Valuations of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk: Part IV

 

Valuations of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

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

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars Below Trend

IA Mediocre Cyclical United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

IB Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

II United States Housing Collapse

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	2.4	1.7	1.7 FD 1.5	5.8
Japan	-1.2	3.2	2.9	3.6
China	7.5	1.6	-2.2
UK	3.0	1.2* CPIH 1.3	-0.5 output 0.9** input -8.4	6.0
Euro Zone	0.8	0.4	-1.4	11.5
Germany	1.2	0.7	-1.0	4.9
France	0.4	0.5	-1.4	10.5
Nether-lands	1.1	0.4	-2.8	6.5
Finland	-0.3	1.2	-0.8	8.9
Belgium	0.8	0.3	-3.9	8.6
Portugal	1.0	0.1	-1.0	13.4
Ireland	NA	0.4	-0.8	10.9
Italy	-0.4	0.2	-2.0	13.2
Greece	1.4	-1.8	0.1	25.9
Spain	1.6	-0.2	-0.3	24.0

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/october-2014/index.html

**Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/october-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 2.4 percent in IIIQ2014 relative to IIIQ2013 (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html, Table 8 in http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp3q14_2nd.pdf). Japan’s GDP fell 0.4 percent in IIIQ2014 relative to IIQ2014 and fell 1.2 percent relative to a year earlier. Japan’s GDP grew at the seasonally adjusted annual rate (SAAR) of minus 1.6 percent in IIIQ2014 (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/geopolitics-monetary-policy-and.html). The UK grew at 0.7 percent in IIIQ2014 relative to IIQ2014 and GDP increased 3.0 percent in IIIQ2014 relative to IIIQ2013 (Section VH and earlier http://cmpassocregulationblog.blogspot.com/2014/10/financial-oscillations-world-inflation.html). The Euro Zone grew at 0.2 percent in IIIQ2014 and 0.8 percent in IIIQ2014 relative to IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2014/11/fluctuating-financial-variables.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: 5.8 percent in the US but 16.1 percent for unemployment/underemployment or job stress of 26.6 million (http://cmpassocregulationblog.blogspot.com/2014/11/rules-discretionary-authorities-and.htm), 3.6 percent for Japan (http://cmpassocregulationblog.blogspot.com/2014/11/fluctuating-financial-variables.html), 6.0 percent for the UK with high rates of unemployment for young people (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, 3.2 percent for Japan, 1.6 percent for China, 0.4 percent for the Euro Zone and 1.2 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/2014/11/squeeze-of-economic-activity-by-carry.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 (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2014/11/fluctuating-financial-variables.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/2014/11/rules-discretionary-authorities-and.html). (4) The timing, dose, impact and instruments of normalizing monetary and fiscal policies (http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/geopolitics-monetary-policy-and.html http://cmpassocregulationblog.blogspot.com/2014/08/weakening-world-economic-growth.html and earlier 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, or reinvestment of principal in securities and issue of bank reserves to maintain policy interest rates at zero, 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 2.0 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 Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 21 quarters from IIIQ2009 to IIIQ2014. 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 IIIQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp3q14_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 $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.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, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2014 would have accumulated to 23.0 percent. GDP in IIIQ2014 would be $18,438.0 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,273.9 billion than actual $16,164.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.1 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/11/rules-discretionary-authorities-and.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/world-financial-turbulence-twenty-seven.html). US GDP in IIIQ2014 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,164.1 billion in IIIQ2014 or 7.8 percent at the average annual equivalent rate of 1.1 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth 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. There is similar behavior in manufacturing. The long-term trend is growth at average 3.3 percent per year from Jan 1919 to Oct 2014. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 123.8884 in Oct 2014. The actual index NSA in Oct 2014 is 101.5613, which is 18.0 percent below trend. Manufacturing output grew at average 2.3 percent between Dec 1986 and Dec 2013, raising the index at trend to 115.9214 in Oct 2014. The output of manufacturing at 101.5613 in Oct 2014 is 12.4 percent below trend under this alternative calculation.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 214,000 in Oct 2014 and private payroll employment increased 209,000. The average monthly number of nonfarm jobs created from Oct 2012 to Oct 2013 was 199,167 using seasonally adjusted data, while the average number of nonfarm jobs created from Oct 2013 to Oct 2014 was 220,250, or increase by 10.6 percent. The average number of private jobs created in the US from Oct 2012 to Oct 2013 was 202,750, using seasonally adjusted data, while the average from Oct 2013 to Oct 2014 was 215,250, or increase by 6.2 percent. This blog calculates the effective labor force of the US at 163.104 million in Oct 2013 and 164.611 million in Oct 2014 (Table I-4), for growth of 1.507 million at average 125,583 per month. The difference between the average increase of 215,250 new private nonfarm jobs per month in the US from Oct 2013 to Oct 2014 and the 125,583 average monthly increase in the labor force from Oct 2013 to Oct 2014 is 89,667 monthly new jobs net of absorption of new entrants in the labor force. There are 26.554 million in job stress in the US currently. Creation of 89,667 new jobs per month net of absorption of new entrants in the labor force would require 296 months to provide jobs for the unemployed and underemployed (26.554 million divided by 89,667) or 25 years (294 divided by 12). The civilian labor force of the US in Oct 2014 not seasonally adjusted stood at 156.616 million with 8.680 million unemployed or effectively 16.675 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 164.611 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 0.9 years (1 million divided by product of 89,667 by 12, which is 1,076,000). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.831 million (0.05 times labor force of 156.616 million). New net job creation would be 0.849 million (8.680 million unemployed minus 7.831 million unemployed at rate of 5 percent) that at the current rate would take 0.8 years (0.849 million divided by 1.076). Under the calculation in this blog, there are 16.675 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 164.611 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 9.464 million jobs net of labor force growth that at the current rate would take 7.8 years (16.675 million minus 0.05(164.611 million) = 8.444 million divided by 1.076, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in Oct 2014 was 147.936 million (NSA) or 0.621 million more people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 248.657 million in Oct 2014 or by 16.699 million. The number employed increased 0.4 percent from Jul 2007 to Oct 2014 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 7.2 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employment as percent of population of 231.958 million). The same ratio in Oct 2014 would result in 157.897 million jobs (0.635 multiplied by noninstitutional civilian population of 248.657 million). There are effectively 9.961 million fewer jobs in Oct 2014 than in Jul 2007, or 157.897 million minus 147.936 million. 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 (http://cmpassocregulationblog.blogspot.com/2014/11/fluctuating-financial-variables.html).

Second, long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions.

The economy of the US can be summarized in growth of economic activity or GDP as fluctuating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.3 percent in 2012 and 2.2 percent in 2013. The following calculations show that actual growth is around 2.1 to 2.6 percent per year. The rate of growth of 0.9 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.

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	3.5
2006-2013	1.0
2007-2013	0.9
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.2
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983-IIIQ1987 IQ1983 to IVQ1987 IQ1983 to IQ1988	5.9 5.7 5.4 5.2 5.0 5.0 4.9 5.0 4.9
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IIIQ2014	2.3
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 2.2 to 2.3 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Eleven Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013 and the first three quarters of 2014 accumulated to 6.4 percent. This growth is equivalent to 2.3 percent per year, obtained by dividing GDP in IIIQ2014 of $16,164.1 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/11: {[($16,164.1/$15,190.3)^4/11 -1]100 = 2.3 percent.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IIIQ2013 to IIIQ2014 accumulated to 2.4 percent that is equivalent to 2.4 percent in a year. This is obtained by dividing GDP in IIIQ2014 of $16,164.1 billion by GDP in IIIQ2013 of $15,779.9 billion and compounding by 4/4: {[($16,164.1/$15,779.9)^4/4 -1]100 = 2.4 %}. The US economy grew 2.4 percent in IIIQ2014 relative to the same quarter a year earlier in IIIQ2013. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.5 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 4.5 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.49 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 3.0 percent, or 0.74 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.9 percent {[(1.007)(1.004)(1.0074)(1.010)^4/4-1]100 = 2.9%}, compounding the quarterly rates and converting into annual equivalent. Inventory divestment deducted 1.16 percentage points from GDP growth in IQ2014. Without this deduction of inventory divestment, GDP growth would have been minus 0.9 percent in IQ2014, such that the actual growth rates in the four quarters ending in IQ2014 is closer to 2.2 percent {[(1.004)(1.011)(1.009)(0.9977)]^4/4 -1]100 = 2.2%}.

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	14,991.8	NA	NA	1.9
IVQ2011	15,190.3	1.3	1.1	1.7
IQ2012	15,275.0	1.9	0.6	2.6
IIQ2012	15,336.7	2.3	0.4	2.3
IIIQ2012	15,431.3	2.9	0.6	2.7
IVQ2012	15,433.7	2.9	0.0	1.6
IQ2013	15,538.4	3.6	0.7	1.7
IIQ2013	15,606.6	4.1	0.4	1.8
IIIQ2013	15,779.9	5.3	1.1	2.3
IVQ2013	15,916.2	6.2	0.9	3.1
IQ2014	15,831.7	5.6	-0.5	1.9
IIQ2014	16,010.4	6.8	1.1	2.6
IIIQ2014	16,164.1	7.8	1.0	2.4
Cumulative ∆% IQ2012 to IIIQ2014	6.4		6.5
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→∞, or reinvestment of principal in securities and issue of bank reserves to maintain interest rates at zero, 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 Oct 29, 2014 with maintenance of the current level of the balance sheet (http://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm):

“Press Release

Release Date: October 29, 2014

For immediate release

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of 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, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this 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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, 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. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

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.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.”

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 End of Bond Purchases and Continuing Reinvestment of Principal in Securities. Earlier programs are continued with reinvestment of principal in securities and bank reserves at $2486 billion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1): “Accordingly, the Committee decided to conclude its asset purchase program this 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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
2. New Advance Guidance. “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, 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. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated” (emphasis added).
3. Policy Commitment with Maximum Employment. The emphasis of policy is in maintaining full employment: “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.”

Focus is shifting from 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. Markets overreacted to the so-called “paring” of outright purchases to $15 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 Oct 29, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm):

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, 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. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated” (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.”

Yellen (2014Aug22) provides comprehensive review of the theory and measurement of labor markets. Monetary policy 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”

Yellen (2014Aug22) finds that the unemployment rate is not sufficient in determining slack:

“One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.”

Yellen (2014Aug22) restates that the FOMC determines monetary policy on newly available information and interpretation of labor markets and inflation and does not follow a preset path:

“But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate. As I have noted many times, monetary policy is not on a preset path. The Committee will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy.”

Yellen (2014Aug22) states that “Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction.”

The minutes of the meeting of the Federal Open Market Committee (FOMC) on Sep 16-17, 2014, reveal concern with global economic conditions (http://www.federalreserve.gov/monetarypolicy/fomcminutes20140917.htm):

“Most viewed the risks to the outlook for economic activity and the labor market as broadly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.”

Chair Yellen analyzes the view of inflation (http://www.federalreserve.gov/newsevents/speech/yellen20140416a.htm):

“Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year. This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.

To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.”

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?

A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html).

Matt Jarzemsky, writing on “Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 17,828.24 on Fri Nov 28, 2014, which is higher by 25.9 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 25.6 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Perhaps one of the most critical statements on policy is the answer to a question of Peter Barnes by Chair Janet Yellen at the press conference following the meeting on Jun 18, 2014 (page 19 at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140618.pdf):

So I don't have a sense--the committee doesn't try to gauge what is the right level of equity prices. But we do certainly monitor a number of different metrics that give us a feeling for where valuations are relative to things like earnings or dividends, and look at where these metrics stand in comparison with previous history to get a sense of whether or not we're moving to valuation levels that are outside of historical norms, and I still don't see that. I still don't see that for equity prices broadly” (emphasis added).

In a speech at the IMF on Jul 2, 2014, Chair Yellen analyzed the link between monetary policy and financial risks (http://www.federalreserve.gov/newsevents/speech/yellen20140702a.htm):

“Monetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system. This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment--the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant. In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, weak underwriting of loans, deficiencies in risk measurement and risk management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.”

Yellen (2014Jul14) warned again at the Committee on Banking, Housing and Urban Affairs on Jul 15, 2014:

“The Committee recognizes that low interest rates may provide incentives for some investors to “reach for yield,” and those actions could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance. More broadly, the financial sector has continued to become more resilient, as banks have continued to boost their capital and liquidity positions, and growth in wholesale short-term funding in financial markets has been modest” (emphasis added).

Greenspan (1996) made similar warnings:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy” (emphasis added).

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. What is the success in evaluating deviations of valuations of risk financial assets from “historical norms”? What are the consequences on economic activity and employment of deviations of valuations of risk financial assets from those “historical norms”? What are the policy tools and their effectiveness in returning valuations of risk financial assets to their “historical norms”?

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

Professor Raguram G Rajan, governor of the Reserve Bank of India, which is India’s central bank, warned about risks in high valuations of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor Rajan demystifies in the interview “competitive easing” by major central banks as equivalent to competitive devaluation. Rajan (2005) anticipated the risks of the world financial crisis. Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor (1993, 1998LB, 1999, 1998LB, 1999, 2007JH, 2008Nov, 2009, 2012JMCB, 2014Jan3) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities http://cmpassocregulationblog.blogspot.com/2014/07/financial-irrational-exuberance.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html).

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

The FOMC provides guidelines on the process of normalization of monetary policy at the meeting on Sep 17, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140917c.htm):

“All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:

• The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.
  • When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
  • During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
  • During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.
• The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
  • The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
  • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
• The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
• The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.”

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 testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm):

“The economy has continued to recover from the steep recession of 2008 and 2009. Real gross domestic product (GDP) growth stepped up to an average annual rate of about 3-1/4 percent over the second half of last year, a faster pace than in the first half and during the preceding two years. Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Conditions in the labor market have continued to improve. The unemployment rate was 6.3 percent in April, about 1-1/4 percentage points below where it was a year ago. Moreover, gains in payroll employment averaged nearly 200,000 jobs per month over the past year. During the economic recovery so far, payroll employment has increased by about 8-1/2 million jobs since its low point, and the unemployment rate has declined about 3-3/4 percentage points since its peak.

While conditions in the labor market have improved appreciably, they are still far from satisfactory. Even with recent declines in the unemployment rate, it continues to be elevated. Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly--another signal that a substantial amount of slack remains in the labor market.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent. A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen. Moreover, U.S. financial conditions remain supportive of growth in economic activity and employment.”

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 differ from 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 http://cmpassocregulationblog.blogspot.com/2014/07/financial-irrational-exuberance.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html).

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 Raguram G Rajan, governor of the Reserve Bank of India, which is India’s central bank, warned about risks in high valuations of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor Rajan demystifies in the interview “competitive easing” by major central banks as equivalent to competitive devaluation.

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 Sep 17, 2014. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.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 IIIQ2014 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html). The Bureau of Economic Analysis provides the estimate of IIIQ2014 GDP (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.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 (and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html). The report on “Personal Income and Outlays” was released on Nov 26, 2014 (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2014/11/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 Oct 2014 was released on Nov 7, 2014 (http://cmpassocregulationblog.blogspot.com/2014/11/rules-discretionary-authorities-and.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 2014 and 2015 because 2016 and longer term are too far away, and there is not much information even on what will happen in 2014-2015 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 Sep 17, 2014 and the second row “PR” the projection of the Jun 18, 2014 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 2.1 to 2.3 percent at the meeting in Jun 2014 to 2.0 to 2.2 percent at the meeting in Sep 2014.

2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment for 2014 from 6.0 to 6.1 percent at the meeting on Jun 18, 2014 to 5.9 to 6.0 percent at the meeting on Sep 17, 2014. The projection for 2015 decreased to the range of 5.4 to 5.6 in Sep 2014 from 5.4 to 5.7 in Jun 2014. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 4.9 to 5.3 percent in 2017 after the meeting on Sep 17, 2014.

3. Inflation “∆% PCE Inflation.” The FOMC did not change the forecast of personal consumption expenditures (PCE) inflation for 2014 from 1.5 to 1.7 percent at the meeting on Jun 18, 2014 to 1.5 to 1.7 percent at the meeting on Sep 17, 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 1.5 to 1.6 percent at the meeting on Jun 18, 20134 to 1.5 to 1.6 percent at the meeting Sep 17, 2014. In 2015, there is minor change in the projection from 1.6 to 2.0 percent at the meeting on Jun 18, 2014 to 1.5 to 1.6 percent on Sep 17, 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, Jun 18, 2014 and Sep 17, 2014

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2014  Jun PR	2.0 to 2.2 2.1 to 2.3	5.9 to 6.0 6.0 to 6.1	1.5 to 1.7 1.5 to 1.7	1.5 to 1.6 1.5 to 1.6
2015 Jun PR	2.6 to 3.0 3.0 to 3.2	5.4 to 5.6 5.4 to 5.7	1.6 to 1.9 1.5 to 2.0	1.6 to 1.9 1.6 to 2.0
2016 Jun PR	2.6 to 2.9 2.5 to 3.0	5.1 to 5.4 5.1 to 5.5	1.7 to 2.0 1.6 to 2.0	1.8 to 2.0 1.7 to 2.0
2017 Jun PR	2.3 to 2.5    NA	4.9 to 5.3 NA	1.9 to 2.0 NA	1.9 to 2.0 NA
Longer Run Jun PR	2.0 to 2.3 2.1 to 2.3	5.2 to 5.5 5.2 to 5.5	2.0 2.0
Range
2014 Jun PR	1.8 to 2.3 1.9 to 2.4	5.7 to 6.1 5.8 to 6.2	1.5 to 1.8 1.4 to 2.0	1.5 to 1.8 1.4 to 1.8
2015 Jun PR	2.1 to 3.2 2.2 to 3.6	5.2 to 5.7 5.2 to 5.9	1.5 to 2.4 1.4 to 2.4	1.6 to 2.4 1.5 to 2.4
2016 Jun PR	2.1 to 3.0 2.2 to 3.2	4.9 to 5.6 5.0 to 5.6	1.6 to 2.1 1.5 to 2.0	1.7 to 2.2 1.6 to 2.0
2017 Jun PR	2.0 to 2.6 NA	4.7 to 5.8   NA	1.7 to 2.2 NA	1.8 to 2.2 NA
Longer Run Jun PR	1.8 to 2.6 1.8 to 2.5	5.0 to 6.0 5.0 to 6.0	2.0 2.0

Notes: UEM: unemployment; PR: Projection

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

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.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/fomcprojtabl20140917.pdf). The rate would still remain at 0 to ¼ percent in 2014 for 16 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, 3 participants expect the rate to remain between 0.5 and 1.0 percent, 5 to be between 1.0 and 1.5 percent, 10 between 1 and 2 percent and 1 between 2 and 3 percent. For 2016, 2 participant expects the rate between 1.0 and 1 percent, 2 between 1 and 2 percent, 8 between 2 and 3 percent and 6 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, Sep 17, 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	16	1
2015	3	3	5	10	1
2016	1		2	2	8	6
2017				1	1	17
Longer Run						17

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

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.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, Sep 17, 2014

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2014	1
2015	14
2016	2

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

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf

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 indexes of prices of personal consumption. There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. Resulting fluctuations of prices confuse risk/return decisions, inducing financial instability with adverse financial and economic consequences. The first wave is in Jan-Apr 2011 when headline PCE inflation increased at the average annual equivalent rate of 4.0 percent and PCE inflation excluding food and energy (PCEX) at 1.8 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 7.8 percent and of energy prices (PCEE) at 30.1 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 1.8 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.4 percent with subdued PCE inflation excluding food and energy of 2.0 percent while PCE food rose at 6.2 percent and PCE energy increased at 5.3 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 percent for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.2 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 10.3 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 2.8 percent and 2.0 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 12.2 percent because of the jump of 1.6 percent in Feb 2012 followed by 0.7 percent in Mar 2012. In the sixth wave, renewed risk aversion caused reversal of carry trades with headline PCE inflation at the annual equivalent rate of 0.6 percent in Apr-May 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.2 percent. In the seventh wave, further shocks of risk aversion resulted in headline PCE annual equivalent inflation at 0.0 percent in Jun-Jul 2012 with core PCE excluding food and energy at 1.8 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 3.7 percent annual equivalent in Aug-Sep 2012 with PCEX excluding food and energy at 0.6 percent while PCEE energy jumped at 63.8 percent annual equivalent. The program of outright monetary transactions (OTM) of the European Central Bank induced relaxed risk aversion (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). In the ninth wave, prices collapsed with reversal of carry trade positions in a new episode of risk aversion with central PCE at annual equivalent 0.6 percent in Oct 2012 to Jan 2013 and PCEX at 1.5 percent while energy prices fell at minus 13.6 percent. In the tenth wave, central PCE increased at annual equivalent 3.7 percent in Feb 2013, PCEX at 1.2 percent and PCEE at 63.8 percent. In the eleventh wave, renewed risk aversion resulted in decline in annual equivalent of general PCE prices at 1.2 percent in Mar-Apr 2013 while PCEX increased at 0.6 percent and energy prices fell at 29.3 percent. In the twelfth wave, central PCE increased at 1.6 percent annual equivalent in May-Nov 2013 with PCEX increasing at 1.4 percent, food PCEF increasing at 0.2 percent and energy PCEE increasing at 2.6 percent with the jump of 1.9 percent in Jun 2013. In the thirteenth wave, central PCE increased at annual equivalent 1.8 percent in Dec 2013-Mar 2014 and PCEX at 1.2 percent. PCEE increased at 4.6 percent annual equivalent. In the fourteenth wave, central PCE inflation was 2.1 percent in annual equivalent in Apr-Jul 2014 with PCEX at 2.1 percent and energy prices at 8.1 percent. In the fifteenth wave, central PCE increased at annual equivalent 0.8 percent in Aug-Oct 2014 while PCEX increased at 1.6 percent. PCEF increased at 2.0 percent while PCEE fell at 19.9 percent. Commodity prices have moderated with reallocation of financial investments to carry trades in equities.

Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2014
Oct	0.1	-0.3	0.0	0.2	0.2	0.0	-2.0
Sep	0.1	0.0	-0.1	0.1	0.1	0.2	-0.8
Aug	0.0	-0.5	-0.2	0.2	0.1	0.3	-2.7
∆% AE Aug-Oct	0.8	-3.2	-1.2	2.0	1.6	2.0	-19.9
Jul	0.1	0.0	-0.2	0.1	0.1	0.3	-0.3
Jun	0.2	0.4	-0.1	0.1	0.2	0.0	1.7
May	0.2	0.2	-0.3	0.3	0.2	0.6	0.8
Apr	0.2	0.3	0.0	0.2	0.2	0.3	0.4
∆% AE Apr-Jul	2.1	2.7	-1.8	2.1	2.1	3.7	8.1
Mar	0.2	-0.2	-0.3	0.3	0.1	0.5	-0.1
Feb	0.1	-0.1	-0.2	0.2	0.1	0.3	-0.5
Jan	0.1	0.0	-0.1	0.2	0.1	0.0	0.4
2013
Dec	0.2	0.1	-0.4	0.2	0.1	0.1	1.7
∆% AE Dec-Mar	1.8	-0.6	-3.0	2.7	1.2	2.7	4.6
Nov	0.1	-0.2	-0.3	0.2	0.1	0.0	-0.4
Oct	0.1	-0.2	-0.2	0.2	0.1	0.0	-0.9
Sep	0.1	-0.1	-0.1	0.2	0.1	-0.1	0.2
Aug	0.1	0.0	-0.3	0.1	0.1	0.1	-0.4
Jul	0.1	0.1	-0.3	0.1	0.1	0.1	0.3
Jun	0.3	0.4	-0.1	0.2	0.2	0.2	1.9
May	0.1	-0.1	-0.1	0.2	0.1	-0.2	0.8
∆% AE May-Nov	1.6	-0.2	-2.4	2.1	1.4	0.2	2.6
Apr	-0.1	-0.5	-0.3	0.1	0.0	0.1	-2.4
Mar	-0.1	-0.6	-0.2	0.2	0.1	0.1	-3.3
∆% AE Mar-Apr	-1.2	-6.4	-3.0	1.8	0.6	1.2	-29.3
Feb	0.3	0.7	0.0	0.2	0.1	0.1	4.2
∆% AE Feb	3.7	8.7	0.0	2.4	1.2	1.2	63.8
Jan	0.1	-0.1	0.0	0.2	0.2	0.0	-0.9
2012
Dec	0.0	-0.4	-0.2	0.2	0.0	0.2	-1.4
Nov	-0.1	-0.6	-0.1	0.2	0.1	0.3	-3.3
Oct	0.2	0.2	-0.1	0.3	0.2	0.2	0.8
∆% AE Oct-Jan	0.6	-2.7	-1.2	2.7	1.5	2.1	-13.6
Sep	0.3	0.6	-0.2	0.1	0.1	-0.1	3.8
Aug	0.3	0.6	-0.2	0.1	0.0	0.0	4.6
∆% AE Aug-Sep	3.7	7.4	-2.4	1.2	0.6	-0.6	63.8
Jul	0.0	-0.1	-0.2	0.1	0.1	0.0	-1.1
Jun	0.0	-0.3	-0.2	0.2	0.2	0.2	-2.1
∆% AE Jun-Jul	0.0	-2.4	-2.4	2.4	1.8	1.2	-17.6
May	0.0	-0.5	-0.1	0.2	0.1	0.0	-2.8
Apr	0.1	0.0	-0.2	0.2	0.1	0.1	0.0
∆% AE Apr- May	0.6	-3.0	-1.8	2.4	1.2	0.6	-15.7
Mar	0.2	0.3	-0.1	0.2	0.2	0.2	0.7
Feb	0.2	0.3	-0.1	0.1	0.1	0.0	1.6
Jan	0.3	0.3	0.1	0.2	0.2	0.2	0.6
∆% AE Jan- Mar	2.8	3.7	-0.4	2.0	2.0	1.6	12.2
2011
Dec	0.0	-0.2	-0.2	0.2	0.1	0.2	-1.7
Nov	0.1	0.1	-0.2	0.2	0.2	0.0	0.1
Oct	0.1	-0.1	0.0	0.1	0.1	0.1	-1.1
∆% AE Oct- Dec	0.8	-0.8	-1.6	2.0	1.6	1.2	-10.3
Sep	0.2	0.2	-0.4	0.2	0.1	0.5	1.0
Aug	0.2	0.2	-0.2	0.2	0.2	0.6	0.1
Jul	0.2	0.2	-0.1	0.2	0.2	0.4	0.2
∆% AE Jul-Sep	2.4	2.4	-2.8	2.4	2.0	6.2	5.3
Jun	0.0	-0.1	0.1	0.1	0.1	0.2	-1.6
May	0.3	0.5	0.1	0.3	0.2	0.5	1.4
∆% AE May-Jun	1.8	2.4	1.2	2.4	1.8	4.3	-1.3
Apr	0.4	0.8	0.3	0.3	0.2	0.4	3.3
Mar	0.4	0.7	-0.1	0.2	0.1	0.9	3.2
Feb	0.3	0.4	0.2	0.2	0.2	0.6	1.3
Jan	0.2	0.4	0.0	0.1	0.1	0.6	1.1
∆% AE Jan-Apr	4.0	7.1	1.2	2.4	1.8	7.8	30.1
2010
Dec	0.2	0.6	-0.3	0.1	0.0	0.1	4.1
Nov	0.2	0.2	-0.2	0.1	0.1	0.2	1.1
Oct	0.2	0.4	-0.2	0.1	0.1	0.1	3.1
Sep	0.1	0.2	-0.1	0.1	0.0	0.2	0.6
Aug	0.1	0.3	0.1	0.1	0.1	0.1	1.0
Jul	0.1	0.1	-0.3	0.1	0.1	0.1	1.2
Jun	0.1	-0.1	-0.4	0.1	0.1	-0.1	-0.5
May	0.0	-0.2	-0.2	0.2	0.1	0.1	-1.2
Apr	0.0	-0.3	-0.2	0.1	0.0	0.1	-0.8
Mar	0.1	-0.1	0.0	0.2	0.1	0.2	-0.5
Feb	0.0	-0.2	-0.3	0.1	0.1	0.1	-1.2
Jan	0.2	0.3	-0.1	0.1	0.1	0.1	1.7

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services. AE: annual equivalent.

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

The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2014 around 0.2 percent per month.

Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2014

Source: US Bureau of Economic Analysis

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

There is much less volatility in the PCE index excluding food and energy shown in Chart IV-2 with monthly percentage changes from 1999 to 2014. With the exception of 2001, there are no negative changes and again changes around 0.2 percent when excluding outliers.

Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2014

Source: US Bureau of Economic Analysis

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

Fluctuations in the PCE index of food are much wider as shown in Chart IV-3 by monthly percentage changes from 1999 to 2014. There are also multiple negative changes and positive changes even exceeding 1.0 percent in three months.

Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2014

Source: US Bureau of Economic Analysis

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

The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes and large percentages.

Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2014

Source: US Bureau of Economic Analysis

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

Table IV-6 provides 12-month rates of PCE inflation from Jan 2012 to Oct 2014, annual inflation rates from 2000 to 2013 and average yearly rates of PCE inflation for various periods since 1929. Headline 12-month PCE inflation decreased from 2.5 percent in in the 12 months ending in Jan 2012 to 1.4 percent in the 12 months ending in Oct 2014. PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, decreased from 2.1 percent in the 12 months ending in Jan 2012 to 1.6 percent in the 12 months ending in Oct 2014, which is still below or at the tolerable maximum of 2.0-2.5 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy. Annual PCE inflation in the second part of Table IV-6 shows significant fluctuations. Headline PCE inflation rose during the period of 1 percent interest rates from Jun 2003 to Jun 2005, reaching 2.9 percent in 2005. PCEE rose at very high two-digit rates after 2003. Headline PCE inflation increased 3.1 percent in 2008 while PCEE energy increased 14.3 percent in carry trades from zero interest rates to commodity derivatives during deep global recession. Flight away from risk financial assets to US government obligations fueled by proposals of TARP in Congress (Cochrane and Zingales 2009) caused decline of PCEE of 19.0 percent in 2009 and minus 0.1 percent in headline PCE. There is no deflation in the US economy. Carry trades from zero interest rates to commodity exposures mixed with portfolio reallocations among risk financial assets caused wide recent oscillations. Headline PCE inflation increased at the average rate of 2.9 percent from 1929 to 2013, as shown in Table IV-6 using the revisions by the BEA. PCE inflation was 6.1 percent on average during the Great Inflation episode from 1965 to 1981 (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). PCE inflation was 3.2 percent on average from 1947 to 2013 and 3.2 percent on average for PCEX. The long-term charts of PCEE and PCEX show almost identical behavior.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption

Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2014
Oct	1.4	-0.2	-2.2	2.3	1.6	2.5	-1.9
Sep	1.4	-0.1	-2.3	2.2	1.5	2.5	-0.9
Aug	1.5	-0.2	-2.3	2.3	1.5	2.2	0.1
Jul	1.6	0.2	-2.4	2.3	1.5	2.0	2.5
Jun	1.6	0.3	-2.6	2.3	1.5	1.8	3.1
May	1.7	0.3	-2.5	2.3	1.5	2.0	3.3
Apr	1.5	0.1	-2.3	2.3	1.4	1.2	3.3
Mar	1.2	-0.8	-2.6	2.2	1.3	1.0	0.4
Feb	1.0	-1.2	-2.5	2.1	1.2	0.7	-2.8
Jan	1.2	-0.5	-2.3	2.1	1.2	0.6	1.8
2013
Dec	1.2	-0.5	-2.2	2.1	1.3	0.6	0.5
Nov	1.0	-1.0	-2.0	2.1	1.3	0.7	-2.6
Oct	0.9	-1.4	-1.9	2.0	1.3	1.0	-5.4
Sep	1.0	-1.0	-1.8	2.1	1.3	1.2	-3.8
Aug	1.2	-0.4	-1.9	2.0	1.3	1.2	-0.3
Jul	1.5	0.3	-1.8	2.0	1.3	1.2	4.7
Jun	1.4	0.1	-1.7	2.0	1.3	1.0	3.2
May	1.1	-0.6	-1.8	2.0	1.3	1.0	-0.8
Apr	1.0	-1.0	-1.8	2.0	1.3	1.2	-4.3
Mar	1.2	-0.5	-1.7	2.1	1.4	1.1	-1.9
Feb	1.5	0.4	-1.6	2.1	1.5	1.2	2.1
Jan	1.4	0.0	-1.7	2.1	1.5	1.0	-0.5
2012
Dec	1.5	0.4	-1.6	2.1	1.6	1.3	1.1
Nov	1.6	0.5	-1.6	2.1	1.6	1.3	0.9
Oct	1.8	1.3	-1.6	2.1	1.7	1.0	4.4
Sep	1.6	1.0	-1.5	2.0	1.7	0.9	2.4
Aug	1.5	0.6	-1.7	2.0	1.6	1.5	-0.3
Jul	1.5	0.1	-1.7	2.1	1.8	2.0	-4.6
Jun	1.6	0.4	-1.6	2.2	1.9	2.4	-3.3
May	1.6	0.7	-1.3	2.1	1.9	2.4	-2.9
Apr	2.0	1.6	-1.1	2.2	2.0	2.9	1.3
Mar	2.3	2.4	-0.6	2.2	2.1	3.3	4.6
Feb	2.5	2.8	-0.6	2.3	2.0	3.9	7.3
Jan	2.5	3.0	-0.4	2.3	2.1	4.6	7.0
Annual ∆%
2013	1.2	-0.5	-1.8	2.1	1.3	1.0	-0.8
2012	1.8	1.2	-1.3	2.1	1.8	2.3	1.4
2011	2.5	3.7	-0.9	1.8	1.5	4.0	16.0
2010	1.7	1.6	-1.4	1.7	1.3	0.3	10.1
2009	-0.1	-2.3	-1.7	1.1	1.2	1.2	-19.0
2008	3.1	3.0	-1.9	3.1	2.1	6.1	14.3
2007	2.5	1.1	-2.0	3.2	2.2	3.9	6.0
2006	2.7	1.4	-1.6	3.4	2.2	1.7	11.3
2005	2.9	2.0	-1.0	3.3	2.2	1.7	17.3
2004	2.4	1.4	-1.9	3.0	1.9	3.1	11.3
2003	2.0	-0.1	-3.6	3.1	1.5	1.9	12.6
2002	1.3	-0.9	-2.5	2.6	1.7	1.5	-5.8
2001	1.9	-0.1	-2.0	3.1	1.8	2.9	2.5
2000	2.5	2.0	-1.8	2.8	1.7	2.3	18.3
Average ∆%
2000-2013	2.0	0.9	-21.3*	2.6	1.7	2.4	5.5
1929-2013	2.9	2.3	1.4	3.3	2.8	2.9	3.3
1947-2013	3.2	2.3	1.1	3.9	3.2	3.0	4.2
1965-1981	6.1	5.6	4.3	6.5	5.7	6.3	9.3

*Percentage change from 2000 to 2012.

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

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

The headline PCE index is shown in Chart IV-5 from 1999 to 2014. There is an evident upward trend with the carry-trade bump in 2008-2009 during the global recession.

Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2014

Source: US Bureau of Economic Analysis

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

The consumer price index in Chart IV-6 mirrors the behavior of the PCE price index in Chart IV-6. There is the same upward trend with the carry-trade bump in 2008 during the global recession.

Chart IV-6, US, Consumer Price Index, NSA, 1999-2014

Source: US Bureau of Labor Statistics

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

Chart IV-7 provides the PCE price index excluding food and energy. There is milder upward trend with fewer oscillations.

Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2014

Source: US Bureau of Economic Analysis

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

The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.

Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2014

Source: US Bureau of Labor Statistics

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

The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.

Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2014

Source: US Bureau of Economic Analysis

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

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and in 2012-2014.

Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2014

Source: US Bureau of Labor Statistics

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

The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. Cochrane and Zingales (2009) explain the flight by public allegations of toxic assets in banks during the request of funding from Congress for the Troubled Asset Relief Program (TARP). The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2014

Source: US Bureau of Economic Analysis

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

Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion and increases during risk appetite.

Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2014

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

Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. The peak in Chart IV-13 is $145.18 on Jul 14, 2008, in the midst of deep global recession, falling to $33.87/barrel on Dec 19, 2008 (data from the US Energy Information Administration (http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D). Prices collapsed in the flight to government obligations caused by proposals for withdrawing “toxic assets” in the Troubled Asset Relief Program (TARP) as analyzed by Cochrane and Zingales (2009). Risk appetite with zero interest rates after stress tests of US banks resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.

Chart IV-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

Table IV-14 provides the annual PCE price index from the revised and enhanced dataset of the Bureau of Economic Analysis (BEA). The annual PCEE index increased at the average rate of 2.9 percent from 1929 to 2013. There is no support for fear of deflation.

Chart IV-14, US, Price Index of Personal Consumption Expenditures, Annual, 1929-2013

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

Chart IV-15 of the Bureau of Labor Statistics (BLS) provides the consumer price index from 1915 to 2014. There is long-term inflation and no evidence in support of fear of deflation.

Chart IV-15, US, Consumer Price Index, Annual, 1915-2014

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

Chart IV-16 provides the BEA annual index of PCE prices excluding food and energy. The average rate of increase from 1929 to 2013 is 2.8 percent.

Chart IV-16, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy, Annual, 1929-2013

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

Chart IV-17 of the Bureau of Labor Statistics (BLS) provides the annual consumer price index excluding food and energy from 1957 to 2013. There is long-term, fluctuating inflation.

Chart IV-17, US, Consumer Price Index Excluding Food and Energy, Annual, 1957-2013

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

Chart IV-18 provides annual percentage changes of the index of prices of personal consumption expenditures. With the exception of the Great Depression of the 1930s, the index was negative only after World War II high inflation and the speculative carry trades on commodities induced by zero interest rates in 2008. Deflation fear does not have support in reality.

Chart IV-18, US, Price Index of Personal Consumption Expenditures, Annual Percentage Changes 1930-2013

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

Chart IV-19 provides annual percentage changes of the US consumer price index since 1914. Besides the Great Depression, the index of consumer prices all items fell only after World War II, the Korean War and the episode of speculative carry trades induced by zero interest rates during the global recession in 2008.

Chart IV-19, US, Consumer Price Index, Annual Percentage Changes, 1915-2013

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

Chart IV-20 provides annual percentage changes of the price index of personal consumption expenditures excluding food and energy since 1930. Besides the episode of the Great Depression, there are no negative changes with the lowest reading after fast inflation during World War II.

Chart IV-20, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy, Annual Percentage Changes, 1930-2013

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

Chart IV-21 provides annual percentage changes of the PCE index excluding food and energy. There are no negative changes in the history of the index that would support fear of deflation justifying unconventional monetary policy.

Chart IV-21, US, Consumer Price Index Excluding Food and Energy, Annual Percentage Changes, 1958-2013

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

There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html), as shown in Table IV-7. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trades from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 10.4 percent. In the second wave, producer prices fell 0.2 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun 2011 of minus 1.8 percent. In the third wave from Jul to Sep 2011, annual equivalent producer price inflation was 3.7 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.8 percent. In the fifth wave in Jan-Mar 2012, average annual inflation rose to 6.2 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 4.3 percent during unwinding of carry trades because of increasing risk aversion. In the seventh wave, carry trades returned under more relaxed risk aversion with producer price inflation in France at 7.4 percent in annual equivalent in Jul-Oct 2012. In the eighth wave, return of risk aversion caused unwinding carry trade and annual equivalent inflation of minus 4.1 percent in Nov-Dec 2012. In the ninth wave, inflation returned with annual equivalent 4.9 percent in Jan-Mar 2013. In the tenth wave, annual equivalent inflation was minus 10.7 percent in Apr-Jun 2013. In the eleventh wave, annual equivalent inflation was 8.7 percent in Jul 2013 and 4.5 percent in Jul-Sep 2013. In the twelfth wave, annual equivalent inflation in Oct 2013 was minus 2.4 percent. In the thirteenth wave, inflation in Nov 2013 was 0.6 percent, primarily because of increases in electricity rates (http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20131227), which is 7.4 percent in annual equivalent and 4.9 percent in annual equivalent in Nov-Dec 2013. In the fourteenth wave, annual equivalent inflation decreased at 4.0 percent in Jan-Aug 2014. The National Institute of Statistics and Economic Studies (INSEE) of France explains: “In January, French producer prices in industry for French market decreased (-0,6%, after +0.1% in December), driven down by the fall in prices for refined petroleum products (1.9%) and for electricity and gas (-2.9%), while prices for manufactured products were almost unchanged” (http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20140228). In the fifteenth wave, annual equivalent returned at 8.7 percent in Sep 2014. In the sixteenth wave, annual equivalent inflation fell at 3.5 percent in Oct 2014. The bottom part of Table IV-7 shows producer price inflation at 3.2 percent in the 12 months ending in Dec 2005 and again at 4.6 percent in the 12 months ending in Dec 2007. Producer prices fell 2.9 percent in 2009 during the global contraction and decline of commodity prices but returned at 4.3 percent in the 12 months ending in Dec 2010.

Table IV-7, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Oct 2014	-0.3	-1.4
AE ∆% Oct	-3.5
Sep	0.7	-1.3
AE ∆% Sep	8.7
Aug	-0.4	-1.6
Jul	-0.3	-1.2
Jun	0.1	-0.2
May	-0.5	-0.6
Apr	-0.6	-1.3
Mar	-0.3	-1.9
Feb	-0.2	-1.5
Jan	-0.5	-0.9
AE ∆% Jan-Aug	-4.0
Dec 2013	0.2	0.2
Nov	0.6	-0.5
AE ∆% Nov-Dec	4.9
Oct	-0.2	-1.3
AE ∆% Oct	-2.4
Sep	0.4	-0.6
Aug	0.0	-0.7
Jul	0.7	0.3
AE ∆% Jul-Sep	4.5
Jun	-0.3	0.1
May	-1.2	-0.2
Apr	-1.3	0.4
AE ∆% Apr-Jun	-10.7
Mar	0.1	1.8
Feb	0.5	2.1
Jan	0.6	2.1
AE ∆% Jan-Mar	4.9
Dec 2012	-0.5	2.0
Nov	-0.2	2.2
AE ∆% Nov-Dec	-4.1
Oct	0.5	2.8
Sep	0.3	2.8
Aug	1.0	2.8
Jul	0.6	1.8
AE ∆% Jul-Oct	7.4
Jun	-0.6	1.8
May	-0.6	2.3
Apr	0.1	2.8
AE ∆% Apr-Jun	-4.3
Mar	0.5	3.6
Feb	0.5	4.0
Jan	0.5	4.2
AE ∆% Jan-Mar	6.2
Dec 2011	-0.2	4.5
Nov	0.4	5.2
Oct	0.5	5.3
AE ∆% Oct-Dec	2.8
Sep	0.3	5.4
Aug	0.0	5.6
Jul	0.6	5.7
AE ∆% Jul-Sep	3.7
Jun	-0.1	5.4
May	-0.2	5.7
AE ∆% May-Jun	-1.8
Apr	1.0	6.0
Mar	0.8	5.7
Feb	0.7	5.2
Jan	0.8	4.6
AE ∆% Jan-Apr	10.4
Dec 2010		4.3
Dec 2009		-2.9
Dec 2008		0.8
Dec 2007		4.6
Dec 2006		2.6
Dec 2005		3.2
Dec 2004		3.0
Dec 2003		0.3
Dec 2002		1.2
Dec 2001		-0.7
Dec 2000		3.9

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20141128

Chart IV-22 of the Institut National de la Statistique et des Études Économiques of France provides the producer price index for the internal market in France from Jan 1999 to Oct 2014. The index also captures the low price environment of the early 2000s that was used as an argument of fear of deflation. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. During the first round of unconventional monetary policy of low interest rates and withdrawal of duration in bond markets by suspension of auctions of the 30-year Treasury bond, inflation accelerated from 2004 to 2007. When policy interest rates were moved toward zero in 2008, carry trades during a global recession caused sharp increases in commodity prices and price indexes worldwide. Inflation collapsed in the risk panic from the latter part of 2008 into the first part of 2009. Carry trades induced by zero interest rates have caused a trend of inflation with oscillations during period of risk aversion (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html).

Chart IV-22, France, Producer Prices for the Internal Market, Jan 1999-Oct 2014, 2010=100

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20141128

France’s producer price index for the domestic market is shown in Table IV-8 for Oct 2014. The segment mining includes electricity and increased 2.1 percent in Oct 2014 and decreased 1.8 percent in 12 months. The segment of prices of coke and refined petroleum decreased 6.5 percent in Oct 2014 and decreased 10.0 percent in 12 months. Manufacturing prices, with the highest weight in the index, decreased 0.8 percent in Sep and decreased 1.3 percent in 12 months. Waves of inflation originating in carry trades from unconventional monetary policy of zero interest rates (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html) tend to deteriorate sales prices of productive activities relative to prices of inputs and commodities with adverse impact on operational margins and thus on production, investment and hiring.

Table IV-8, France, Producer Price Index for the Domestic Market, %

Oct 2014	Weight	Month ∆%	12 Months ∆%
Total	1000	-0.2	-1.4
Mining	194	2.1	-1.8
Mfg	806	-0.8	-1.3
Food Products, Beverages, Tobacco	186	-0.8	-1.7
Coke and Refined Petroleum	56	-6.5	-10.0
Electrical, Electronic	72	0.0	-0.5
Transport	111	0.1	0.5
Other Mfg	380	-0.3	-0.2

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20141128

Chart IV-23 of the Institut National de la Statistique et des Études Économiques of France provides the PPI for all markets, imports, foreign markets and the domestic market. All indexes decline in 2014.

Chart IV-23, France, Producer Price Indexes

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20141128

Italy’s producer price inflation in Table IV-9 also has the same waves in 2011 and into 2012-2014 observed for many countries (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html). The annual equivalent producer price inflation in the first wave Jan-Apr 2011, annual equivalent inflation was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was 1.8 percent in annual equivalent rate in May-Jun 2011. In the third wave, annual equivalent inflation was 4.9 percent in Jul-Sep 2011. With the return of risk aversion in the fourth wave coinciding with the worsening sovereign debt crisis in Europe, annual equivalent inflation was 2.0 percent in Oct-Dec 2011. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 8.1 percent. In the sixth wave, annual equivalent inflation in Mar-Apr 2012 was at 6.8 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 0.6 percent in May-Jun 2012. In the eighth wave, more aggressive carry trades into commodity futures exposures resulted in increase of inflation at annual equivalent 9.4 percent in Jul-Aug 2012. In the ninth wave, risk aversion caused unwinding carry trades with annual equivalent inflation of minus 5.2 percent in Sep 2012-Jan 2013. Inflation returned in the tenth wave at 1.2 percent annual equivalent in Feb-Mar 2013. In the eleventh wave, industrial prices fell at annual equivalent 3.5 percent in Apr-May 2013. In the twelfth wave, inflation returned at annual equivalent 4.9 percent in Jun 2013 and 0.3 percent in Jun-Sep 2013. In the thirteenth wave, annual equivalent inflation was minus 2.7 percent in Oct-2013 to May 2014. In the fourteenth wave, annual equivalent inflation was 2.4 percent in Jun 2014. In the fifteenth wave, annual equivalent inflation was minus 3.5 percent in Jul-Aug 2014. In the sixteenth wave, annual equivalent inflation returned at 1.2 percent in Sep 2014. In the seventeenth wave, annual equivalent inflation fell at 7.0 percent in Oct 2014.

Table IV-9, Italy, Industrial Prices, Internal Market

	Month ∆%	12-Month ∆%
Oct 2014	-0.6	-1.6
AE ∆% Oct	-7.0
Sep	0.1	-2.0
AE ∆% Sep	1.2
Aug	-0.1	-2.1
Jul	-0.5	-1.9
AE ∆% Jul-Aug	-3.5
Jun	0.2	-1.8
AE ∆% Jun	2.4
May	-0.1	-1.7
Apr	-0.2	-1.7
Mar	-0.2	-1.9
Feb	-0.1	-1.7
Jan	0.0	-1.5
Dec 2013	-0.1	-2.1
Nov	-0.1	-2.3
Oct	-1.0	-2.5
AE ∆% Oct-May	-2.7
Sep	0.0	-2.2
Aug	0.1	-2.4
Jul	-0.4	-1.5
Jun	0.4	-0.7
AE ∆% Jun-Sep	0.3
May	-0.1	-1.1
Apr	-0.5	-1.1
AE ∆% Apr-May	-3.5
Mar	0.0	0.0
Feb	0.2	0.5
AE ∆% Feb-Mar	1.2
Jan	-0.6	0.7
Dec 2012	-0.3	2.4
Nov	-0.3	2.8
Oct	-0.7	3.5
Sep	-0.3	4.2
AE ∆% Sep-Jan	-5.2
Aug	1.1	4.5
Jul	0.4	3.8
AE ∆% Jul-Aug	9.4
Jun	0.0	4.2
May	-0.1	4.4
AE ∆% May-Jun	-0.6
Apr	0.6	4.6
Mar	0.5	4.8
AE ∆% Mar-Apr	6.8
Feb	0.5	5.2
Jan	0.8	5.2
AE ∆% Jan-Feb	8.1
Dec 2011	0.1	5.5
Nov	0.4	6.0
Oct	0.0	6.1
AE ∆% Oct-Dec	2.0
Sep	0.0	5.3
Aug	0.4	5.4
Jul	0.8	5.2
AE ∆% Jul-Sep	4.9
Jun	0.2	4.6
May	0.1	4.6
AE ∆% May-Jun	1.8
Apr	0.9	5.1
Mar	0.9	5.0
Feb	0.4	4.5
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Year
2013		-1.3
2012		4.2
2011		5.1
2010		3.1
2009		-5.4
2008		5.8
2007		3.3
2006		5.3
2005		4.0
2004		2.8
2003		1.6
2002		0.1
2001		2.0

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/140346

http://www.istat.it/it/archivio/137232

Chart IV-24 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Oct 2012 with increases of 0.7 percent in the month of Jan 2013 and 0.5 percent in Feb 2013 followed by stability in Mar 2013. Inflation turned negative in Apr-May 2013 with marginal increase in Jun 2013 followed by decline in Jul-Dec 2013. Inflation in 12 months fell in Jan-Mar 2014 and at lower rate in Apr-May 2014. Mild inflation returned in Jun 2014 followed by decline in Jul 2014 and stability in Aug-Oct 2014.

Chart IV-24, Italy, Producer Price Index 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

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

Table IV-10 provides monthly and 12-month inflation of producer prices in Italy by segments. Durable goods prices increased 0.3 percent in Oct and increased 1.0 percent in 12 months. Nondurable goods prices decreased 0.2 percent in Oct and decreased 0.2 percent in 12 months. Energy prices decreased 1.6 percent in Oct and declined 4.0 percent in 12 months.

Table IV-10, Italy, Producer Price Index for the Internal Market, ∆%

	Oct 14/Sep 14	Oct 14/Oct 13
Consumer Goods	0.0	0.0
Durable	0.3	1.0
Nondurable	-0.2	-0.2
Capital Goods	0.0	0.8
Intermediate Goods	-0.1	-0.3
Energy	-1.6	-4.9
Total Ex Energy	-0.1	0.1
Total	-0.6	-1.6

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/140346

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-11. Annual equivalent inflation in the first four months of 2011 from Jan to Apr was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 to Aug 2013 was 2.0 percent. In the twelfth wave, annual equivalent inflation was minus 3.2 percent in Sep-Nov 2013 during reallocations of investment portfolios away from commodity futures. In the thirteenth wave, inflation returned in annual equivalent 2.4 percent in Dec 2013-Jan 2014. In the fourteenth wave, annual equivalent inflation fell at 1.2 percent in Feb 2014. In the fifteenth wave, annual equivalent inflation was 1.8 percent in Mar-Apr 2014. In the sixteen wave, annual inflation was minus 1.2 percent in May 2014. In the seventeenth wave, annual equivalent inflation was 1.2 percent in Jun 2014. In the eighteenth wave, annual equivalent inflation was minus 1.2 percent in Jul 2014. In the nineteenth wave, annual equivalent inflation was 2.4 percent in Aug 2014. In the twentieth wave, annual equivalent inflation was minus 4.7 percent in Sep 2014. In the twenty-first wave, annual equivalent inflation returned at 1.2 percent in Oct 2014. In the twenty-second wave, annual equivalent inflation fell at 2.4 percent in Nov 2014. There are worldwide shocks to economies by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html).

Table IV-11, Italy, Consumer Price Index

	Month	12 Months
Nov 2014	-0.2	0.2
AE ∆% Nov	-2.4
Oct	0.1	0.1
AE ∆% Oct	1.2
Sep	-0.4	-0.2
AE ∆% Sep	-4.7
Aug	0.2	-0.1
AE ∆% Aug	2.4
Jul	-0.1	0.1
AE ∆% Jul	-1.2
Jun	0.1	0.3
AE ∆% Jun	1.2
May	-0.1	0.5
AE ∆% May	-1.2
Apr	0.2	0.6
Mar	0.1	0.4
AE ∆% Mar-Apr	1.8
Feb	-0.1	0.5
AE ∆% Feb	-1.2
Jan	0.2	0.7
Dec 2013	0.2	0.7
AE ∆% Dec 2013-Jan 2014	2.4
Nov	-0.3	0.7
Oct	-0.2	0.8
Sep	-0.3	0.9
AE ∆% Sep-Nov	-3.2
Aug	0.4	1.2
Jul	0.1	1.2
Jun	0.3	1.2
May	0.0	1.1
Apr	0.0	1.1
Mar	0.2	1.6
Feb	0.1	1.9
Jan	0.2	2.2
Dec 2012	0.2	2.3
AE ∆% Dec 2012-Aug 2013	2.0
Nov	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2013		1.2
2012		3.0
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/140327

Chart IV-25 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012, 2.3 percent in Dec 2012, 2.2 percent in Jan 2013, 1.9 percent in Feb 2013 and 1.6 percent in Mar 2013. Consumer prices increased 1.1 percent in the 12 months ending in Apr-May 2013 and 1.2 percent in Jun-Jul 2013. In Aug 2013, consumer prices increased 1.2 percent in 12 months. Consumer prices increased 0.9 percent in the 12 months ending in Sep 2013 and 0.8 percent in the 12 months ending in Oct 2013. Consumer price inflation increased 0.7 percent in the 12 months ending in Nov 2013 and 0.7 percent in the 12 months ending in Dec 2013. Consumer prices increased 0.7 percent in the 12 months ending in Jan 2014 and 0.5 percent in the 12 months ending in Feb 2014. Consumer prices increased 0.4 percent in the 12 months ending in Mar 2014 and 0.6 percent in the 12 months ending in Apr 2014. Consumer prices increased 0.5 percent in the 12 months ending in May 2014 and 0.3 percent in the 12 months ending in Jun 2014. Consumer prices increased 0.1 percent in the 12 months ending in Jul 2014 and fell 0.1 percent in the 12 months ending in Aug 2014. Consumer prices fell 0.2 percent in the 12 months ending in Sep 2014 and increased 0.1 percent in the 12 months ending in Oct 2014. Consumer prices increased 0.2 percent in the 12 months ending in Nov 2014.

Chart IV-25, Italy, Consumer Price Index 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

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

Consumer price inflation in Italy by segments in the estimate by ISTAT for Oct 2014 is provided in Table IV-12. Total consumer price inflation in Nov 2014 was -0.2 percent and 0.2 percent in 12 months. Inflation of goods was minus percent in Nov 2014 and minus 0.4 percent in 12 months. Prices of durable goods decreased 0.1 percent in Nov and decreased 0.5 percent in 12 months, as typical in most countries. Prices of energy decreased 1.3 percent in Nov and decreased 2.9 percent in 12 months. Food prices increased 0.6 percent in Nov and increased 0.5 percent in 12 months. Prices of services decreased 0.5 percent in No and rose 0.9 percent in 12 months. Transport prices, also influenced by commodity prices, decreased 1.2 percent in Nov and increased 0.2 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion and portfolio reallocations (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html).

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

Nov 2014	Weights	Month ∆%	12-Month ∆%
General Index All Items	1,000,000	-0.2	0.2
I Goods	546,724	-0.1	-0.4
Food	173,611	0.6	0.5
Energy	85,796	-1.3	-2.9
Durable	80,901	-0.1	-0.5
Nondurable	74,391	0.0	0.5
II Services	453,276	-0.5	0.9
Housing	77,009	0.1	1.5
Communications	18,206	1.5	0.3
Transport	81,924	-1.2	0.2

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/140327

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/ns/cs.aspx?id=28) to show GDP in dollars in 2012 and the growth rate of real GDP of the world and selected regional countries from 2013 to 2016. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has changed its forecast of the world economy to 3.3 percent in 2013 but accelerating to 3.3 percent in 2014, 3.8 percent in 2015 and 4.0 percent in 2016. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $34,523 billion of world output of $72,688 billion, or 47.5 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2013 to 2016 in contrast with 3.6 percent for the world as a whole. While the world would grow 15.2 percent in the four years from 2013 to 2016, the G7 as a whole would grow 8.5 percent. The difference in dollars of 2012 is rather high: growing by 15.2 percent would add around $11.0 trillion of output to the world economy, or roughly, two times the output of the economy of Japan of $5,938 billion but growing by 8.0 percent would add $5.8 trillion of output to the world, or about the output of Japan in 2012. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2012 of $27,512 billion, or 37.8 percent of world output. The EMDEs would grow cumulatively 20.7 percent or at the average yearly rate of 4.8 percent, contributing $5.7 trillion from 2013 to 2016 or the equivalent of somewhat less than the GDP of $8,387 billion of China in 2012. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2012 adds to $14,511 billion, or 19.9 percent of world output, which is equivalent to 42.0 percent of the combined output of the major advanced economies of the G7.

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

	GDP USD 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015	Real GDP ∆% 2016
World	72,688	3.3	3.3	3.8	4.0
G7	34,523	1.5	1.7	2.3	2.3
Canada	1,709	2.0	2.3	2.4	2.4
France	2,688	0.3	0.4	1.0	1.6
DE	3,428	0.5	1.4	1.5	1.8
Italy	2,014	-1.9	-0.2	0.9	1.3
Japan	5,938	1.5	0.9	0.8	0.8
UK	2,471	1.7	3.2	2.7	2.4
US	16,163	2.2	2.2	3.1	3.0
Euro Area	12,220	-0.4	0.8	1.3	1.7
DE	3,428	0.5	1.4	1.5	1.8
France	2,688	0.3	0.4	1.0	1.6
Italy	2,014	-1.9	-0.2	0.9	1.3
POT	212	-1.4	1.0	1.5	1.7
Ireland	211	-0.3	1.7	2.5	2.5
Greece	249	-3.9	0.6	2.9	3.7
Spain	1,323	-1.2	1.3	1.7	1.8
EMDE	27,512	4.7	4.4	5.0	5.2
Brazil	2,248	2.5	0.3	1.4	2.2
Russia	2,017	1.3	0.2	0.5	1.5
India	1,859	5.0	5.6	6.4	6.5
China	8,387	7.7	7.4	7.1	6.8

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/ns/cs.aspx?id=28

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/ns/cs.aspx?id=28). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2012 to 2016 for major countries and regions. In fact, unemployment rates for 2013 in Table I-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high in 2013 for the countries with sovereign debt difficulties in Europe: 16.2 percent for Portugal (POT), 13.0 percent for Ireland, 27.3 percent for Greece, 26.1 percent for Spain and 12.2 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.1 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

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

	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015	% Labor Force 2016
World	NA	NA	NA	NA	NA
G7	7.4	7.1	6.5	6.3	6.1
Canada	7.3	7.1	7.0	6.9	6.8
France	9.8	10.3	10.0	10.0	9.9
DE	5.5	5.3	5.3	5.3	5.3
Italy	10.7	12.2	12.6	12.0	11.3
Japan	4.3	4.0	3.7	3.8	3.8
UK	8.0	7.6	6.3	5.8	5.5
US	8.1	7.4	6.3	5.9	5.8
Euro Area	11.3	11.9	11.6	11.2	10.7
DE	5.5	5.3	5.3	5.3	5.3
France	9.8	10.3	10.0	10.0	9.9
Italy	10.7	12.2	12.6	12.0	11.3
POT	15.5	16.2	14.2	13.5	13.0
Ireland	14.7	13.0	11.2	10.5	10.1
Greece	24.2	27.3	25.8	23.8	20.9
Spain	24.8	26.1	24.6	23.5	22.4
EMDE	NA	NA	NA	NA	NA
Brazil	5.5	5.4	5.5	6.1	5.9
Russia	5.5	5.5	5.6	6.5	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.1	4.1	4.1	4.1

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/ns/cs.aspx?id=28

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog from IQ2012 to IIIQ2014 available now for all countries. There are preliminary estimates for all countries for IIIQ2014. Growth is weak throughout most of the world.

• Japan. The GDP of Japan increased 1.1 percent in IQ2012, 4.5 percent at SAAR (seasonally adjusted annual rate) and 3.3 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP fell 0.6 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 2.4 percent, which is much lower than 4.5 percent in IQ2012. Growth of 3.2 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.6 percent in IIIQ2012 at the SAAR of minus 2.2 percent and decreased 0.2 percent relative to a year earlier. Japan’s GDP decreased 0.1 percent in IVQ2012 at the SAAR of minus 0.5 percent and decreased 0.3 percent relative to a year earlier. Japan grew 1.4 percent in IQ2013 at the SAAR of 5.6 percent and increased 0.1 percent relative to a year earlier. Japan’s GDP increased 0.8 percent in IIQ2013 at the SAAR of 3.2 percent and increased 1.2 percent relative to a year earlier. Japan’s GDP grew 0.6 percent in IIIQ2013 at the SAAR of 2.4 percent and increased 2.3 percent relative to a year earlier. In IVQ2013, Japan’s GDP decreased 0.4 percent at the SAAR of minus 1.6 percent, increasing 2.5 percent relative to a year earlier. Japan’s GDP increased 1.6 percent in IQ2014 at the SAAR of 6.7 percent and increased 2.9 percent relative to a year earlier. In IIQ2014, Japan’s GDP fell 1.9 percent at the SAAR of minus 7.3 percent and fell 0.2 percent relative to a year earlier. Japan’s GDP contracted 0.4 percent in IIIQ2014 at the SAAR of 1.6 percent and fell 1.2 percent relative to a year earlier.
• China. China’s GDP grew 1.4 percent in IQ2012, annualizing to 5.7 percent, and 8.1 percent relative to a year earlier. The GDP of China grew at 2.1 percent in IIQ2012, which annualizes to 8.7 percent and 7.6 percent relative to a year earlier. China grew at 2.0 percent in IIIQ2012, which annualizes at 8.2 percent and 7.4 percent relative to a year earlier. In IVQ2012, China grew at 1.9 percent, which annualizes at 7.8 percent, and 7.9 percent in IVQ2012 relative to IVQ2011. In IQ2013, China grew at 1.6 percent, which annualizes at 6.6 percent and 7.7 percent relative to a year earlier. In IIQ2013, China grew at 1.8 percent, which annualizes at 7.4 percent and 7.5 percent relative to a year earlier. China grew at 2.3 percent in IIIQ2013, which annualizes at 9.5 percent and 7.8 percent relative to a year earlier. China grew at 1.7 percent in IVQ2013, which annualized to 7.0 percent and 7.7 percent relative to a year earlier. China’s GDP grew 1.5 percent in IQ2014, which annualizes to 6.1 percent, and 7.4 percent relative to a year earlier. China’s GDP grew 2.0 percent in IIQ2014, which annualizes at 8.2 percent, and 7.5 percent relative to a year earlier. China’s GDP grew 1.9 percent in IIIQ2014, which is equivalent to 7.8 percent in a year, and 7.3 percent relative to a year earlier. There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2014.
• Euro Area. GDP fell 0.1 percent in the euro area in IQ2012 and decreased 0.2 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.3 percent IIQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.2 percent and declined 0.7 percent relative to a year earlier. In IVQ2012, euro area GDP fell 0.5 percent relative to the prior quarter and fell 1.0 percent relative to a year earlier. In IQ2013, the GDP of the euro area fell 0.2 percent and decreased 1.1 percent relative to a year earlier. The GDP of the euro area increased 0.3 percent in IIQ2013 and fell 0.6 percent relative to a year earlier. In IIIQ2013, euro area GDP increased 0.1 percent and fell 0.3 percent relative to a year earlier. The GDP of the euro area increased 0.3 percent in IVQ2013 and increased 0.4 percent relative to a year earlier. In IQ2014, the GDP of the euro area increased 0.3 percent and 1.0 percent relative to a year earlier. The GDP of the euro area increased 0.1 percent in IIQ2014 and increased 0.8 percent relative to a year earlier. The euro area’s GDP increased 0.2 percent in IIIQ2014 and increased 0.8 percent relative to a year earlier.
• Germany. The GDP of Germany increased 0.3 percent in IQ2012 and 1.5 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.1 percent and increased 0.3 percent relative to a year earlier but 0.8 percent relative to a year earlier when adjusted for calendar (CA) effects. In IIIQ2012, Germany’s GDP increased 0.1 percent and 0.1 percent relative to a year earlier. Germany’s GDP contracted 0.4 percent in IVQ2012 and decreased 0.3 percent relative to a year earlier. In IQ2013, Germany’s GDP decreased 0.4 percent and fell 1.8 percent relative to a year earlier. In IIQ2013, Germany’s GDP increased 0.8 percent and 0.5 percent relative to a year earlier. The GDP of Germany increased 0.3 percent in IIIQ2013 and 0.8 percent relative to a year earlier. In IVQ2013, Germany’s GDP increased 0.4 percent and 1.0 percent relative to a year earlier. The GDP of Germany increased 0.8 percent in IQ2014 and 2.6 percent relative to a year earlier. In IIQ2014, Germany’s GDP contracted 0.1 percent and increased 1.0 percent relative to a year earlier. The GDP of Germany increased 0.1 percent in IIIQ2014 and increased 1.2 percent relative to a year earlier.
• United States. Growth of US GDP in IQ2012 was 0.6 percent, at SAAR of 2.3 percent and higher by 2.6 percent relative to IQ2011. US GDP increased 0.4 percent in IIQ2012, 1.6 percent at SAAR and 2.3 percent relative to a year earlier. In IIIQ2012, US GDP grew 0.6 percent, 2.5 percent at SAAR and 2.7 percent relative to IIIQ2011. In IVQ2012, US GDP grew 0.0 percent, 0.1 percent at SAAR and 1.6 percent relative to IVQ2011. In IQ2013, US GDP grew at 2.7 percent SAAR, 0.7 percent relative to the prior quarter and 1.7 percent relative to the same quarter in 2013. In IIQ2013, US GDP grew at 1.8 percent in SAAR, 0.4 percent relative to the prior quarter and 1.8 percent relative to IIQ2012. US GDP grew at 4.5 percent in SAAR in IIIQ2013, 1.1 percent relative to the prior quarter and 2.3 percent relative to the same quarter a year earlier (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2014/11/fluctuating-financial-variables.html). In IVQ2013, US GDP grew 0.9 percent at 3.5 percent SAAR and 3.1 percent relative to a year earlier. In IQ2014, US GDP decreased 0.5 percent, increased 1.9 percent relative to a year earlier and fell 2.1 percent at SAAR. In IIQ2014, US GDP increased 1.1 percent at 4.6 percent SAAR and increased 2.6 percent relative to a year earlier. US GDP increased 1.0 percent in IIIQ2014 at 3.9 percent SAAR and increased 2.4 percent relative to a year earlier.
• United Kingdom. In IQ2012, UK GDP increased 0.1 percent, increasing 1.0 percent relative to a year earlier. UK GDP fell 0.2 percent in IIQ2012 and increased 0.6 percent relative to a year earlier. UK GDP increased 0.8 percent in IIIQ2012 and increased 0.7 percent relative to a year earlier. UK GDP fell 0.3 percent in IVQ2012 relative to IIIQ2012 and increased 0.4 percent relative to a year earlier. UK GDP increased 0.5 percent in IQ2013 and 0.8 percent relative to a year earlier. UK GDP increased 0.7 percent in IIQ2013 and 1.7 percent relative to a year earlier. In IIIQ2013, UK GDP increased 0.9 percent and 1.7 percent relative to a year earlier. UK GDP increased 0.6 percent in IVQ2013 and 2.7 percent relative to a year earlier. In IQ2014, UK GDP increased 0.7 percent and 2.9 percent relative to a year earlier. UK GDP increased 0.9 percent in IIQ2014 and 3.2 percent relative to a year earlier. In IIIQ2014, UK GDP increased 0.7 percent and increased 3.0 percent relative to a year earlier.
• Italy. Italy has experienced decline of GDP in nine consecutive quarters from IIIQ2011 to IIIQ2013 and in IIQ2014 and IIIQ2014. Italy’s GDP fell 0.9 percent in IQ2012 and declined 1.9 percent relative to IQ2011. Italy’s GDP fell 0.4 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.4 percent and declined 2.5 percent relative to a year earlier. The GDP of Italy contracted 0.8 percent in IVQ2012 and fell 2.5 percent relative to a year earlier. In IQ2013, Italy’s GDP contracted 0.9 percent and fell 2.4 percent relative to a year earlier. Italy’s GDP fell 0.2 percent in IIQ2013 and 2.2 percent relative to a year earlier. The GDP of Italy changed 0.0 percent in IIIQ2013 and declined 1.8 percent relative to a year earlier. Italy’s GDP decreased 0.1 percent in IVQ2013 and decreased 1.2 percent relative to a year earlier. In IQ2014, Italy’s GDP changed 0.0 percent and fell 0.3 percent relative to a year earlier. The GDP of Italy fell 0.2 percent in IIQ2014 and declined 0.3 percent relative to a year earlier. In IIIQ2014, Italy’s GDP contracted 0.1 percent and fell 0.4 percent relative to a year earlier.
• France. France’s GDP increased 0.2 percent in IQ2012 and increased 0.6 percent relative to a year earlier. France’s GDP decreased 0.2 percent in IIQ2012 and increased 0.4 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.2 percent and increased 0.4 percent relative to a year earlier. France’s GDP fell 0.3 percent in IVQ2012 and changed 0.0 percent relative to a year earlier. In IQ2013, France GDP changed 0.0 percent and declined 0.2 percent relative to a year earlier. The GDP of France increased 0.7 percent in IIQ2013 and 0.7 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIIQ2013 and increased 0.3 percent relative to a year earlier. The GDP of France increased 0.2 percent in IVQ2013 and 0.8 percent relative to a year earlier. In IQ2014, France’s GDP changed 0.0 percent and increased 0.8 percent relative to a year earlier. In IIQ2014, France’s GDP contracted 0.1 percent and changed 0.0 percent relative to a year earlier. France’s GDP increased 0.3 percent in IIIQ2014 and increased 0.4 percent relative to a year earlier.

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

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	QOQ: 0.6        SAAR: 2.3	2.6
Japan	QOQ: 1.1 SAAR: 4.5	3.3
China	1.4	8.1
Euro Area	-0.1	-0.2
Germany	0.3	1.5
France	0.2	0.6
Italy	-0.9	-1.9
United Kingdom	0.1	1.0
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.4         SAAR: 1.6	2.3
Japan	QOQ: -0.6 SAAR: -2.4	3.2
China	2.1	7.6
Euro Area	-0.3	-0.5
Germany	0.1	0.3 0.8 CA
France	-0.2	0.4
Italy	-0.4	-2.4
United Kingdom	-0.2	0.6
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.6  SAAR: 2.5	2.7
Japan	QOQ: –0.6 SAAR: –2.2	-0.2
China	2.0	7.4
Euro Area	-0.2	-0.7
Germany	0.1	0.1
France	0.2	0.4
Italy	-0.4	-2.5
United Kingdom	0.8	0.7
	IVQ2012/IIIQ2012	IVQ2012/IVQ2011
United States	QOQ: 0.0 SAAR: 0.1	1.6
Japan	QOQ: -0.1 SAAR: -0.5	-0.3
China	1.9	7.9
Euro Area	-0.5	-1.0
Germany	-0.4	-0.3
France	-0.3	0.0
Italy	-0.8	-2.5
United Kingdom	-0.3	0.4
	IQ2013/IVQ2012	IQ2013/IQ2012
United States	QOQ: 0.7 SAAR: 2.7	1.7
Japan	QOQ: 1.4 SAAR: 5.6	0.1
China	1.6	7.7
Euro Area	-0.2	-1.1
Germany	-0.4	-1.8
France	0.0	-0.2
Italy	-0.9	-2.4
UK	0.5	0.8
	IIQ2013/IQ2013	IIQ2013/IIQ2012
United States	QOQ: 0.4 SAAR: 1.8	1.8
Japan	QOQ: 0.8 SAAR: 3.2	1.2
China	1.8	7.5
Euro Area	0.3	-0.6
Germany	0.8	0.5
France	0.7	0.7
Italy	-0.2	-2.2
UK	0.7	1.7
	IIIQ2013/IIQ2013	III/Q2013/  IIIQ2012
USA	QOQ: 1.1 SAAR: 4.5	2.3
Japan	QOQ: 0.6 SAAR: 2.4	2.3
China	2.3	7.8
Euro Area	0.1	-0.3
Germany	0.3	0.8
France	-0.1	0.3
Italy	0.0	-1.8
UK	0.9	1.7
	IVQ2013/IIIQ2013	IVQ2013/IVQ2012
USA	QOQ: 0.9 SAAR: 3.5	3.1
Japan	QOQ: -0.4 SAAR: -1.6	2.5
China	1.7	7.7
Euro Area	0.3	0.4
Germany	0.4	1.0
France	0.2	0.8
Italy	-0.1	-1.2
UK	0.6	2.7
	IQ2014/IVQ2013	IQ2014/IQ2013
USA	QOQ -0.5 SAAR -2.1	1.9
Japan	QOQ: 1.6 SAAR: 6.7	2.9
China	1.5	7.4
Euro Area	0.3	1.0
Germany	0.8	2.6
France	0.0	0.8
Italy	0.0	-0.3
UK	0.7	2.9
	IIQ2014/IQ2014	IIQ2014/IIQ2013
USA	QOQ 1.1 SAAR 4.6	2.6
Japan	QOQ: -1.9 SAAR: -7.3	-0.2
China	2.0	7.5
Euro Area	0.1	0.8
Germany	-0.1	1.0
France	-0.1	0.0
Italy	-0.2	-0.3
UK	0.9	3.2
	IIIQ2014/IIQ2014	IIIQ2014/IIIQ2013
USA	QOQ: 1.0 SAAR: 3.9	2.4
Japan	QOQ: -0.4 SAAR: -1.6	-1.2
China	1.9	7.3
Euro Area	0.2	0.8
Germany	0.1	1.2
France	0.3	0.4
Italy	-0.1	-0.4
UK	0.7	3.0

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

Source: Country Statistical Agencies http://www.census.gov/aboutus/stat_int.html

Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP.

• Japan. Japan provides the most worrisome data (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/08/monetary-policy-world-inflation-waves.html and earlier http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/06/valuation-risks-world-inflation-waves.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/11/risks-of-zero-interest-rates-world.html http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations_8763.html http://cmpass ocregulationblog.blogspot.com/2013/08/interest-rate-risks-duration-dumping.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and_4699.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/08/duration-dumping-and-peaking-valuations.html and earlier http://cmpassocreulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). In Oct 2014, Japan’s exports increased 9.6 percent in 12 months while imports increased 2.7 percent. The second part of Table V-4 shows that net trade deducted 1.5 percentage points from Japan’s growth of GDP in IIQ2012, deducted 1.9 percentage points from GDP growth in IIIQ2012 and deducted 0.5 percentage points from GDP growth in IVQ2012. Net trade added 0.4 percentage points to GDP growth in IQ2012, 1.7 percentage points in IQ2013 and 0.2 percentage points in IIQ2013. In IIIQ2013, net trade deducted 1.6 percentage points from GDP growth in Japan. Net trade ducted 2.4 percentage points from GDP growth in Japan in IVQ2013. Net trade deducted 0.8 percentage point from GDP growth of Japan in IQ2014. Net trade added 4.2 percentage points to GDP growth in IIQ2014. Net trade added 0.3 percentage points to GDP growth in IIIQ2014.

• China. In Sep 2014, China exports increased 15.3 percent relative to a year earlier and imports increased 7.0 percent.
• Germany. Germany’s exports decreased 5.8 percent in the month of Aug 2014 and decreased 1.0 percent in the 12 months ending in Aug 2014. Germany’s imports decreased 1.3 percent in the month of Aug and decreased 2.4 percent in the 12 months ending in Aug. Net trade contributed 0.8 percentage points to growth of GDP in IQ2012, contributed 0.4 percentage points in IIQ2012, contributed 0.3 percentage points in IIIQ2012, deducted 0.5 percentage points in IVQ2012, deducted 0.3 percentage points in IQ2013 and added 0.1 percentage points in IIQ2013. Net traded deducted 0.5 percentage points from Germany’s GDP growth in IIIQ2013 and added 0.5 percentage points to GDP growth in IVQ2013. Net trade deducted 0.1 percentage points from GDP growth in IQ2014. Net trade added 0.1 percentage points to GDP growth in IIQ2014 and added 0.2 percentage points in IIIQ2014.
• United Kingdom. Net trade contributed 0.7 percentage points in IIQ2013. In IIIQ2013, net trade deducted 2.0 percentage points from UK growth. Net trade contributed 0.5 percentage points to UK value added in IVQ2013. Net trade contributed 0.6 percentage points to UK value added in IQ2014 and 0.0 percentage points in IIQ2014. Net trade deducted 0.5 percentage points to GDP growth in IIIQ2014.
• France. France’s exports decreased 1.3 percent in Aug 2014 while imports decreased 0.6 percent. France’s imports decreased 1.2 percent in the 12 months ending in Aug 2014 and imports increased 0.1 percent relative to a year earlier. Net traded added 0.1 percentage points to France’s GDP in IIIQ2012 and 0.1 percentage points in IVQ2012. Net trade deducted 0.1 percentage points from France’s GDP growth in IQ2013 and added 0.3 percentage points in IIQ2013, deducting 0.4 percentage points in IIIQ2013. Net trade added 0.3 percentage points to France’s GDP in IVQ2013 and deducted 0.0 percentage points in IQ2014. Net trade deducted 0.1 percentage points from France’s GDP growth in IIQ2014.
• United States. US exports decreased 1.5 percent in Sep 2014 and goods exports increased 3.4 percent in Jan-Sep 2014 relative to a year earlier. Imports changed 0.0 percent in Sep 2014 and goods imports increased 3.4 percent in Jan-Sep 2014 relative to a year earlier. Net trade deducted 0.04 percentage points from GDP growth in IIQ2012 and added 0.39 percentage points in IIIQ2012 and 0.79 percentage points in IVQ2012. Net trade deducted 0.08 percentage points from US GDP growth in IQ2013 and deducted 0.54 percentage points in IIQ2013. Net traded added 0.59 percentage points to US GDP growth in IIIQ2013. Net trade added 1.08 percentage points to US GDP growth in IVQ2013. Net trade deducted 1.66 percentage points from US GDP growth in IQ2014 and deducted 0.34 percentage points in IIQ2014. Net trade added 0.78 percentage points to IIIQ2014. The Federal Reserve completed its annual revision of industrial production and capacity utilization on Mar 28, 2014 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm). The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):

“Industrial production edged down 0.1 percent in October after having advanced 0.8 percent in September. In October, manufacturing output increased 0.2 percent for the second consecutive month. The index for mining declined 0.9 percent and the output of utilities moved down 0.7 percent. At 104.9 percent of its 2007 average, total industrial production in October was 4.0 percent above its level of a year earlier. Capacity utilization for the industrial sector decreased 0.3 percentage point in October to 78.9 percent, a rate that is 1.2 percentage points below its long-run (1972–2013) average.”

In the six months ending in Oct 2014, United States national industrial production accumulated increase of 1.6 percent at the annual equivalent rate of 3.2 percent, which is lower than growth of 4.0 percent in the 12 months ending in Oct 2014. Excluding growth of 0.8 percent in Sep 2014, growth in the remaining five months from May to Oct 2014 accumulated to 0.8 percent or 1.9 percent annual equivalent. Industrial production declined in two of the past six months. Industrial production expanded at annual equivalent 2.0 percent in the most recent quarter from Aug to Oct 2014 and at 4.5 percent in the prior quarter May-Jul 2014. Business equipment accumulated growth of 1.6 percent in the six months from May to Oct 2014 at the annual equivalent rate of 3.2 percent, which is lower than growth of 4.6 percent in the 12 months ending in Oct 2014. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for the industrial sector decreased 0.3 percentage point in October to 78.9 percent, a rate that is 1.2 percentage points below its long-run (1972–2013) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and weaker growth in past months.

Manufacturing decreased by 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 19.9 percent from the trough in Apr 2009 to Dec 2013. Manufacturing grew 26.2 percent from the trough in Apr 2009 to Oct 2014. Manufacturing output in Oct 2014 is 1.4 percent below the peak in Jun 2007. Growth at trend in the entire cycle from IVQ2007 to IIIQ2014 would have accumulated to 23.0 percent. GDP in IIIQ2014 would be $18,438.0 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,287.4 billion than actual $16,150.6 billion. There are about two trillion dollars of GDP less than at trend, explaining the 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.1 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/11/rules-discretionary-authorities-and.html

and earlier (http://cmpassocregulationblog.blogspot.com/2014/10/world-financial-turbulence-twenty-seven.html). US GDP in IIIQ2014 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,150.6 billion in IIIQ2014 or 7.7 percent at the average annual equivalent rate of 1.1 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth 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. There is similar behavior in manufacturing. The long-term trend is growth at average 3.3 percent per year from Jan 1919 to Oct 2014. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 123.8884 in Oct 2014. The actual index NSA in Oct 2014 is 101.5613, which is 18.0 percent below trend. Manufacturing output grew at average 2.3 percent between Dec 1986 and Dec 2013, raising the index at trend to 115.9214 in Oct 2014. The output of manufacturing at 101.5613 in Oct 2014 is 12.4 percent below trend under this alternative calculation.

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

	Exports M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	-1.5 Sep	3.4 Jan-Sep	0.0 Sep	3.4 Jan-Sep
Japan		Oct 9.6 Sep 6.9 Aug -1.3 Jul 3.9 Jun -2.0 May 2014 -2.7 Apr 2014 5.1 Mar 2014 1.8 Feb 2014 9.5 Jan 2014 9.5 Dec 2013 15.3 Nov 2013 18.4 Oct 2013 18.6 Sep 2013 11.5 Aug 2013 14.7 Jul 2013 12.2 Jun 2013 7.4 May 2013 10.1 Apr 2013 3.8 Mar 2013 1.1 Feb 2013 -2.9 Jan 2013 6.4 Dec -5.8 Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1		Oct 2.7 Sep 6.2 Aug -1.5 Jul 2.3 Jun 8.4 May 2014 -3.6 Apr 2013 3.4 Mar 2014 18.1 Feb 2014 9.0 Jan 2014 25.0 Dec 2013 24.7 Nov 2013 21.1 Oct 2013 26.1 Sep 2013 16.5 Aug 2013 16.0 Jul 2013 19.6 Jun 2013 11.8 May 2013 10.0 Apr 2013 9.4 Mar 2013 5.5 Feb 2013 7.3 Jan 2013 7.3 Dec 1.9 Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1
China		2014 15.3 Sep 9.4 Aug 14.5 Jul 7.2 Jun 7.0 May 0.9 Apr -6.6 Mar -18.1 Feb 10.6 Jan 2013 4.3 Dec 12.7 Nov 5.6 Oct -0.3 Sep 7.2 Aug 5.1 Jul -3.1 Jun 1.0 May 14.7 Apr 10.0 Mar 21.8 Feb 25.0 Jan		2014 7.0 Aug -2.4 Aug -1.6 Jul 5.5 Jun -1.6 May -0.8 Apr -11.3 Mar 10.1 Feb 10.0 Jan 2013 8.3 Dec 5.3 Nov 7.6 Oct 7.4 Sep 7.0 Aug 10.9 Jul -0.7 Jun -0.3 May 16.8 Apr 14.1 Mar -15.2 Feb 28.8 Jan
Euro Area	-2.8 12-M Aug	0.8 Jan-Aug	-4.4 12-M Aug	-0.2 Jan-Aug
Germany	-5.8 Aug CSA	-1.0 Aug	-1.3 Aug CSA	-2.4 Aug
France Aug	-1.3	-1.2	-0.6	0.1
Italy Aug	1.1	-2.7	-0.4	-7.0
UK	-1.7 Aug	-7.4 Jun-Aug 14 /Jun-Aug 13	-4.2 Aug	-6.9 Jun-Aug 14 /Jun-Aug 13
Net Trade % Points GDP Growth	% Points
USA	IIIQ2014 0.78 IIQ2014 -0.34 IQ2014 -1.66 IVQ2013 1.08 IIIQ2013 0.59 IIQ2013 -0.54 IQ2013 -0.08 IVQ2012 +0.79 IIIQ2012 0.39 IIQ2012 -0.04 IQ2012 -0.11
Japan	0.4 IQ2012 -1.5 IIQ2012 -1.9 IIIQ2012 -0.5 IVQ2012 1.7 IQ2013 0.2 IIQ2013 -1.6 IIIQ2013 -2.4 IVQ2013 -0.8 IQ2014 4.2 IIQ2014 0.3 IIIQ2014
Germany	IQ2012 0.8 IIQ2012 0.4 IIIQ2012 0.3 IVQ2012 -0.5 IQ2013 -0.3 IIQ2013 0.1 IIIQ2013 -0.5 IVQ2013 0.5 IQ2014 -0.1 IIQ2014 0.1 IIIQ2014 0.2
France	0.1 IIIQ2012 0.1 IVQ2012 -0.1 IQ2013 0.3 IIQ2013 -0.4 IIIQ2013 0.3 IVQ2013 0.0 IQ2014 -0.1 IIQ2014
UK	0.7 IIQ2013 -2.0 IIIQ2013 0.5 IVQ2013 0.6 IQ2014 0.0 IIQ2014 -0.5 IIIQ2014

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

The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table VB-7 for Oct 2014. The share of Asia in Japan’s trade is close to one-half for 53.8 percent of exports and 46.8 percent of imports. Within Asia, exports to China are 18.4 percent of total exports and imports from China 24.6 percent of total imports. While exports to China increased 7.2 percent in the 12 months ending in Oct 2014, imports from China increased 9.6 percent. The second largest export market for Japan in Oct 2014 is the US with share of 19.0 percent of total exports, which is close to that of China, and share of imports from the US of 8.8 percent in total imports. Japan’s exports to the US increased 8.9 percent in the 12 months ending in Oct 2014 and imports from the US increased 11.0 percent. Western Europe has share of 10.4 percent in Japan’s exports and of 10.4 percent in imports. Rates of growth of exports of Japan in Oct 2014 are 8.9 percent for exports to the US, minus 13.3 percent for exports to Brazil and 7.7 percent for exports to Germany. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity. Growth rates of imports in the 12 months ending in Oct 2014 are mixed. Imports from Asia increased 4.2 percent in the 12 months ending in Oct 2014 while imports from China increased 9.6 percent. Data are in millions of yen, which may have effects of recent depreciation of the yen relative to the United States dollar (USD).

Table V-4, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yen

Oct 2014	Exports Millions Yen	12 months ∆%	Imports Millions Yen	12 months ∆%
Total	6,688,484	9.6	7,398,479	2.7
Asia	3,600,282 % Total 53.8	10.5	3,461,895 % Total 46.8	4.2
China	1,229,609 % Total 18.4	7.2	1,816,360 % Total 24.6	9.6
USA	1,268,270 % Total 19.0	8.9	653,784 % Total 8.8	11.0
Canada	77,993	1.9	113,549	5.8
Brazil	40,866	-13.3	94,573	-4.0
Mexico	112,108	28.2	34,682	-1.9
Western Europe	693,867 % Total 10.4	6.0	766,070 % Total 10.4	5.7
Germany	179,360	7.7	229,959	6.2
France	57,975	-1.5	103,055	13.3
UK	107,378	16.2	57,263	7.0
Middle East	278,805	29.5	1,297,145	-1.9
Australia	120,260	-14.5	407,604	-0.6

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

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