	1.0	0.3	0.0
Feb	1.2	0.5	0.0
AE ∆% Feb-Mar		4.9	0.0
Jan	1.3	-0.6	0.0
AE ∆% Jan		-7.0	0.0
Dec 2013	1.4	0.4	0.2
Nov	1.3	0.2	0.2
AE ∆% Nov-Dec		3.7	2.4
Oct	1.2	-0.2	0.0
AE ∆% Oct		-2.4	0.0
Sep	1.4	0.0	0.1
Aug	1.5	0.0	-0.1
AE ∆% Aug-Sep		0.0	0.0
Jul	1.9	0.5	0.2
Jun	1.8	0.1	0.3
May	1.5	0.4	0.3
AE ∆% May-Jul		4.1	3.2
Apr	1.2	-0.5	0.0
AE ∆% Apr		-5.8	0.0
Mar	1.4	0.5	0.1
Feb	1.5	0.6	0.1
AE ∆% Feb-Mar		6.8	1.2
Jan	1.7	-0.5	0.0
AE ∆% Jan		-5.8	0.0
Dec 2012	2.0	0.3	0.1
Nov	1.9	0.1	0.1
Oct	2.0	0.0	0.2
Sep	2.0	0.1	0.1
AE ∆% Sep-Dec		1.5	1.5
Aug	2.2	0.4	0.3
Jul	1.9	0.4	0.2
AE ∆% Jul-Aug		4.9	3.0
Jun	1.7	-0.2	0.0
May	2.0	0.0	0.1
AE ∆% May-Jun		-1.2	0.6
Apr	2.0	-0.2	0.2
Mar	2.2	0.6	0.2
Feb	2.2	0.7	0.2
AE ∆% Feb-Apr		4.5	2.4
Jan	2.1	-0.1	0.3
Dec 2011	2.0	0.2	0.0
AE ∆% Dec-Jan		0.6	1.8
Nov	2.4	0.2	0.2
Oct	2.3	0.0	0.1
Sep	2.4	0.2	0.3
Aug	2.1	0.1	0.1
Jul	2.1	0.2	0.1
AE ∆% Jul-Nov		1.7	1.9
Jun	2.1	0.1	0.3
May	2.0	0.0	0.2
AE ∆% May-Jun		0.6	3.0
Apr	1.9	0.0	0.2
Mar	2.0	0.6	0.2
Feb	1.9	0.6	0.2
Jan	1.7	-0.2	0.2
AE ∆% Feb-Apr		3.0	2.4
Dec 2010	1.3	0.6	0.2
Nov	1.5	0.1	0.2
Oct	1.3	0.1	0.2
Sep	1.2	-0.1	0.1
Aug	1.0	0.1	0.1
Annual Average ∆%
2013	1.5
2012	2.0
2011	2.1
2010	1.1
2009	0.4
2008	2.6
Dec 2009	0.8
Dec 2008	1.1
Dec 2007	3.2
Dec 2006	1.4
Dec 2005	1.4
Dec 2004	2.2
Dec 2003	1.1
Dec 2002	1.1
Dec 2001	1.6

AE: Annual Equivalent

Source: Statistisches Bundesamt Deutschland

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

Chart IV-12 of the Statistisches Bundesamt Deutschland, or federal statistical office of Germany, provides the unadjusted consumer price index of Germany from 2005 to 2014. There is evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in subsequent months with renewed strength in Dec 2011, decline in Jan 2012 and another upward spike from Feb to Apr 2012, new drop in May-Jun 2012 and increases in Jul and Aug 2012 relaxed in Sep-Nov 2012. Inflation returned in Dec 2012 and fell in Jan 2013, rebounding in Feb-Mar 2013. Inflation fell in Apr 2013 and rebounded in May 2013. Reversals of commodity exposures caused the decline in Apr 2013 followed by increases in May-Jul 2013. Inflation stabilized in Aug-Sep 2013 and fell in Oct 2013. Inflation increased in Nov-Dec 2013 and fell in Jan 2014. Consumer prices increased again in Feb-Mar 2014. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.

Chart IV-12, Germany, Consumer Price Index, Unadjusted, 2010=100

Source: Statistisches Bundesamt Deutschland

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

Chart IV-12A provides the consumer price index NSA of the US from 2005 to 2014. The salient similarity is the hump in 2008 caused by commodity carry trades driven by the movement to zero interest rates. Inflation communicated worldwide through carry trade from zero interest rates to exposures in commodity futures, creating instability in financial and economic decisions.

Chart IV-12A, US, Consumer Price Index, All Items, NSA, 2006-2014

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

Chart IV-13, of the Statistisches Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index and trend of Germany from 2010 to 2014. Chart IV-13 captures inflation waves with alternation of periods of positive and negative slopes resulting from zero interest rates with shocks of risk appetite and risk aversion. For example, the negative slope of decline of inflation by 0.2 percent in Jun 2012 and 0.0 percent in May 2012 follows an upward slope of price increases in Feb-Apr 2012 after decline of inflation by 0.1 percent in Jan 2012. The final segment shows another positive slope caused by inflation of 0.4 percent in Jul 2012, which is followed by 0.4 percent in Aug 2012 and flattening segment, as inflation remains almost unchanged with 0.1 percent in Sep and 0.0 percent in Oct 2012, increasing 0.1 percent in Nov 2012 and increasing 0.3 percent in Dec 2012. Inflation fell 0.5 percent in Jan 2013 and jumped 0.6 percent in Feb 2013 and 0.5 percent in Mar 2013. The final declining segment indicates the decline of 0.5 percent in Apr 2013 followed by the increases in May-Jul 2013. Inflation was nil in Aug-Sep 2013 and fell in Oct 2013. Inflation increased in Nov-Dec 2013 and fell in Jan 2014. Inflation returned in Feb-Mar 2014. The waves occur around an upward trend of prices, disproving the proposition of fear of deflation.

Chart IV-13, Germany, Consumer Price Index, Unadjusted and Trend, 2010=100

Source: Statistisches Bundesamt Deutschland

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

Table IV-14 provides the monthly and 12-month rate of inflation for segments of the consumer price index of Germany in Mar 2014. Inflation excluding energy increased 0.4 percent in Mar 2014 and increased 1.4 percent in 12 months. Excluding household energy inflation increased 0.3 percent in Mar 2014 and rose 1.2 percent in 12 months. Food prices decreased 0.4 percent in Mar 2014 and increased 2.2 percent in 12 months. There were differences in inflation of energy-related prices. Heating oil decreased 7.5 percent in 12 months and decreased 1.9 percent in Mar 2014. Motor fuels decreased 0.2 percent in Mar and decreased 3.1 percent in 12 months.

Table IV-14, Germany, Consumer Price Index ∆%

Mar 2014	Weight	12- Month ∆%	Month   ∆%
Total	1,000.00	1.0	0.3
Excluding heating oil and motor fuels	950.52	1.3	0.3
Excluding household energy	931.81	1.2	0.3
Excluding Energy	893.44	1.4	0.4
Total Goods	479.77	0.6	0.4
Nondurable Consumer Goods	307.89	0.8	-0.2
Energy	106.56	-1.6	-0.3
Services	520.23	1.5	0.2
Energy Components
Motor Fuels	38.37	-3.1	-0.2
Household Energy	68.19	-0.8	-0.4
Heating Oil	11.11	-7.5	-1.9
Food	90.52	2.2	-0.4

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2014/04/PE14_136_611.html

Table IV-15 provides monthly and 12 months consumer price inflation in France. There are the same waves as in inflation worldwide (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/squeeze-of-economic-activity-by-carry.html). In the first wave, annual equivalent inflation in Jan-Apr 2011 was 4.3 percent driven by the carry trade from zero interest rates to commodity futures positions in an environment of risk appetite. In the second wave, risk aversion caused the reversal of carry trades into commodity futures, resulting in the fall of the annual equivalent inflation rate to minus 1.2 percent in May-Jul 2011. In the third wave, annual equivalent inflation rose to 3.0 percent in Aug-Nov 2011 with alternations of risk aversion and risk appetite. In the fourth wave, risk aversion originating in the European debt crisis caused annual equivalent inflation of 0.0 percent from Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation increased to 5.3 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation was minus 2.4 percent in May-Jul 2012 during another bout of risk aversion causing reversal of carry trades from zero interest rates to commodity price futures exposures. In the seventh wave, annual equivalent inflation jumped to 8.7 percent in Aug 2012, 3.0 percent in Aug-Sep 2012 and 2.8 percent in Aug-Oct 2012. In the eighth wave, annual equivalent inflation was minus 2.4 percent in Nov 2012 and minus 1.6 percent in Nov 2012 to Jan 2013. In the ninth wave, annual equivalent inflation was 6.8 percent in Feb-Mar 2013. In the tenth wave, annual equivalent inflation was minus 1.2 percent in Apr because of reversal of commodity carry trades. In the eleventh wave, annual equivalent inflation was 1.8 percent in May-Jun 2013. In the twelfth wave, annual equivalent inflation was minus 3.5 percent in Jul 2013. In the thirteenth wave, annual equivalent inflation returned at 6.2 percent in Aug 2013. In the fourteenth wave, annual equivalent inflation was minus 1.6 percent in Sep-Nov 2013. In the fifteenth wave, annual equivalent inflation was 3.7 percent in Dec 2013. In the sixteenth wave, annual equivalent inflation was minus 7.0 percent in Jan 2014. In the sixteenth wave, annual equivalent inflation was 6.8 percent in Feb-Mar 2014.

Table IV-15, France, Consumer Price Index, Month and 12-Month ∆%

	Month ∆%	12-Month ∆%
Mar 2014	0.5	0.6
Feb	0.6	0.9
AE ∆% Feb-Mar	6.8
Jan	-0.6	0.7
AE ∆% Jan	-7.0
Dec 2013	0.3	0.7
AE ∆% Dec	3.7
Nov	-0.1	0.7
Oct	-0.1	0.6
Sep	-0.2	0.9
AE ∆% Sep-Nov	-1.6
Aug	0.5	0.9
AE ∆% Aug	6.2
Jul	-0.3	1.1
AE ∆% Jul	-3.5
Jun	0.2	0.9
May	0.1	0.8
AE ∆% May-Jun	1.8
Apr	-0.1	0.7
AE ∆% Apr	-1.2
Mar	0.8	1.0
Feb	0.3	1.0
AE ∆% Feb-Mar	6.8
Jan	-0.5	1.2
Dec 2012	0.3	1.3
Nov	-0.2	1.4
AE ∆% Nov-Jan	-1.6
Oct	0.2	1.9
Sep	-0.2	1.9
Aug	0.7	2.1
AE ∆% Aug-Oct	2.8
Jul	-0.5	1.9
Jun	0.0	1.9
May	-0.1	2.0
AE ∆% May-Jul	-2.4
Apr	0.1	2.1
Mar	0.8	2.3
Feb	0.4	2.3
AE ∆% Feb-Apr	5.3
Jan	-0.4	2.4
Dec 2011	0.4	2.5
AE ∆% Dec-Jan	0.0
Nov	0.3	2.5
Oct	0.3	2.4
Sep	-0.1	2.2
Aug	0.5	2.2
AE ∆% Aug-Nov	3.0
Jul	-0.5	1.9
Jun	0.1	2.1
May	0.1	2.0
AE ∆% May-Jul	-1.2
Apr	0.3	2.1
Mar	0.8	2.0
Feb	0.5	1.6
Jan	-0.2	1.8
AE ∆% Jan-Apr	4.3
Dec 2010	0.4	1.8
Annual
2013		0.9
2012		2.0
2011		2.1
2010		1.5
2009		0.1
2008		2.8
2007		1.5
2006		1.6
2005		1.8
2004		2.1
2003		2.1
2002		1.9
2001		1.7
2000		1.7
1999		0.5
1998		0.7
1997		1.2
1996		2.0
1995		1.8
1994		1.6
1993		2.1
1992		2.4
1991		3.2

AE: Annual Equivalent Metropolitan France

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140410

Chart IV-14 of Institut National de la Statistique et des Études Économiques provides the consumer price index in France since Jan 1998. There is the same jump and decline of inflation during the global recession from 2008 to 2009 caused by carry trades from zero interest rates into commodity exposures. The index also captures the waves of inflation around an upward trend.

Chart IV-14, France, Consumer Price Index, Jan 1998-Mar 2014, 1998=100

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140410

Table IV-16 provides consumer price inflation in France and of various items in Mar 2014 and in the 12 months ending in Mar 2014. Inflation of all items was 0.4 percent in Mar 2014 and 0.6 percent in 12 months. Energy prices decreased 0.6 percent in Mar 2014 and decreased 1.6 percent in 12 months. Transport and communications decreased 0.5 percent in Mar 2014 and rose 1.2 percent in 12 months. Rentals and dwellings show higher 12-month increase of 1.5 percent. Services increased 0.3 percent in Mar 2014 and increased 1.8 percent in 12 months.

Table IV-16, France, Consumer Price Index, Month and 12-Month Percentage Changes of Index and Components, ∆%

Mar 2014	Weights	Month ∆%	12-Month ∆%
All Items	10000	0.4	0.6
Food	1653	0.2	-0.2
Manufactured Products	2653	1.3	-0.8
Energy	850	-0.6	-1.6
Petroleum Products	475	-0.8	-6.0
Services	4640	0.3	1.8
Rentals, Dwellings	748	0.1	1.5
Transport and Communications	503	-0.5	1.2

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140410

Chart IV-15 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows headline and core consumer price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. The current downward trend of inflation originates in concentration of carry trades in equities and high-yield bonds with reversal of exposures in commodities.

Chart IV-15, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140410

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014.