CMP Associates Regulation Blog: Dollar Devaluation and Rising Valuations of Risk Financial Assets, Recovery without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle Age Unemployment, United States International Trade, United States Producer Prices, World Cyclical Slow Growth and Global Recession Risk: Part II

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Dollar Devaluation and Rising Valuations of Risk Financial Assets, Recovery without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle Age Unemployment, United States International Trade, United States Producer Prices, World Cyclical Slow Growth and Global Recession Risk

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

IA4 Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and Middle-Age Unemployment

IIB United States International Trade

IIC United States Producer Price Index

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

IIA United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (https://www.census.gov/foreign-trade/index.html). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html). The Census Bureau revised data for 2017, 2016, 2015, 2014 and 2013. Exports increased 2.3 percent in Nov 2017 while imports increased 2.5 percent. The trade deficit increased from $48,914 million in Oct 2017 to $50,497 million in Nov 2017. The trade deficit deteriorated to $45,290 million in Feb 2016, improving to $37,380 million in Mar 2016. The trade deficit deteriorated to $38,422 million in Apr 2016, deteriorating to $41,520 million in May 2016 and $43,385 million in Jun 2016. The trade deficit improved to $41,294 million in Jul 2016, moving to $41,130 million in Aug 2016. The trade deficit improved to $38,466 million in Sep 2016, deteriorating to $43,069 million in Oct 2016. The trade deficit deteriorated to $46,373 million in Nov 2016, improving to $44,607 million in Dec 2016. The trade deficit deteriorated to $48,775 million in Jan 2017, improving to $44,507 million in Feb 2017. The trade deficit deteriorated to $44,812 million in Mar 2017 and $48,147 million in Apr 2017, improving to $47,883 million in May 2017. The trade deficit improved to $45,686 million in Jun 2017 and to $45,162 million in Jul 2017. The trade deficit improved to $44.306 million in Aug 2017, deteriorating to $44,890 million in Sep 2017. The trade deficit deteriorated to $48,914 million in Oct 2017, deteriorating to $50,497 million in Nov 2017.

Table IIA-1, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%

	Trade Balance	Exports	Month ∆%	Imports	Month ∆%
Nov 2017	-50,497	200,222	2.3	250,719	2.5
Oct	-48,914	195,782	-0.1	244,696	1.6
Sep	-44,890	195,928	1.1	240,817	1.2
Aug	-44,306	193,749	0.2	238,054	-0.2
Jul	-45,162	193,416	-0.1	238,578	-0.3
Jun	-45,686	193,565	1.2	239,251	0.0
May	-47,883	191,357	0.2	239,239	0.0
Apr	-48,147	191,050	-0.6	239,197	0.9
Mar	-44,812	192,218	0.0	237,029	0.1
Feb	-44,507	192,311	0.3	236,818	-1.5
Jan	-48,775	191,698	1.2	240,473	2.7
Dec 2016	-44,607	189,507	2.5	234,114	1.3
Nov	-46,373	184,848	-0.4	231,221	1.1
Oct	-43,069	185,599	-1.3	228,668	0.9
Sep	-38,466	188,123	0.4	226,588	-0.8
Aug	-41,130	187,385	1.1	228,514	0.8
Jul	-41,294	185,330	0.8	226,624	-0.4
Jun	-43,385	183,770	0.9	227,605	1.8
May	-41,520	182,166	0.1	223,686	1.5
Apr	-38,422	181,895	1.1	220,317	1.4
Mar	-37,380	179,887	-0.6	217,277	-3.9
Feb	-45,290	180,892	1.2	226,182	1.9
Jan	-43,409	178,660	-2.3	222,070	-0.9
Dec 2015	-41,125	182,919	-0.5	224,044	-0.3
Jan-Dec 2016	-504,793	2,208,072	-2.5	2,712,866	-1.9

Note: Trade Balance of Goods = Exports of Goods less Imports of Goods. Trade balance may not add exactly because of errors of rounding and seasonality. Source: US Census Bureau, Foreign Trade Division

http://www.census.gov/foreign-trade/

Table IIA-1B provides US exports, imports and the trade balance of goods. The US has not shown a trade surplus in trade of goods since 1976. The deficit of trade in goods deteriorated sharply during the boom years from 2000 to 2007. The deficit improved during the contraction in 2009 but deteriorated in the expansion after 2009. The deficit could deteriorate sharply with growth at full employment.

Table IIA-1B, US, International Trade Balance of Goods, Exports and Imports of Goods, Millions of Dollars, Census Basis

	Balance	∆%	Exports	∆%	Imports	∆%
1960	4,608	(X)	19,626	(X)	15,018	(X)
1961	5,476	18.8	20,190	2.9	14,714	-2.0
1962	4,583	-16.3	20,973	3.9	16,390	11.4
1963	5,289	15.4	22,427	6.9	17,138	4.6
1964	7,006	32.5	25,690	14.5	18,684	9.0
1965	5,333	-23.9	26,699	3.9	21,366	14.4
1966	3,837	-28.1	29,379	10.0	25,542	19.5
1967	4,122	7.4	30,934	5.3	26,812	5.0
1968	837	-79.7	34,063	10.1	33,226	23.9
1969	1,289	54.0	37,332	9.6	36,043	8.5
1970	3,224	150.1	43,176	15.7	39,952	10.8
1971	-1,476	-145.8	44,087	2.1	45,563	14.0
1972	-5,729	288.1	49,854	13.1	55,583	22.0
1973	2,389	-141.7	71,865	44.2	69,476	25.0
1974	-3,884	-262.6	99,437	38.4	103,321	48.7
1975	9,551	-345.9	108,856	9.5	99,305	-3.9
1976	-7,820	-181.9	116,794	7.3	124,614	25.5
1977	-28,352	262.6	123,182	5.5	151,534	21.6
1978	-30,205	6.5	145,847	18.4	176,052	16.2
1979	-23,922	-20.8	186,363	27.8	210,285	19.4
1980	-19,696	-17.7	225,566	21.0	245,262	16.6
1981	-22,267	13.1	238,715	5.8	260,982	6.4
1982	-27,510	23.5	216,442	-9.3	243,952	-6.5
1983	-52,409	90.5	205,639	-5.0	258,048	5.8
1984	-106,702	103.6	223,976	8.9	330,678	28.1
1985	-117,711	10.3	218,815	-2.3	336,526	1.8
1986	-138,279	17.5	227,159	3.8	365,438	8.6
1987	-152,119	10.0	254,122	11.9	406,241	11.2
1988	-118,526	-22.1	322,426	26.9	440,952	8.5
1989	-109,399	-7.7	363,812	12.8	473,211	7.3
1990	-101,719	-7.0	393,592	8.2	495,311	4.7
1991	-66,723	-34.4	421,730	7.1	488,453	-1.4
1992	-84,501	26.6	448,164	6.3	532,665	9.1
1993	-115,568	36.8	465,091	3.8	580,659	9.0
1994	-150,630	30.3	512,626	10.2	663,256	14.2
1995	-158,801	5.4	584,742	14.1	743,543	12.1
1996	-170,214	7.2	625,075	6.9	795,289	7.0
1997	-180,522	6.1	689,182	10.3	869,704	9.4
1998	-229,758	27.3	682,138	-1.0	911,896	4.9
1999	-328,821	43.1	695,797	2.0	1,024,618	12.4
2000	-436,104	32.6	781,918	12.4	1,218,022	18.9
2001	-411,899	-5.6	729,100	-6.8	1,140,999	-6.3
2002	-468,263	13.7	693,103	-4.9	1,161,366	1.8
2003	-532,350	13.7	724,771	4.6	1,257,121	8.2
2004	-654,830	23.0	814,875	12.4	1,469,704	16.9
2005	-772,373	18.0	901,082	10.6	1,673,455	13.9
2006	-827,971	7.2	1,025,967	13.9	1,853,938	10.8
2007	-808,763	-2.3	1,148,199	11.9	1,956,962	5.6
2008	-816,199	0.9	1,287,442	12.1	2,103,641	7.5
2009	-503,582	-38.3	1,056,043	-18.0	1,559,625	-25.9
2010	-635,362	26.2	1,278,495	21.1	1,913,857	22.7
2011	-725,447	14.2	1,482,508	16.0	2,207,954	15.4
2012	-730,446	0.7	1,545,821	4.3	2,276,267	3.1
2013	-689,470	-5.6	1,578,517	2.1	2,267,987	-0.4
2014	-734,482	6.5	1,621,874	2.7	2,356,356	3.9
2015	-745,082	1.4	1,503,101	-7.3	2,248,183	-4.6
2016	-736,794	-1.1	1,451,011	-3.5	2,187,805	-2.7

Source: US Census Bureau, Foreign Trade Division

http://www.census.gov/foreign-trade/

Chart IIA-1 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. The low average rate of growth of GDP of 2.2 percent during the expansion beginning since IIIQ2009 does not deteriorate further the trade balance. Higher rates of growth may cause sharper deterioration.

Chart IIA-1, US, International Trade Balance, Exports and Imports of Goods and Services USD Billions

Source: US Census Bureau

https://www.census.gov/foreign-trade/data/ustrade.jpg

Table IIA-2B provides the US international trade balance, exports and imports of goods and services on an annual basis from 1992 to 2016. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted decreased from $115 billion in IQ2016 to $90 billion in IQ2017, increasing to $134 billion in IIQ2017 (https://www.bea.gov/international/index.htm). The current account deficit seasonally adjusted at annual rate increased from 2.3 percent of GDP in IIQ2016 to 2.4 percent of GDP in IQ2017, increasing to 2.6 percent of GDP in IIQ2017 (https://www.bea.gov/international/index.htm https://www.bea.gov/iTable/index_nipa.cfm). The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The final rows of Table IIA-2B show marginal improvement of the trade deficit from $548,625 million in 2011 to lower $536,773 million in 2012 with exports growing 4.3 percent and imports 3.0 percent. The trade balance improved further to deficit of $461,876 million in 2013 with growth of exports of 3.4 percent while imports virtually stagnated. The trade deficit deteriorated in 2014 to $490,336 million with growth of exports of 3.6 percent and of imports of 4.0 percent. The trade deficit deteriorated in 2015 to $500,445 million with decrease of exports of 4.7 percent and decrease of imports of 3.6 percent. The trade deficit deteriorated in 2016 to $504,793 million with decrease of exports of 2.5 percent and decrease of imports of 1.9 percent. Growth and commodity shocks under alternating inflation waves (https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html) have deteriorated the trade deficit from the low of $383,774 million in 2009.

Table IIA-2B, US, International Trade Balance of Goods and Services, Exports and Imports of Goods and Services, SA, Millions of Dollars, Balance of Payments Basis

	Balance	Exports	∆%	Imports	∆%
1960	3,508	25,940	NA	22,432	NA
1961	4,195	26,403	1.8	22,208	-1.0
1962	3,370	27,722	5.0	24,352	9.7
1963	4,210	29,620	6.8	25,410	4.3
1964	6,022	33,341	12.6	27,319	7.5
1965	4,664	35,285	5.8	30,621	12.1
1966	2,939	38,926	10.3	35,987	17.5
1967	2,604	41,333	6.2	38,729	7.6
1968	250	45,543	10.2	45,293	16.9
1969	91	49,220	8.1	49,129	8.5
1970	2,254	56,640	15.1	54,386	10.7
1971	-1,302	59,677	5.4	60,979	12.1
1972	-5,443	67,222	12.6	72,665	19.2
1973	1,900	91,242	35.7	89,342	23.0
1974	-4,293	120,897	32.5	125,190	40.1
1975	12,404	132,585	9.7	120,181	-4.0
1976	-6,082	142,716	7.6	148,798	23.8
1977	-27,246	152,301	6.7	179,547	20.7
1978	-29,763	178,428	17.2	208,191	16.0
1979	-24,565	224,131	25.6	248,696	19.5
1980	-19,407	271,834	21.3	291,241	17.1
1981	-16,172	294,398	8.3	310,570	6.6
1982	-24,156	275,236	-6.5	299,391	-3.6
1983	-57,767	266,106	-3.3	323,874	8.2
1984	-109,072	291,094	9.4	400,166	23.6
1985	-121,880	289,070	-0.7	410,950	2.7
1986	-138,538	310,033	7.3	448,572	9.2
1987	-151,684	348,869	12.5	500,552	11.6
1988	-114,566	431,149	23.6	545,715	9.0
1989	-93,141	487,003	13.0	580,144	6.3
1990	-80,864	535,233	9.9	616,097	6.2
1991	-31,135	578,344	8.1	609,479	-1.1
1992	-39,212	616,882	6.7	656,094	7.6
1993	-70,311	642,863	4.2	713,174	8.7
1994	-98,493	703,254	9.4	801,747	12.4
1995	-96,384	794,387	13.0	890,771	11.1
1996	-104,065	851,602	7.2	955,667	7.3
1997	-108,273	934,453	9.7	1,042,726	9.1
1998	-166,140	933,174	-0.1	1,099,314	5.4
1999	-258,617	969,867	3.9	1,228,485	11.8
2000	-372,517	1,075,321	10.9	1,447,837	17.9
2001	-361,511	1,005,654	-6.5	1,367,165	-5.6
2002	-418,955	978,706	-2.7	1,397,660	2.2
2003	-493,890	1,020,418	4.3	1,514,308	8.3
2004	-609,883	1,161,549	13.8	1,771,433	17.0
2005	-714,245	1,286,022	10.7	2,000,267	12.9
2006	-761,716	1,457,642	13.3	2,219,358	11.0
2007	-705,375	1,653,548	13.4	2,358,922	6.3
2008	-708,726	1,841,612	11.4	2,550,339	8.1
2009	-383,774	1,583,053	-14.0	1,966,827	-22.9
2010	-494,658	1,853,606	17.1	2,348,263	19.4
2011	-548,625	2,127,021	14.8	2,675,646	13.9
2012	-536,773	2,218,989	4.3	2,755,762	3.0
2013	-461,876	2,293,457	3.4	2,755,334	0.0
2014	-490,336	2,375,905	3.6	2,866,241	4.0
2015	-500,445	2,263,907	-4.7	2,764,352	-3.6
2016	-504,793	2,208,072	-2.5	2,712,866	-1.9

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Nov 2017. There is long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The global recession from IVQ2007 to IIQ2009 reversed the trend of deterioration. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks. There are additional effects for revaluation of the dollar with the Fed orienting interest rate increases while the European Central Bank and the Bank of Japan determine negative nominal interest rates.

Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Jul 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-3 of the US Census Bureau provides US exports SA from Jan 1992 to Nov 2017. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation.

Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Jul 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-4 of the US Census Bureau provides US imports SA from Jan 1992 to Nov 2017. Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment resulting from weaker world economic growth and diminishing inflation because of risk aversion and portfolio reallocations from commodity exposures to equities.

Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Jul 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

There is deterioration of the US trade balance in goods in Table IIA-3 from deficit of $64,530 million in Nov 2016 to deficit of $66,677 million in Nov 2017. The nonpetroleum deficit increased $5270 million while the petroleum deficit decreased $2981 million. Total exports of goods increased 7.3 percent in Nov 2017 relative to a year earlier while total imports increased 5.9 percent. Nonpetroleum exports increased 5.6 percent from Nov 2016 to Nov 2017 while nonpetroleum imports increased 6.7 percent. Petroleum imports decreased 3.0 percent.

Table IIA-3, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA

	Nov 2017	Nov 2016	∆%
Total Balance	-66,677	-64,530
Petroleum	-7,566	-10,547
Non-Petroleum	-65,662	-60,392
Total Exports	128,580	119,808	7.3
Petroleum	10,761	8,348	28.9
Non-Petroleum	117,058	110,838	5.6
Total Imports	195,257	184,338	5.9
Petroleum	18,327	18,895	-3.0
Non-Petroleum	182,720	171,230	6.7

Details may not add because of rounding and seasonal adjustment

Source: US Census Bureau

http://www.census.gov/foreign-trade/

US exports and imports of goods not seasonally adjusted in Jan-Nov 2017 and Jan-Nov 2016 are in Table IIA-4. The rate of growth of exports was 6.5 percent and 6.9 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 3.2 percent and of mineral fuels that increased 47.1 percent both because prices of raw materials and commodities increase and fall recurrently because of shocks of risk aversion and portfolio reallocations. The US exports a growing amount of crude oil, increasing 37.5 percent in cumulative Jan-Nov 2017 relative to a year earlier. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports increased 4.2 percent while manufactured imports increased 6.9 percent. Significant part of the US trade imbalance originates in imports of mineral fuels increasing 28.2 percent and petroleum increasing 28.3 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation.

Table IIA-4, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %, Census Basis

	Jan-Nov 2017 $ Millions	Jan-Nov 2016 $ Millions	∆%
Exports	1,410,250	1,324,369	6.5
Manufactured	999,842	959,648	4.2
Agricultural Commodities	125,647	121,797	3.2
Mineral Fuels	122,184	83,071	47.1
Petroleum	92,880	67,534	37.5
Imports	2,142,737	2,004,032	6.9
Manufactured	1,849,084	1,753,521	5.4
Agricultural Commodities	110,886	104,700	5.9
Mineral Fuels	178,457	139,233	28.2
Petroleum	166,342	129,673	28.3

Source: US Census Bureau

http://www.census.gov/foreign-trade/

The current account of the US balance of payments is in Table VI-3A for IIIQ2016 and IIIQ2017. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/newsreleases/international/transactions/2017/pdf/trans317.pdf):

“The U.S. current-account deficit decreased to $100.6 billion (preliminary) in the third quarter of 2017 from $124.4 billion (revised) in the second quarter of 2017, according to statistics released by the Bureau of Economic Analysis (BEA). The deficit decreased to 2.1 percent of current-dollar gross domestic product (GDP) from 2.6 percent in the second quarter. The $23.8 billion decrease in the current-account deficit reflected decreases in the deficits on secondary income and goods and increases in the surpluses on primary income and services.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted decreased from $126.0 billion in IIIQ2016 to $112.8 billion in IIIQ2017. The current account deficit seasonally adjusted at annual rate increased from 2.4 percent of GDP in IIIQ2016 to 2.6 percent of GDP in IIQ2017, decreasing to 2.1 percent of GDP in IIIQ2017. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets.

Table VI-3A, US, Balance of Payments, Millions of Dollars NSA

	IIIQ2016	IIIQ2017	Difference
Goods Balance	-203,022	-211,273	-8,251
X Goods	364,117	382,172	5.0 ∆%
M Goods	-567,139	-593,444	4.6 ∆%
Services Balance	66,707	64,279	-2,428
X Services	197,136	200,710	1.8 ∆%
M Services	-130,429	-136,431	4.6 ∆%
Balance Goods and Services	-136,315	-146,994	-10,679
Exports of Goods and Services and Income Receipts	802,389	861,331
Imports of Goods and Services and Income Payments	-928,421	-974,147
Current Account Balance	-126,032	-112,816	-13,216
% GDP	IIIQ2016	IIIQ2017	IIQ2017
	2.4	2.1	2.6

X: exports; M: imports

Balance on Current Account = Exports of Goods and Services – Imports of Goods and Services and Income Payments

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The alternative fiscal scenario of the CBO (2012NovCDR, 2013Sep17) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

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

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

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

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

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

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

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

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

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

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

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

M_tV(i_t, ·) = P_tY_t (5)

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

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

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

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

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

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

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

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net relative to financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below trend. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. In the release of Jun 14, 2013, the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/international/transactions/2013/pdf/trans113.pdf) informs of revisions of US data on US international transactions since 1999:

“The statistics of the U.S. international transactions accounts released today have been revised for the first quarter of 1999 to the fourth quarter of 2012 to incorporate newly available and revised source data, updated seasonal adjustments, changes in definitions and classifications, and improved estimating methodologies.”

The BEA introduced new concepts and methods (http://www.bea.gov/international/concepts_methods.htm) in comprehensive restructuring on Jun 18, 2014 (http://www.bea.gov/international/modern.htm):

“BEA introduced a new presentation of the International Transactions Accounts on June 18, 2014 and will introduce a new presentation of the International Investment Position on June 30, 2014. These new presentations reflect a comprehensive restructuring of the international accounts that enhances the quality and usefulness of the accounts for customers and bring the accounts into closer alignment with international guidelines.”

Table VI-3B provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1087 billion or 6.8 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5094 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.094 trillion in four years, using the fiscal year deficit of $1087 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5094 billion. Federal debt in 2012 was 70.4 percent of GDP (CBO 2015Jan26) and 72.6 percent of GDP in 2013 (http://www.cbo.gov/). This situation may worsen in the future (CBO 2013Sep17):

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

The gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline, CBO projects. By 2038, the deficit would be 6½ percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100 percent of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.

Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long-term budget outlook. The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”

Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2007	2008	2009	2010	2011
Goods & Services	-705	-709	-384	-495	-549
Primary Income	85	130	115	168	211
Secondary Income	-91	-102	-104	-104	-107
Current Account	-711	-681	-373	-431	-445
NGDP	14478	14719	14419	14964	15518
Current Account % GDP	-4.9	-4.6	-2.6	-2.9	-2.9
NIIP	-1279	-3995	-2628	-2512	-4455
US Owned Assets Abroad	20705	19423	19426	21767	22209
Foreign Owned Assets in US	21984	23418	22054	24279	26664
NIIP % GDP	-8.8	-27.1	-18.2	-16.8	-28.7
Exports Goods, Services and Income	2559	2742	2283	2625	2983
NIIP % Exports Goods, Services and Income	-50	-145	-115	-95	-149
DIA MV	5858	3707	4945	5486	5215
DIUS MV	4134	3091	3619	4099	4199
Fiscal Balance	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	-1.1	-3.1	-9.8	-8.7	-8.5
Federal Debt	5035	5803	7545	9019	10128
Federal Debt % GDP	35.2	39.3	52.3	60.9	65.9
Federal Outlays	2729	2983	3518	3457	3603
∆%	2.8	9.3	17.9	-1.7	4.2
% GDP	19.1	20.2	24.4	23.4	23.4
Federal Revenue	2568	2524	2105	2163	2303
∆%	6.7	-1.7	-16.6	2.7	6.5
% GDP	17.9	17.1	14.6	14.6	15.0

	2012	2013	2014	2015	2016
Goods & Services	-537	-462	-490	-500	-505
Primary Income	207	206	210	181	173
Secondary Income	-97	-94	-94	-115	-120
Current Account	-426	-350	-374	-434	-452
NGDP	16155	16692	17428	18121	18625
Current Account % GDP	-2.6	-2.1	-2.1	-2.4	-2.4
NIIP	-4518	-5373	-6980	-7493	-8318
US Owned Assets Abroad	22562	24145	24832	23352	23849
Foreign Owned Assets in US	27080	29517	31813	30846	32168
NIIP % GDP	-28.0	-32.2	-40.1	-41.3	-44.7
Exports Goods, Services and Income	3096	3212	3333	3173	3157
NIIP % Exports Goods, Services and Income	-146	-167	-209	-236	-263
DIA MV	5969	7121	7189	6999	7375
DIUS MV	4662	5815	6370	6701	7569
Fiscal Balance	-1087	-680	-485	-439	-585
Fiscal Balance % GDP	-6.8	-4.1	-2.8	-2.4	-3.2
Federal Debt	11281	11983	12780	13117	14168
Federal Debt % GDP	70.4	72.6	74.2	73.3	77.0
Federal Outlays	3537	3455	3506	3688	3853
∆%	-1.8	-2.3	1.5	5.2	4.5
% GDP	22.1	20.9	20.4	20.6	20.9
Federal Revenue	2450	2775	3022	3250	3268
∆%	6.4	13.3	8.9	7.6	0.5
% GDP	15.3	16.8	17.5	18.2	17.8

Sources:

Notes: NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm These discrepancies do not alter conclusions. Budget http://www.cbo.gov/

https://www.cbo.gov/about/products/budget-economic-data#6

https://www.cbo.gov/about/products/budget_economic_data#3

https://www.cbo.gov/about/products/budget-economic-data#2

https://www.cbo.gov/about/products/budget_economic_data#2 Balance of Payments and NIIP http://www.bea.gov/international/index.htm#bop Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/iTable/index_nipa.cfm

The most recent CBO long-term budget on Mar 27, 2017, projects US federal debt at 150.0 percent of GDP in 2047 (Congressional Budget Office, The 2017 Long-term Budget Outlook. Washington, DC, Mar 30, 2017 https://www.cbo.gov/publication/52480).

Table VI-3C provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit seasonally adjusted at 2.4 percent in IIIQ2016 stabilizes to 2.4 percent of GDP in IVQ2016. The deficit does not change to 2.4 percent in IQ2017 and increases to 2.6 percent in IIQ2017. The current account deficits decreased to 2.1 percent in IIIQ2017. The absolute value of the net international investment position increases from minus $8.0 trillion in IIIQ2016 to minus $8.3 trillion in IVQ2016. The absolute value of the net international investment position decreases to minus $8.1 trillion in IQ2017 and decreases to minus $8.0 trillion in IIQ2017. The absolute value of the net international investment position decreased to $7.8 trillion in IIIQ2017. The BEA explains as follows (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv217.pdf):

“The U.S. net international investment position increased to -$7,768.7 billion (preliminary) at the end of the third quarter of 2017 from -$8,004.1 billion (revised) at the end of the second quarter, according to statistics released today by the Bureau of Economic Analysis (BEA). The $235.4 billion increase reflected a $1,001.2 billion increase in U.S. assets and a $765.8 billion increase in U.S. liabilities (table 1).”

The BEA explains further (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv317.pdf): “

“The $235.4 billion increase in the net investment position reflected net financial transactions of –$87.4 billion and net other changes in position, such as price and exchange-rate changes, of $322.8 billion (table A).

The net investment position increased 2.9 percent in the third quarter, compared with an increase of 1.1 percent in the second quarter, and an average quarterly decrease of 5.3 percent from the first quarter of 2011 through the first quarter of 2017.

U.S. assets increased $1,001.2 billion to $26,854.9 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment assets that were partly offset by a decrease in financial derivatives.

· Assets excluding financial derivatives increased $1,227.5 billion to $25,149.7 billion. The increase resulted from other changes in position of $869.2 billion and financial transactions of $358.2 billion. Other changes in position mostly reflected foreign equity price increases that raised the equity value of portfolio investment and direct investment assets, and the appreciation of major foreign currencies against the U.S. dollar that raised the value of foreign-currency-denominated assets in dollar terms. Financial transactions mostly reflected net acquisition of portfolio investment assets.

· Financial derivatives decreased $226.2 billion to $1,705.1 billion, mostly in single-currency interest rate contracts.”

U.S. liabilities increased $765.8 billion to $34,623.6 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment liabilities that were partly offset by a decrease in financial derivatives.

· Liabilities excluding financial derivatives increased $988.8 billion to $32,952.3 billion. The increase resulted from other changes in position of $524.6 billion and financial transactions of $464.2 billion (table A). Other changes in position mostly reflected U.S. equity price increases that raised the equity value of portfolio investment and direct investment liabilities. Financial transactions mostly reflected net incurrence of portfolio investment liabilities.

· Financial derivatives decreased $223.0 billion to $1,671.3 billion, mostly in single-currency interest rate contracts.”

Table VI-3C, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and % NSA

	IIIQ2016	IVQ2016	IQ2017	IIQ2017	IIIQ2017
Goods & Services	-136	-132	-113	-155	-147
Primary Income	43	51	49	51	58
Secondary Income	-32	-31	-26	-31	-24
Current Account	-126	-112	-90	-134	-113
Current Account % GDP	-2.4	-2.4	-2.4	-2.6	-2.1
NIIP	-8036	-8318	-8092	-8004	-7769
US Owned Assets Abroad	24839	23849	24933	25853	26855
Foreign Owned Assets in US	-32875	-32168	-33025	-33857	-34623
DIA MV	7392	7375	7895	8125	8581
DIA MV Equity	6147	6172	6609	6909	7355
DIUS MV	7424	7569	7952	8135	8453
DIUS MV Equity	5607	5784	6153	6341	6630

Notes: NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm

Chart VI-3C of the US Bureau of Economic Analysis provides the quarterly and annual US net international investment position (NIIP) NSA in billion dollars. The NIIP deteriorated in 2008, improving in 2009-2011 followed by deterioration after 2012. There is improvement in 2017.

Chart VI-3C, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-10 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jul 1, 1954 at 1.13 percent through Jan 10, 1979, at 9.91 percent per year, to Jan 11, 2018, at 1.42 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1970s (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/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html), the fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart VI-10 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart VI-10 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart VI-10. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart VI-10 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 1.42 percent on Jan 11, 2018. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate. But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

There is essentially the same view in the Testimony of Chair Yellen in delivering the Semiannual Monetary Policy Report to the Congress on Jul 15, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20150715a.htm). The FOMC (Federal Open Market Committee) raised the fed funds rate to ¼ to ½ percent at its meeting on Dec 16, 2015 (http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm).

It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 9.91 percent on Jan 10, 1979, at the beginning in Chart VI-10, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (Section II and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier http://cmpassocregulationblog.blogspot.com/2016/01/weakening-equities-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html

and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). There is not a fiscal cliff or debt limit issue ahead but rather free fall into a fiscal abyss. The combination of the fiscal abyss with zero interest rates could trigger the risk premium on Treasury debt or Himalayan hike in interest rates.

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Mar 23, 2017, Percent per Year

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table VI-7G when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table VI-7G shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table VI-7G, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

Chart VI-14 provides the overnight fed funds rate, the yield of the 10-year Treasury constant maturity bond, the yield of the 30-year constant maturity bond and the conventional mortgage rate from Jan 1991 to Dec 1996. In Jan 1991, the fed funds rate was 6.91 percent, the 10-year Treasury yield 8.09 percent, the 30-year Treasury yield 8.27 percent and the conventional mortgage rate 9.64 percent. Before monetary policy tightening in Oct 1993, the rates and yields were 2.99 percent for the fed funds, 5.33 percent for the 10-year Treasury, 5.94 for the 30-year Treasury and 6.83 percent for the conventional mortgage rate. After tightening in Nov 1994, the rates and yields were 5.29 percent for the fed funds rate, 7.96 percent for the 10-year Treasury, 8.08 percent for the 30-year Treasury and 9.17 percent for the conventional mortgage rate.

Chart VI-14, US, Overnight Fed Funds Rate, 10-Year Treasury Constant Maturity, 30-Year Treasury Constant Maturity and Conventional Mortgage Rate, Monthly, Jan 1991 to Dec 1996

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Chart VI-15 of the Bureau of Labor Statistics provides the all items consumer price index from Jan 1991 to Dec 1996. There does not appear acceleration of consumer prices requiring aggressive tightening.

Chart VI-15, US, Consumer Price Index All Items, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

Chart IV-16 of the Bureau of Labor Statistics provides 12-month percentage changes of the all items consumer price index from Jan 1991 to Dec 1996. Inflation collapsed during the recession from Jul 1990 (III) and Mar 1991 (I) and the end of the Kuwait War on Feb 25, 1991 that stabilized world oil markets. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Policy tightening had adverse collateral effects in the form of emerging market crises in Mexico and Argentina and fixed income markets worldwide.

Chart VI-16, US, Consumer Price Index All Items, Twelve-Month Percentage Change, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

The Congressional Budget Office (CBO 2017Jun29, CBO 2017Jan24) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2016 at 3.2 percent per year. The projected path is significantly lower at 1.8 percent per year from 2017 to 2027. The legacy of the economic cycle expansion from IIIQ2009 to IIIQ2017 at 2.2 percent on average is in contrast with 3.8 percent on average in the expansion from IQ1983 to IQ1991 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 22.6 million or 13.3 percent of the effective labor force in Dec 2017 (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (Section I and earlier https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html and earlier https://cmpassocregulationblog.blogspot.com/2017/11/recovery-without-hiring-ten-million.html).

Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

	Potential GDP	Potential Labor Force	Potential Labor Productivity*
Average Annual ∆%
1950-1973	4.0	1.6	2.4
1974-1981	3.2	2.5	0.6
1982-1990	3.4	1.7	1.7
1991-2001	3.3	1.2	2.0
2002-2007	2.4	1.0	1.4
2008-2016	1.4	0.5	0.9
Total 1950-2016	3.2	1.4	1.7
Projected Average Annual ∆%
2017-2020	1.7	0.5	1.2
2021-2027	1.9	0.5	1.4
2017-2027	1.8	0.5	1.3

*Ratio of potential GDP to potential labor force

Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370 CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015. Aug 2016

https://www.cbo.gov/about/products/budget-economic-data#6

Chart IB1-A1 of the Congressional Budget Office provides historical and projected annual growth of United States potential GDP. There is sharp decline of growth of United States potential GDP.

Chart IB-1A1, Congressional Budget Office, Projections of Annual Growth of United States Potential GDP

Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370

https://www.cbo.gov/about/products/budget-economic-data#6

Chart IB-1A of the Congressional Budget Office provides historical and projected potential and actual US GDP. The gap between actual and potential output closes by 2017. Potential output expands at a lower rate than historically. Growth is even weaker relative to trend.

Chart IB-1A, Congressional Budget Office, Estimate of Potential GDP and Gap

Source: Congressional Budget Office

https://www.cbo.gov/publication/49890

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.2 percent on average from IIIQ2009 to IIIQ2017 during the current economic expansion in contrast with 3.8 percent on average in the cyclical expansion from IQ1983 to IQ1991 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html) cannot be explained by the contraction of 4.2 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 22.6 million or 13.3 percent of the labor force as estimated for Dec 2017 (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (Section I and earlier https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html and earlier https://cmpassocregulationblog.blogspot.com/2017/11/recovery-without-hiring-ten-million.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5). The last year in common in both projections is 2017. The revision lowers potential output in 2017 by 7.3 percent relative to the projection in 2007.

Chart IB-2 provides differences in the projections of potential output by the CBO in 2007 and more recently on Feb 4, 2014, which the CBO explains in CBO (2014Feb28).

Chart IB-2, Congressional Budget Office, Revisions of Potential GDP

Source: Congressional Budget Office, 2014Feb 28. Revisions to CBO’s Projection of Potential Output since 2007. Washington, DC, CBO, Feb 28, 2014.

Chart IB-3 provides actual and projected potential GDP from 2000 to 2024. The gap between actual and potential GDP disappears at the end of 2017 (CBO2014Feb4). GDP increases in the projection at 2.5 percent per year.

Chart IB-3, Congressional Budget Office, GDP and Potential GDP

Source: CBO (2013BEOFeb5), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014.

Chart IIA2-3 of the Bureau of Economic Analysis of the Department of Commerce shows on the lower negative panel the sharp increase in the deficit in goods and the deficits in goods and services from 1960 to 2012. The upper panel shows the increase in the surplus in services that was insufficient to contain the increase of the deficit in goods and services. The adjustment during the global recession has been in the form of contraction of economic activity that reduced demand for goods.

Chart IIA2-3, US, Balance of Goods, Balance on Services and Balance on Goods and Services, 1960-2013, Millions of Dollars

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

Chart IIA2-4 of the Bureau of Economic Analysis shows exports and imports of goods and services from 1960 to 2012. Exports of goods and services in the upper positive panel have been quite dynamic but have not compensated for the sharp increase in imports of goods. The US economy apparently has become less competitive in goods than in services.

Chart IIA2-4, US, Exports and Imports of Goods and Services, 1960-2013, Millions of Dollars

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

Chart IIA2-5 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2012. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.

Chart IIA2-5, US, Balance on Current Account, 1960-2013, Millions of Dollars

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

Chart IIA2-6 of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2016. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.

Chart IIA2-6, US, Real GDP, 1960-2016, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

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

Chart IIA2-6, US, Real GDP, 1960-2016, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

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

Chart IIA-7 provides the US current account deficit on a quarterly basis from 1980 to IQ1983. The deficit is at a lower level because of growth below potential not only in the US but worldwide. The combination of high government debt and deficit with external imbalance restricts potential prosperity in the US.

Chart IIA-7, US, Balance on Current Account, Quarterly, 1980-2013

Source: Bureau of Economic Analysis

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

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There are now temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of four trillion dollars of securities held outright. Net foreign purchases of US long-term securities (row C in Table VA-4) weakened from $65.0 billion in Sep 2017 to $7.9 billion in Oct

2017. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Sep 2017 of $60.8 billion weakened to $7.5 billion in Oct 2017. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) weakened from $20.1 billion in Sep 2017 to $15.7 billion in Oct 2017. Other transactions (row C2 in Table VA-4) changed from minus $15.9 billion in Sep 2017 to minus $15.4 billion in Oct 2017. In Oct 2017,

C = A + B + C2 = $7.5 billion + $15.7 billion - $15.4 billion = $7.9 billion

There are minor rounding errors. There is weakening demand in Table VA-4 in Oct 2017 in A1 private purchases by residents overseas of US long-term securities of minus $25.6 billion of which weakening in A11 Treasury securities of minus $1.9 billion, weakening in A12 of $6.5 billion in agency securities, weakening of

$7.6 billion of corporate bonds and weakening of $13.4 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 decreased $18.1 billion with decrease of Treasury securities of $20.2 billion in Oct 2017. Official purchases of agency securities increased $3.4 billion in Oct 2017. Row D shows increase in Oct 2017 of $47.6 billion in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills increased $26.0 billion (row D11) with foreign official holdings increasing $7.0 billion while the category “other” increased $14.6 billion. Foreign private holdings of US Treasury bills increased $26.0 billion in what could be arbitrage of duration exposures and international risks. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations in risk perceptions.

Table VA-4, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Oct 2016 12 Months	Oct 2017 12 Months	Sep 2017	Oct 2017
A Foreign Purchases less Sales of US LT Securities	51.5	346.8	60.8	7.5
A1 Private	411.1	427.6	59.5	25.6
A11 Treasury	93.5	153.4	13.1	-1.9
A12 Agency	211.9	99.9	9.1	6.5
A13 Corporate Bonds	127.4	110.8	14.1	7.6
A14 Equities	-21.6	63.5	23.2	13.4
A2 Official	-359.6	-80.8	1.3	-18.1
A21 Treasury	-394.6	-120.7	-0.4	-20.2
A22 Agency	41.4	34.7	-0.2	3.4
A23 Corporate Bonds	-4.9	0.6	-1.2	-0.2
A24 Equities	-1.5	4.6	3.0	-1.1
B Net US Purchases of LT Foreign Securities	183.4	136.9	20.1	15.7
B1 Foreign Bonds	230.2	246.9	24.2	27.8
B2 Foreign Equities	-46.8	-110.0	-4.1	-12.0
C1 Net Transactions	234.9	483.7	80.9	23.2
C2 Other	-263.1	-243.1	-15.9	-15.4
C Net Foreign Purchases of US LT Securities	-28.1	240.7	65.0	7.9
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	130.9	92.9	10.1	47.6
D1 US Treasury Bills	43.8	73.5	8.5	33.0
D11 Private	56.0	36.4	7.4	26.0
D12 Official	-12.2	37.1	1.1	7.0
D2 Other	87.0	19.4	1.7	14.6

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/press-center/press-releases/Pages/jl2609.aspx

Table VA-5 provides major foreign holders of US Treasury securities. China is the largest holder with $1189.2 billion in Oct 2017, increasing 0.7 percent from $1180.8 billion in Sep 2017 while increasing $73.5 billion from Oct 2016 or 6.6 percent. The United States Treasury estimates US government debt held by private investors at $11,643 billion in Sep 2017 (Fiscal Year 2017). China’s holding of US Treasury securities represents 10.2 percent of US government marketable interest-bearing debt held by private investors (http://www.fms.treas.gov/bulletin/index.html). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan decreased its holdings from $1131.9 billion in Oct 2016 to $1093.9 billion in Oct 2017 or 3.4 percent. The combined holdings of China and Japan in Oct 2017 add to $2283.1 billion, which is equivalent to 19.6 percent of US government marketable interest-bearing securities held by investors of $11,643 billion in Sep 2017 (Fiscal Year 2017) (http://www.fms.treas.gov/bulletin/index.html). Total foreign holdings of Treasury securities increased from $6043.6 billion in Oct 2016 to $6349.4 billion in Oct 2017, or 5.1 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)). A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

Table VA-5, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Oct 2017	Sep 2017	Oct 2016
Total	6349.4	6323.0	6043.6
China	1189.2	1180.8	1115.7
Japan	1093.9	1096.0	1131.9
Ireland	312.4	310.6	273.9
Brazil	270.0	272.8	254.7
Cayman Islands	269.9	267.6	262.2
Switzerland	254.0	254.9	235.6
United Kingdom	225.9	237.4	207.3
Luxembourg	217.9	213.9	217.8
Hong Kong	192.3	194.7	186.3
Taiwan	181.7	183.9	188.6
Saudi Arabia	145.2	136.7	96.7
India	141.4	145.1	123.0
Foreign Official Holdings	4079.1	4070.4	3839.2
A. Treasury Bills	332.2	325.2	295.1
B. Treasury Bonds and Notes	3746.9	3745.2	3544.1

Source: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

http://ticdata.treasury.gov/Publish/mfh.txt

II United States Producer Price Index. The history of producer price inflation in the past five decades does not provide evidence of deflation. The finished core PPI does not register even one single year of decline, as shown in Table PPIEX.

Table PPIEX, Annual Percentage Changes of the PPI Finished Goods Excluding Food and Energy

Year	Annual ∆%
1974	11.4
1975	11.4
1976	5.7
1977	6.0
1978	7.5
1979	8.9
1980	11.2
1981	8.6
1982	5.7
1983	3.0
1984	2.4
1985	2.5
1986	2.3
1987	2.4
1988	3.3
1989	4.4
1990	3.7
1991	3.6
1992	2.4
1993	1.2
1994	1.0
1995	2.1
1996	1.4
1997	0.3
1998	0.9
1999	1.7
2000	1.3
2001	1.4
2002	0.1
2003	0.2
2004	1.5
2005	2.4
2006	1.5
2007	1.9
2008	3.4
2009	2.6
2010	1.2
2011	2.4
2012	2.6
2013	1.5
2014	1.9
2015	2.0
2016	1.6
2017	1.8

Source: Bureau of Labor Statistics

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

Chart I-1 provides US nominal GDP from 1929 to 2016. The chart disguises the decline of nominal GDP during the 1930s from $104.6 billion in 1929 to $57.2 billion in 1933 or by 45.3 percent (data from the US Bureau of Economic Analysis at http://www.bea.gov/iTable/index_nipa.cfm). The level of nominal GDP reached $102.9 billion in 1940 and exceeded the $104.6 billion of 1929 only with $129.4 billion in 1941. The only major visible bump in the chart occurred in the recession of IVQ2007 to IIQ2009 with revised cumulative decline of real GDP of 4.2 percent. US nominal GDP fell from $14,718.6 billion in 2008 to $14,418.7 billion in 2009 or by 2.0 percent. US nominal GDP rose to $14,964.4 billion in 2010 or by 3.8 percent and to $15,517.9 billion in 2011 for an additional 3.7 percent for cumulative increase of 7.6 percent relative to 2009 and to $16,155.3 billion in 2012 for an additional 4.1 percent and cumulative increase of 12.0 percent relative to 2009. US nominal GDP increased from $14,477.6 in 2007 to $18,624.5 billion in 2016 or by 28.6 percent at the average annual rate of 2.8 percent per year (http://www.bea.gov/iTable/index_nipa.cfm). Tendency for deflation would be reflected in persistent bumps. In contrast, during the Great Depression in the four years of 1929 to 1933, GDP in constant dollars fell 26.3 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html).

Chart I-1, US, Nominal GDP 1929-2016

Source: US Bureau of Economic Analysis

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

Chart I-2 provides US real GDP from 1929 to 2016. The chart also disguises the Depression of the 1930s. In the four years of 1929 to 1933, GDP in constant dollars fell 26.3 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7; data from the US Bureau of Economic Analysis at http://www.bea.gov/iTable/index_nipa.cfm). Persistent deflation threatening real economic activity would also be reflected in the series of long-term growth of real GDP. There is no such behavior in Chart I-2 except for periodic recessions in the US economy that have occurred throughout history.

Chart I-2, US, Real GDP 1929-2016

Source: US Bureau of Economic Analysis

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

Deflation would also be in evidence in long-term series of prices in the form of bumps. The GDP implicit deflator series in Chart I-3 from 1929 to 2016 shows sharp dynamic behavior over time. There is decline of the implicit price deflator of GDP by 25.8 percent from 1929 to 1933 (data from the US Bureau of Economic Analysis at http://www.bea.gov/iTable/index_nipa.cfm). In contrast, the implicit price deflator of GDP of the US increased from 97.337 (2009 =100) in 2007 to 100.00 in 2009 or by 2.7 percent and increased to 111.416 in 2016 or by 11.5 percent relative to 2009 and 14.5 percent relative to 2007. The implicit price deflator of US GDP increased in every quarter from IVQ2007 to IVQ2012 with only two declines from 100.062 in IQ2009 to 99.895 in IIQ2009 or by 0.2 percent and to 99.873 in IIIQ2009 for cumulative 0.2 percent relative to IQ2009 and -0.02 percent relative to IIQ2009 (http://www.bea.gov/iTable/index_nipa.cfm). Wars are characterized by rapidly rising prices followed by declines when peace is restored. The US economy is not plagued by deflation but by long-run inflation.

Chart I-3, US, GDP Implicit Price Deflator 1929-2016

Source: US Bureau of Economic Analysis

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

Chart I-4 provides percent change from preceding quarter in prices of GDP at seasonally adjusted annual rates (SAAR) from 1980 to 2016. There is one case of negative change by 0.6 percent in IIQ2009 that was adjustment from 2.8 percent in IIIQ2008 following 2.3 percent in IQ2008 and 1.8 percent IIQ2008 caused by carry trades from policy interest rates being moved to zero into commodity futures. These positions were reversed because of the fear of toxic assets in banks in the proposal of TARP in late 2008 (Cochrane and Zingales 2009). Prices of GDP increased at 0.6 percent in IVQ2014. GDP prices decreased at 0.1 percent in IQ2015, increasing at 2.2 percent in IIQ015 and at 1.4 percent in IIIQ2015. Prices of GDP increased at 0.8 percent in IVQ2015 and at 0.3 percent in IQ2016. Prices of GDP increased at 2.4 percent in IIQ2016 and increased at 1.4 percent in IIIQ2016. Prices of GDP increased at 2.0 percent in IVQ2016 and increased at 2.0 percent in IQ2017. Prices of GDP increased at 1.0 percent in IIQ2017 and increased at 2.1 percent in IIIQ2017. There has not been actual deflation or risk of deflation threatening depression in the US that would justify unconventional monetary policy.

Chart I-4, Percent Change from Preceding Period in Prices for GDP Seasonally Adjusted at Annual Rates 1980-2017

Source: US Bureau of Economic Analysis

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

Chart I-5 provides percent change from preceding year in prices of GDP from 1929 to 2016. There are four consecutive years of declines of prices of GDP during the Great Depression: 3.8 percent in 1930, 9.9 percent in 1931, 11.4 percent in 1932 and 2.7 percent in 1933. There were two consecutive declines of 1.8 percent in 1938 and 1.3 percent in 1939. Prices of GDP fell 0.1 percent in 1949 after increasing 12.6 percent in 1946, 11.2 percent in 1947 and 5.6 percent in 1948, which is similar to experience with wars in other countries. There are no other negative changes of annual prices of GDP in 74 years from 1939 to 2016.

Chart I-5, Percent Change from Preceding Year in Prices for Gross Domestic Product 1930-2016

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

The producer price index of the US from 1947 to 2017 in Chart I-6 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.

Chart I-6, US, Producer Price Index, Finished Goods, NSA, 1947-2017

Source: US Bureau of Labor Statistics

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

Chart I-17 provides 12-month percentage changes of the producer price index from 1948 to 2017. The distinguishing even in Chart I-7 is the Great Inflation of the 1970s. The shape of the two-hump Bactrian camel of the 1970’s resembles the double hump from 2007 to 2017.

Chart I-7, US, Producer Price Index, Finished Goods, 12-Month Percentage Change, NSA, 1948-2017

Source: US Bureau of Labor Statistics

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

Annual percentage changes of the producer price index from 1948 to 2017 are shown in Table I-1A. The producer price index fell 2.8 percent in 1949 following the adjustment to World War II and fell 0.6 percent in 1952 and 1.0 percent in 1953 around the Korean War. There are two other mild declines of 0.3 percent in 1959 and 0.3 percent in 1963. There are only few subsequent and isolated declines of the producer price index of 1.4 percent in 1986, 0.8 percent in 1998, 1.3 percent in 2002 and 2.6 percent in 2009. The decline of 2009 was caused by unwinding of carry trades in 2008 that had lifted oil prices to $140/barrel during deep global recession because of the panic of probable toxic assets in banks that would be removed with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Producer prices fell 3.2 percent in 2015 and declined 1.0 percent in 2016 during collapse of commodity prices form high prices induced by zero interest rates. Producer prices increased 3.2 percent in 2017. There is no evidence in this history of 66 years of the US producer price index suggesting that there is frequent and persistent deflation shock requiring aggressive unconventional monetary policy. The design of such anti-deflation policy could provoke price and financial instability because of lags in effect of monetary policy, model errors, inaccurate forecasts and misleading analysis of current economic conditions.

Table I-1A, US, Annual PPI Inflation ∆% 1948-2016

Year	Annual ∆%
1948	8.0
1949	-2.8
1950	1.8
1951	9.2
1952	-0.6
1953	-1.0
1954	0.3
1955	0.3
1956	2.6
1957	3.8
1958	2.2
1959	-0.3
1960	0.9
1961	0.0
1962	0.3
1963	-0.3
1964	0.3
1965	1.8
1966	3.2
1967	1.1
1968	2.8
1969	3.8
1970	3.4
1971	3.1
1972	3.2
1973	9.1
1974	15.4
1975	10.6
1976	4.5
1977	6.4
1978	7.9
1979	11.2
1980	13.4
1981	9.2
1982	4.1
1983	1.6
1984	2.1
1985	1.0
1986	-1.4
1987	2.1
1988	2.5
1989	5.2
1990	4.9
1991	2.1
1992	1.2
1993	1.2
1994	0.6
1995	1.9
1996	2.7
1997	0.4
1998	-0.8
1999	1.8
2000	3.8
2001	2.0
2002	-1.3
2003	3.2
2004	3.6
2005	4.8
2006	3.0
2007	3.9
2008	6.3
2009	-2.6
2010	4.2
2011	6.1
2012	1.9
2013	1.2
2014	1.9
2015	-3.2
2016	-1.0
2017	3.2

Source: US Bureau of Labor Statistics

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

The producer price index excluding food and energy from 1973 to 2017, the first historical date of availability in the dataset of the Bureau of Labor Statistics (BLS), shows similarly dynamic behavior as the overall index, as shown in Chart I-8. There is no evidence of persistent deflation in the US PPI.

Chart I-8, US Producer Price Index, Finished Goods Excluding Food and Energy, NSA, 1973-2017

Source: US Bureau of Labor Statistics

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

Chart I-9 provides 12-month percentage rates of change of the finished goods index excluding food and energy. The dominating characteristic is the Great Inflation of the 1970s. The double hump illustrates how inflation may appear to be subdued and then returns with strength.

Chart I-9, US Producer Price Index, Finished Goods Excluding Food and Energy, 12-Month Percentage Change, NSA, 1974-2017

Source: US Bureau of Labor Statistics

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

The producer price index of energy goods from 1974 to 2017 is in Chart I-10. The first jump occurred during the Great Inflation of the 1970s analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html 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 in Appendix I. There is relative stability of producer prices after 1986 with another jump and decline in the late 1990s into the early 2000s. The episode of commodity price increases during a global recession in 2008 could only have occurred with interest rates dropping toward zero, which stimulated the carry trade from zero interest rates to leveraged positions in commodity futures. Commodity futures exposures were dropped in the flight to government securities after Sep 2008. Commodity future exposures were created again when risk aversion diminished around Mar 2010 after the finding that US bank balance sheets did not have the toxic assets that were mentioned in proposing TARP in Congress (see Cochrane and Zingales 2009). Fluctuations in commodity prices and other risk financial assets originate in carry trade when risk aversion ameliorates. There are also fluctuations originating in shifts in preference for asset classes such as between commodities and equities.

Chart I-10, US, Producer Price Index, Finished Energy Goods, NSA, 1974-2017

Source: US Bureau of Labor Statistics

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

Chart I-11 shows 12-month percentage changes of the producer price index of finished energy goods from 1975 to 2017. This index is only available after 1974 and captures only one of the humps of energy prices during the Great Inflation. Fluctuations in energy prices have occurred throughout history in the US but without provoking deflation. Two cases are the decline of oil prices in 2001 to 2002 that has been analyzed by Barsky and Kilian (2004) and the collapse of oil prices from over $140/barrel with shock of risk aversion to the carry trade in Sep 2008.

Chart I-11, US, Producer Price Index, Finished Energy Goods, 12-Month Percentage Change, NSA, 1974-2017

Source: US Bureau of Labor Statistics

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

Headline and core producer price indexes are in Table I-6. The headline PPI SA decreased 0.3 percent in Dec 2017 and increased 3.3 percent NSA in the 12 months ending in Dec 2017. The core PPI SA changed 0.0 percent in Dec 2017 and increased 2.0 percent in 12 months. Analysis of annual equivalent rates of change shows inflation waves similar to those worldwide. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe motivated the carry trade from zero interest rates into commodity futures that caused the annual equivalent rate of 11.1 percent in the headline PPI in Jan-Apr 2011 and 3.7 percent in the core PPI. In the second wave, commodity futures prices collapsed in Jun 2011 with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline PPI inflation collapsed to 0.6 percent in May-Jun 2011 but the core annual equivalent inflation rate was higher at 2.4 percent. In the third wave, headline PPI inflation resuscitated with annual equivalent at 4.1 percent in Jul-Sep 2011 and core PPI inflation at 3.2 percent. Core PPI inflation was persistent throughout 2011, jumping from annual equivalent at 2.0 percent in the first three months of 2010 to 3.0 percent in 12 months ending in Dec 2011. Unconventional monetary policy is based on the proposition that core rates reflect more fundamental inflation and are thus better predictors of the future. In practice, the relation of core and headline inflation is as difficult to predict as future inflation (see IIID Supply Shocks in http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). In the fourth wave, risk aversion originating in the lack of resolution of the European debt crisis caused unwinding of carry trades with annual equivalent headline PPI inflation of 0.0 percent in Oct-Dec 2011 and 2.0 percent in the core annual equivalent. In the fifth wave from Jan to Mar 2012, annual equivalent inflation was 3.2 percent for the headline index but 3.2 percent for the core index excluding food and energy. In the sixth wave, annual equivalent inflation in Apr-May 2012 during renewed risk aversion was minus 4.1 percent for the headline PPI and 1.8 percent for the core. In the seventh wave, continuing risk aversion caused reversal of carry trades into commodity exposures with annual equivalent headline inflation of minus 1.2 percent in Jun-Jul 2012 while core PPI inflation was at annual equivalent 3.7 percent. In the eighth wave, relaxed risk aversion because of the announcement of the impaired bond buying program or Outright Monetary Transactions (OMT) of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html) induced carry trades that drove annual equivalent inflation of producer prices of the United States at 13.4 percent in Aug-Sep 2012 and 1.2 percent in the core index. In the ninth wave, renewed risk aversion caused annual equivalent inflation of minus 2.4 percent in Oct 2012-Dec 2012 in the headline index and 1.2 percent in the core index. In the tenth wave, annual equivalent inflation was 7.4 percent in the headline index in Jan-Feb 2013 and 1.8 percent in the core index. In the eleventh wave, annual equivalent inflation was minus 6.4 percent in Mar-Apr 2012 and 1.2 percent for the core index. In the twelfth wave, annual equivalent inflation returned at 2.4 percent in May-Aug 2013 and 1.2 percent in the core index. In the thirteenth wave, portfolio reallocations away from commodities and into equities reversed commodity carry trade with annual equivalent inflation of 1.2 percent in Sep-Nov 2013 in the headline PPI and 1.6 percent in the core. In the fourteenth wave, annual equivalent inflation returned at 5.7 percent annual equivalent for the headline index in Dec 2013-Feb 2014 and 3.7 percent for the core index. In the fifteenth wave, annual equivalent inflation was 1.2 percent for the general PPI index in Mar 2014 and 0.0 percent for the core PPI index. In the sixteenth wave, annual equivalent headline PPI inflation increased at 1.8 percent in Apr-Jul 2014 and 1.8 percent for the core PPI. In the seventeenth wave, annual equivalent inflation in Aug-Nov 2014 was minus 3.0 percent and 1.8 percent for the core index. In the eighteenth wave, annual equivalent inflation fell at 17.1 percent for the general index in Dec 2014 to Jan 2015 and increased at 3.0 percent in the core index. In the nineteenth wave, annual equivalent inflation increased at 3.7 percent in Feb 2015 and increased at 3.7 percent for the core index. In the twentieth wave, annual equivalent producer prices increased at 1.2 percent in Mar 2015 and the core at 1.2 percent. In the twenty-first wave, producer prices fell at 4.7 percent annual equivalent in Apr 2015 while the core index changed at 0.0 percent. In the twenty-second wave, producer prices increased at annual equivalent 10.7 percent in May-Jun 2015 and core producer prices at 4.3 percent. In the twenty-third wave, producer prices fell at 3.5 percent in Jul 2015 and the core index increased at 2.4 percent. In the twenty-fourth wave, annual equivalent inflation fell at 7.4 percent in Aug-Oct 2015 and the core index changed at 0.0 percent annual equivalent. In the twenty-fifth wave, annual equivalent inflation was 2.4 percent in Nov 2015 with the core at 1.2 percent. In the twenty-sixth wave, the headline PPI fell at annual equivalent 6.2 percent and the core increased at 2.0 percent in Dec 2015-Feb 2016. In the twenty-seventh wave, annual equivalent inflation was 3.7 percent for the central index in Mar-May 2016 and 2.0 percent for the core. In the twenty-eighth wave, annual equivalent inflation was 7.4 percent for the headline index in Jun 2016 and 3.7 percent for the core. In the twenty-ninth wave, producer prices fell at annual equivalent 2.4 percent in Jul 2016 and core producer prices fell at 1.2 percent. In the thirtieth wave, producer prices fell at 2.4 percent annual equivalent in Aug 2016 while core producer prices increased at 1.2 percent. In the thirty-first wave, producer prices increased at annual equivalent 5.5 percent in Sep-Oct 2016 while core prices increased at 1.8 percent. In the thirty-second wave, producer prices decreased at 1.2 percent annual equivalent in Nov 2016 and the core index increased at 2.4 percent. In the thirty-third wave, producer prices increased at 7.4 percent in Dec 2016 and the core index increased at 3.7 percent. In the thirty-fourth wave, producer prices increased at 12.7 percent in Jan 2017 while the core increased at 1.2 percent. In the thirty-fifth wave, producer prices increased at 3.7 percent in Feb 2017 while the core index increased at 2.4 percent. In the thirty-sixth wave, producer prices fell at annual equivalent 3.5 percent in Mar 2017 while core producer prices increased at 3.7 percent. In the thirty-seventh wave, annual equivalent inflation of the headline index was at 8.7 percent in Apr 2017 and 3.7 percent for the core. In the thirty-eighth wave, producer prices fell at 8.1 percent annual equivalent in May 2017 while core producer prices increased at 1.2 percent. In the thirty-ninth wave, producer prices decreased at annual equivalent 1.2 percent in Jun 2017 while core producer prices increased at 2.4 percent. In the fortieth wave, headline producer prices fell at 2.4 percent annual equivalent in Jul 2017 while core prices changed at 0.0 percent. In the forty-first wave, central producer prices increased at 8.1 percent annual equivalent in Aug-Sep 2017 while core prices increased at 1.8 percent. In the forty-second wave, producer prices increased at annual equivalent 10.0 percent in Oct-Nov 2017 while core producer prices increased at 4.3 percent. In the forty-third wave, producer prices fell at annual equivalent 3.5 percent in Dec 2017 while core prices changed at 0.0 percent. It is almost impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.

Table I-6, US, Headline and Core PPI Inflation Monthly SA and 12-Month NSA ∆%

	Finished Goods SA Month	Finished Goods NSA 12 months	Finished Core SA Month	Finished Core NSA 12 months
Dec 2017	-0.3	3.3	0.0	2.0
AE Dec	-3.5		0.0
Nov	1.4	4.3	0.4	2.2
Oct	0.2	2.9	0.3	2.0
AE Oct-Nov	10.0		4.3
Sep	0.7	3.3	0.2	1.7
Aug	0.6	3.0	0.1	1.8
AE Aug-Sep	8.1		1.8
Jul	-0.2	2.1	0.0	1.8
AE Jul	-2.4		0.0
Jun	-0.1	2.1	0.2	1.7
AE Jun	-1.2		2.4
May	-0.7	2.8	0.1	1.9
AE May	-8.1		1.2
Apr	0.7	4.0	0.3	2.0
AE Apr	8.7		3.7
Mar	-0.3	3.8	0.3	1.8
AE Mar	-3.5		3.7
Feb	0.3	3.8	0.2	1.6
AE Feb	3.7		2.4
Jan	1.0	2.9	0.1	1.7
AE Jan	12.7		1.2
Dec 2016	0.6	1.9	0.3	1.7
AE Dec	7.4		3.7
Nov	-0.1	0.4	0.2	1.6
AE Nov	-1.2		2.4
Oct	0.4	0.7	0.0	1.6
Sep	0.5	-0.1	0.2	1.4
AE Sep-Oct	5.5		1.8
Aug	-0.2	-1.9	0.1	1.4
AE Aug	-2.4		1.2
Jul	-0.2	-2.0	-0.1	1.2
AE Jul	-2.4		-1.2
Jun	0.6	-2.0	0.3	1.5
AE Jun	7.4		3.7
May	0.5	-2.2	0.2	1.6
Apr	0.4	-1.5	0.2	1.6
Mar	0.0	-2.3	0.1	1.5
AE Mar-May	3.7		2.0
Feb	-0.6	-2.0	0.2	1.5
Jan	-0.1	-1.2	0.2	1.7
Dec 2015	-0.9	-2.7	0.1	1.8
AE Dec-Feb	-6.2		2.0
Nov	0.2	-3.3	0.1	1.7
AE Nov	2.4		1.2
Oct	-0.3	-4.0	-0.2	1.8
Sep	-1.3	-4.1	0.2	2.1
Aug	-0.3	-3.1	0.0	2.1
AE ∆% Aug-Oct	-7.4		0.0
Jul	-0.3	-2.8	0.2	2.3
AE ∆% Jul	-3.5		2.4
Jun	0.5	-2.6	0.5	2.3
May	1.2	-2.9	0.2	2.0
AE ∆% May-Jun	10.7		4.3
Apr	-0.4	-4.5	0.0	2.0
AE ∆% Apr	-4.7		0.0
Mar	0.1	-3.3	0.1	2.1
AE ∆% Mar	1.2		1.2
Feb	0.3	-3.2	0.3	1.9
AE ∆% Feb	3.7		3.7
Jan	-1.6	-3.0	0.4	1.7
Dec 2014	-1.5	-0.6	0.1	1.7
AE ∆% Dec-Jan	-17.1		3.0
Nov	-0.4	1.1	0.1	2.0
Oct	-0.3	1.8	0.2	2.2
Sep	-0.2	2.2	0.2	2.1
Aug	-0.1	2.3	0.1	1.9
AE ∆% Aug-Nov	-3.0		1.8
July	0.0	2.9	0.1	1.9
Jun	0.2	2.8	0.2	1.9
May	-0.2	2.5	0.2	1.8
Apr	0.6	3.1	0.1	1.7
AE ∆% Apr-Jul	1.8		1.8
Mar	0.1	1.8	0.0	1.7
AE ∆% Mar	1.2		0.0
Feb	0.3	1.3	0.1	1.9
Jan	0.8	1.6	0.4	2.0
Dec 2013	0.3	1.4	0.4	1.6
AE ∆% Dec-Feb	5.7		3.7
Nov	0.2	0.8	0.3	1.3
Oct	0.2	0.3	0.1	1.2
Sep	-0.1	0.2	0.0	1.2
AE ∆% Sep-Nov	1.2		1.6
Aug	0.4	1.2	0.1	1.2
Jul	-0.1	2.1	0.1	1.3
Jun	0.1	2.3	0.1	1.6
May	0.4	1.6	0.1	1.7
AE ∆% May-Aug	2.4		1.2
Apr	-0.6	0.5	0.1	1.7
Mar	-0.5	1.1	0.1	1.7
AE ∆% Mar-Apr	-6.4		1.2
Feb	0.7	1.8	0.2	1.8
Jan	0.5	1.5	0.1	1.8
AE ∆% Jan-Feb	7.4		1.8
Dec 2012	-0.2	1.4	0.0	2.1
Nov	-0.5	1.4	0.2	2.2
Oct	0.1	2.3	0.1	2.2
AE ∆% Oct-Dec	-2.4		1.2
Sep	0.9	2.1	0.0	2.4
Aug	1.2	1.9	0.2	2.6
AE ∆% Aug-Sep	13.4		1.2
Jul	0.2	0.5	0.4	2.6
Jun	-0.4	0.7	0.2	2.6
AE ∆% Jun-Jul	-1.2		3.7
May	-0.6	0.6	0.1	2.7
Apr	-0.1	1.8	0.2	2.7
AE ∆% Apr-May	-4.1		1.8
Mar	0.1	2.7	0.2	2.9
Feb	0.3	3.4	0.2	3.1
Jan	0.4	4.1	0.4	3.1
AE ∆% Jan-Mar	3.2		3.2
Dec 2011	-0.1	4.7	0.2	3.0
Nov	0.3	5.7	0.1	3.0
Oct	-0.2	5.9	0.2	2.9
AE ∆% Oct-Dec	0.0		2.0
Sep	0.9	7.1	0.3	2.8
Aug	-0.3	6.6	0.2	2.7
Jul	0.4	7.2	0.3	2.7
AE ∆% Jul-Sep	4.1		3.2
Jun	-0.4	7.0	0.3	2.3
May	0.5	7.1	0.1	2.1
AE ∆% May-Jun	0.6		2.4
Apr	0.9	6.7	0.3	2.3
Mar	0.7	5.7	0.3	2.0
Feb	1.1	5.5	0.2	1.8
Jan	0.8	3.7	0.4	1.6
AE ∆% Jan-Apr	11.1		3.7
Dec 2010	0.9	3.8	0.2	1.4
Nov	0.4	3.4	0.0	1.2
Oct	0.8	4.3	0.0	1.6
Sep	0.3	3.9	0.2	1.6
Aug	0.6	3.3	0.1	1.3
Jul	0.1	4.1	0.1	1.5
Jun	-0.3	2.7	0.1	1.1
May	0.0	5.1	0.3	1.3
Apr	0.0	5.4	0.0	0.9
Mar	0.7	5.9	0.2	0.9
Feb	-0.7	4.1	0.1	1.0
Jan	1.0	4.5	0.2	1.0

Note: Core: excluding food and energy; AE: annual equivalent

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

The US producer price index NSA from 2000 to 2017 is in Chart I-24. There are two episodes of decline of the PPI during recessions in 2001 and in 2008. Barsky and Kilian (2004) consider the 2001 episode as one in which real oil prices were declining when recession began. Recession and the fall of commodity prices instead of generalized deflation explain the behavior of US inflation in 2008. There is similar collapse of producer prices into 2015 as in 2009 caused by the drop of

commodity prices.

Chart I-24, US, Producer Price Index, NSA, 2000-2017

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the PPI NSA from 2000 to 2017 are in Chart I-25. It may be possible to forecast trends a few months in the future under adaptive expectations but turning points are almost impossible to anticipate especially when related to fluctuations of commodity prices in response to risk aversion. In a sense, monetary policy has been tied to behavior of the PPI in the negative 12-month rates in 2001 to 2003 and then again in 2009 to 2010. There is similar sharp decline of inflation into 2015 caused by the drop of commodities. Monetary policy following deflation fears caused by commodity price fluctuations would introduce significant volatility and risks in financial markets and eventually in consumption and investment.

Chart I-25, US, Producer Price Index, 12-Month Percentage Change NSA, 2000-2017

Source: US Bureau of Labor Statistics

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

The US PPI excluding food and energy from 2000 to 2017 is in Chart I-26. There is here again a smooth trend of inflation instead of prolonged deflation as in Japan.

Chart I-26, US, Producer Price Index Excluding Food and Energy, NSA, 2000-2017

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the producer price index excluding food and energy are in Chart I-27. Fluctuations replicate those in the headline PPI. There is an evident trend of increase of 12-month rates of core PPI inflation in 2011 but lower rates in 2012-2014. Prices rose less rapidly into 2015-2017 as during earlier fluctuations.

Chart I-27, US, Producer Price Index Excluding Food and Energy, NSA, 12-Month Percentage Changes, 2000-2017

Source: US Bureau of Labor Statistics

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

The US producer price index of energy goods from 2000 to 2017 is in Chart I-28. There is a clear upward trend with fluctuations, which would not occur under persistent deflation.

Chart I-28, US, Producer Price Index Finished Energy Goods, NSA, 2000-2017

Source: US Bureau of Labor Statistics

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

Chart I-29 provides 12-month percentage changes of the producer price index of energy goods from 2000 to 2017. Barsky and Killian (2004) relate the episode of declining prices of energy goods in 2001 to 2002 to the analysis of decline of real oil prices. Interest rates dropping to zero during the global recession in 2008 induced carry trades that explain the rise of the PPI of energy goods toward 30 percent. Bouts of risk aversion with policy interest rates held close to zero explain the fluctuations in the 12-month rates of the PPI of energy goods in the expansion phase of the economy. Symmetric inflation targets induce significant instability in inflation and interest rates with adverse effects on financial markets and the overall economy.

Chart I-29, US, Producer Price Index Energy Goods, 12-Month Percentage Change, NSA, 2000-2017

Source: US Bureau of Labor Statistics

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

Effective with the January 2014 Producer Price Index (PPI) data release in February 2014 (https://www.bls.gov/news.release/archives/ppi_02192014.pdf 8), “BLS transitions from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. This shift results in significant changes to the PPI news release, as well as other documents available from PPI. The transition to the FD-ID system is the culmination of a long-standing PPI objective to improve the current SOP aggregation system by incorporating PPIs for services, construction, government purchases, and exports. In comparison to the SOP system, the FD-ID system more than doubles PPI coverage of the United States economy to over 75 percent of in-scope domestic production. The FD-ID system was introduced as a set of experimental indexes in January 2011. Nearly all new FD-ID goods, services, and construction indexes provide historical data back to either November 2009 or April 2010, while the indexes for goods that correspond with the historical SOP indexes go back to the 1970s or earlier.”

Headline and core final demand producer price indexes are in Table I-6B. The headline FD PPI SA decreased 0.1 percent in Dec 2017 and increased 2.6 percent NSA in the 12 months ending in Dec 2017. The core FD PPI SA decreased 0.1 percent in Dec 2017 and increased 2.3 percent in 12 months. Analysis of annual equivalent rates of change shows inflation waves similar to those worldwide. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe motivated the carry trade from zero interest rates into commodity futures that caused the average equivalent rate of 7.4 percent in the headline FD PPI in Jan-Apr 2011 and 4.6 percent in the core FD PPI. In the second wave, commodity futures prices collapsed in Jun 2011 with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline FD PPI inflation collapsed to 2.4 percent in May-Jun 2011 but the core annual equivalent inflation rate was at 2.4 percent. In the third wave, headline FD PPI inflation resuscitated with annual equivalent at 3.2 percent in Jul-Sep 2011 and core PPI inflation at 3.2 percent. Core FD PPI inflation was persistent throughout 2011, from annual equivalent at 4.6 percent in the first four months of 2011 to 2.6 percent in 12 months ending in Dec 2011. Unconventional monetary policy is based on the proposition that core rates reflect more fundamental inflation and are thus better predictors of the future. In practice, the relation of core and headline inflation is as difficult to predict as future inflation (see IIID Supply Shocks in http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). In the fourth wave, risk aversion originating in the lack of resolution of the European debt crisis caused unwinding of carry trades with annual equivalent headline FD PPI inflation of minus 0.8 percent in Oct-Dec 2011 and minus 0.4 percent in the core annual equivalent. In the fifth wave from Jan to Mar 2012, annual equivalent inflation was 3.7 percent for the headline index and 3.7 percent for the core index excluding food and energy. In the sixth wave, annual equivalent inflation in Apr-May 2012 during renewed risk aversion was 1.2 percent for the headline FD PPI and 3.0 percent for the core. In the seventh wave, continuing risk aversion caused reversal of carry trades into commodity exposures with annual equivalent headline inflation of minus 2.4 percent in Jun-Jul 2012 while core FD PPI inflation was at annual equivalent minus 1.2 percent. In the eighth wave, relaxed risk aversion because of the announcement of the impaired bond buying program or Outright Monetary Transactions (OMT) of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html) induced carry trades that drove annual equivalent inflation of final demand producer prices of the United States at 6.2 percent in Aug-Sep 2012 and 1.2 percent in the core index. In the ninth wave, renewed risk aversion caused annual equivalent inflation of 0.8 percent in Oct 2011-Dec 2012 in the headline index and 2.8 percent in the core index. In the tenth wave, annual equivalent inflation was 3.0 percent in the headline index in Jan-Feb 2013 and 0.6 percent in the core index. In the eleventh wave, annual equivalent price change was minus 1.2 percent in Mar-Apr 2012 and 2.4 percent for the core index. In the twelfth wave, annual equivalent inflation returned at 1.8 percent in May-Aug 2013 and 1.2 percent in the core index. In the thirteenth wave, portfolio reallocations away from commodities and into equities reversed commodity carry trade with annual equivalent inflation of 1.6 percent in Sep-Nov 2013 in the headline FD PPI and 2.0 percent in the core. In the fourteenth wave, annual equivalent inflation was 2.8 percent annual equivalent for the headline index in Dec 2013-Feb 2014 and 1.6 percent for the core index. In the fifteenth wave, annual equivalent inflation increased to 2.2 percent in the headline FD PPI and 2.7 percent in the core in Mar-Jul 2014. In the sixteenth wave, annual equivalent inflation was minus 1.2 percent for the headline FD index and minus 1.2 percent for the core FD index in Aug-Sep 2014. In the seventeenth wave, annual equivalent inflation was 2.4 percent for the headline FD and 6.2 percent for the core FD in Oct 2014. In the eighteenth wave, annual equivalent inflation was minus 3.5 percent for the headline FDI and 1.2 percent for the core in Nov-Dec 2014. In the nineteenth wave, annual equivalent inflation was minus 5.3 percent for the general index and minus 2.4 percent for the core in Jan-Feb 2015. In the twentieth wave, annual equivalent inflation was 0.0 percent for the general index in Mar 2015 and 0.0 percent for the core. In the twenty-first wave, final demand prices changed at annual equivalent 0.0 percent for the headline index in Apr 2015 and increased at 2.4 percent for the core index. In the twenty-second wave, annual equivalent inflation returned at 3.2 percent for the headline index in May-Jul 2015 and at 2.0 percent for the core index. In the twenty-third wave, the headline final demand index fell at 2.4 percent annual equivalent in Aug 2015 and the core decreased at 1.2 percent annual equivalent. In the twenty-fourth wave, FD prices fell at annual equivalent 4.1 percent in Sep-Oct 2015. In the twenty-fifth wave, FD prices increased at 1.2 percent annual equivalent in Nov 2015. In the twenty-sixth wave, FD prices decreased at 2.4 percent annual equivalent in Dec 2015. In the twenty-seventh wave, FD prices increased at 6.2 percent annual equivalent in Jan 2016 and the core FD increased at 8.7 percent. In the twenty-eighth wave, FD prices fell at annual equivalent 2.4 percent in Feb-Mar 2016 while the core decreased at 1.2 percent. In the twenty-ninth wave, FD prices increased at 4.1 percent annual equivalent in Apr-Jun 2016 and core FD increased at 2.4 percent. In the thirtieth wave, final demand prices fell at 1.2 percent in annual equivalent in Jul 2016 while the core changed at 0.0 percent. In the thirty-first wave, final demand prices decreased at annual equivalent 2.4 percent in Aug 2016 and the core decreased at 1.2 percent. In the thirty-second wave, final demand prices increased at annual equivalent 3.7 percent in Sep 2016 while core final demand increased at 2.4 percent. In the thirty-third wave, final demand prices increased at 3.7 percent and core final demand prices increased at 1.2 percent in Oct 2016. In the thirty-fourth wave, final demand producer prices increased at 2.4 percent annual equivalent in Nov-Dec 2016 while the core increased at 2.4 percent. In the thirty-fifth wave, final demand producer prices increased at 7.4 percent in Jan 2017 while core prices increased at 6.2 percent. In the thirty-sixth wave, final demand prices changed at 0.0 percent annual equivalent in Feb 2017 while the core index decreased at 2.4 percent. In the thirty-seventh wave, final demand prices changed at 0.0 percent annual equivalent in Mar 2017 while the core index increased at 2.4 percent. In the thirty-eighth wave, final demand prices increased at 6.2 percent in Apr 2017 while the core increased at 6.2 percent. In the thirty-ninth wave, final demand prices changed at annual equivalent 0.0 percent in May-Jun 2017 while core prices increased at 1.2 percent. In the fortieth wave, final demand prices increased at 1.2 percent annual equivalent in Jul 2017 while core prices increased at 2.4 percent. In the forty-first wave, final demand prices increased at 4.6 percent annual equivalent in Aug-Nov 2017 while core prices increased at 3.4 percent. In the forty-second wave, final demand prices fell at annual equivalent 1.2 percent in Dec 2017 while core prices fell at 1.2 percent. It is almost impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.

Table I-6B, US, Headline and Core Final Demand Producer Price Inflation Monthly SA and 12-Month NSA ∆%

	Final Demand SA Month	Final Demand NSA 12 months	Final Demand Core SA Month	Final Demand Core NSA 12 months
Dec 2017	-0.1	2.6	-0.1	2.3
AE ∆% Dec	-1.2		-1.2
Nov	0.4	3.1	0.3	2.4
Oct	0.4	2.8	0.4	2.4
Sep	0.3	2.6	0.2	2.2
Aug	0.4	2.4	0.2	2.2
AE ∆% Aug-Nov	4.6		3.4
Jul	0.1	2.0	0.2	1.9
AE ∆% Jul	1.2		2.4
Jun	0.0	1.9	0.0	1.8
May	0.0	2.3	0.2	2.0
AE ∆% May-Jun	0.0		1.2
Apr	0.5	2.5	0.5	1.9
AE ∆% Apr	6.2		6.2
Mar	0.0	2.2	0.2	1.5
AE ∆% Mar	0.0		2.4
Feb	0.0	2.0	-0.2	1.3
AE ∆% Feb	0.0		-2.4
Jan	0.6	1.7	0.5	1.4
AE ∆% Jan	7.4		6.2
Dec 2016	0.2	1.7	0.1	1.7
Nov	0.2	1.3	0.3	1.7
AE ∆% Nov-Dec	2.4		2.4
Oct	0.3	1.1	0.1	1.5
AE ∆% Oct	3.7		1.2
Sep	0.3	0.6	0.2	1.2
AE ∆% Sep	3.7		2.4
Aug	-0.2	0.0	-0.1	1.0
AE ∆% Aug	-2.4		-1.2
July	-0.1	0.0	0.0	0.9
AE ∆% Jul	-1.2		0.0
Jun	0.5	0.2	0.3	1.2
May	0.2	0.0	0.1	1.2
Apr	0.3	0.2	0.2	1.1
AE ∆% Apr-Jun	4.1		2.4
Mar	-0.2	-0.1	-0.1	1.1
Feb	-0.2	0.1	-0.1	1.3
AE ∆% Mar-Feb	-2.4		-1.2
Jan	0.5	0.0	0.7	0.8
AE ∆% Jan	6.2		8.7
Dec 2015	-0.2	-1.1	0.1	0.2
AE ∆% Dec	-2.4		1.2
Nov	0.1	-1.3	0.1	0.3
AE ∆% Nov	1.2		1.2
Oct	-0.2	-1.4	-0.2	0.2
Sep	-0.5	-1.1	0.0	0.7
AE ∆% Sep-Oct	-4.1		-1.2
Aug	-0.2	-1.0	-0.1	0.6
AE ∆% Aug	-2.4		-1.2
Jul	0.1	-0.7	0.2	0.8
Jun	0.3	-0.5	0.3	1.1
May	0.4	-0.8	0.0	0.7
AE ∆% May-Jul	3.2		2.0
Apr	0.0	-1.1	0.2	1.0
AE ∆% Apr	0.0		2.4
Mar	0.0	-0.9	0.0	0.8
AE ∆% Mar	0.0		0.0
Feb	-0.4	-0.5	-0.4	1.0
Jan	-0.5	0.0	0.0	1.7
AE ∆% Jan-Feb	-5.3		-2.4
Dec 2014	-0.4	0.9	0.2	2.0
Nov	-0.2	1.3	0.0	1.7
AE ∆% Nov-Dec	-3.5		1.2
Oct	0.2	1.5	0.5	1.9
AE ∆% Oct	2.4		6.2
Sep	-0.2	1.6	-0.2	1.6
Aug	0.0	1.9	0.0	1.9
AE ∆% Aug-Sep	-1.2		-1.2
Jul	0.3	1.9	0.5	1.9
Jun	0.0	1.8	0.0	1.6
May	0.2	2.1	0.3	2.1
Apr	0.1	1.8	0.0	1.5
Mar	0.3	1.6	0.3	1.6
AE ∆% Mar-Jul	2.2		2.7
Feb	0.3	1.2	0.2	1.6
Jan	0.4	1.3	0.2	1.4
Dec 2013	0.0	1.2	0.0	1.2
AE ∆% Dec-Feb	2.8		1.6
Nov	0.2	1.1	0.2	1.4
Oct	0.1	1.3	0.2	1.7
Sep	0.1	1.1	0.1	1.6
AE ∆% Sep-Nov	1.6		2.0
Aug	0.1	1.7	0.0	1.8
Jul	0.2	2.0	0.2	1.7
Jun	0.4	1.7	0.5	1.3
May	-0.1	0.9	-0.3	0.9
AE ∆% May-Aug	1.8		1.2
Apr	-0.2	0.9	0.2	1.3
Mar	0.0	1.3	0.2	1.5
AE ∆% Mar-Apr	-1.2		2.4
Feb	0.2	1.6	0.0	1.4
Jan	0.3	1.6	0.1	1.7
AE ∆% Jan-Feb	3.0		0.6
Dec 2012	0.0	1.9	0.1	2.0
Nov	0.1	1.7	0.5	1.8
Oct	0.1	1.9	0.1	1.6
AE ∆% Oct-Dec	0.8		2.8
Sep	0.7	1.5	0.3	1.4
Aug	0.3	1.2	-0.1	1.2
AE ∆% Aug-Sep	6.2		1.2
Jul	-0.1	1.0	-0.1	1.7
Jun	-0.3	1.3	-0.1	1.9
AE ∆% Jun-Jul	-2.4		-1.2
May	-0.1	1.6	0.2	2.2
Apr	0.3	2.0	0.3	2.1
AE ∆% Apr-May	1.2		3.0
Mar	0.2	2.4	0.2	2.3
Feb	0.3	2.8	0.3	2.6
Jan	0.4	3.1	0.4	2.5
AE ∆% Jan-Mar	3.7		3.7
Dec 2011	-0.1	3.2	0.0	2.6
Nov	0.3	3.7	0.2	2.7
Oct	-0.4	3.7	-0.3	2.7
AE ∆% Oct-Dec	-0.8		-0.4
Sep	0.4	4.5	0.2	2.9
Aug	0.2	4.4	0.4	3.0
Jul	0.2	4.5	0.2	2.7
AE ∆% Jul-Sep	3.2		3.2
Jun	0.1	4.3	0.2	2.6
May	0.3	4.2	0.2	2.3
AE ∆% May-Jun	2.4		2.4
Apr	0.5	4.2	0.3	2.5
Mar	0.7	4.0	0.5	NA
Feb	0.6	3.3	0.3	NA
Jan	0.6	2.4	0.4	NA
AE ∆% Jan-Apr	7.4		4.6
Dec 2010	0.3	2.8	0.1	NA
Nov	0.3	2.6	0.1	NA
Oct	0.4	NA	0.1	NA
Sep	0.3	NA	0.2	NA
Aug	0.2	NA	0.0	NA
Jul	0.2	NA	0.2	NA
Jun	-0.2	NA	-0.1	NA
May	0.2	NA	0.3	NA
Apr	0.3	NA	NA	NA
Mar	0.1	NA	NA	NA
Feb	-0.2	NA	NA	NA
Jan	0.9	NA	NA	NA
Dec 2009	0.1

Note: Core: excluding food and energy; AE: annual equivalent

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

Chart I-24B provides the FD PPI NSA from 2009 to 2017. There is persistent inflation with periodic declines in inflation waves similar to those worldwide.

Chart I-24B, US, Final Demand Producer Price Index, NSA, 2009-2017

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the FD PPI from 2010 to 2017 are in Chart I-25B. There are fluctuations in the rates with evident trend of decline to more subdued inflation. Reallocations of investment portfolios of risk financial assets from commodities to stocks explain much lower FD PPI inflation.

Chart I-25B, US, Final Demand Producer Price Index, 12-Month Percentage Change NSA, 2010-2017

Source: US Bureau of Labor Statistics

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

The core FD PPI NSA is in Chart I-26B. The behavior is similar to the headline index but with less fluctuation.

Chart I-26B, US, Final Demand Producer Price Index Excluding Food and Energy, NSA, 2009-2017

Source: US Bureau of Labor Statistics

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

Percentage changes in 12 months of the core FD PPI are in Chart I-27B. There are fluctuations in 12-month percentage changes but with evident declining trend to more moderate inflation.

Chart I-27B, US, Final Demand Producer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 2010-2017

Source: US Bureau of Labor Statistics

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

The energy FD PPI NSA is in Chart I-28B. The index increased during the reposition of carry trades after the discovery of lack of toxic assets in banks that caused flight away from risk financial assets into government obligations of the US (Cochrane and Zingales 2009). Alternating risk aversion and appetite with reallocations among classes of risk financial assets explain the behavior of the index after late 2010.

Chart I-28B, US, Final Demand Energy Producer Price Index, NSA, 2009-2017

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the FD energy PPI are in Chart I-29B. Rates moderated from late 2010 to the present. There are multiple negative rates. Investors create and reverse carry trades from zero interest rates to derivatives of commodities in accordance with relative risk evaluations of classes of risk financial assets.

Chart I-29B, US, Final Demand Energy Producer Price Index, 12-Month Percentage Change, NSA, 2010-2017

Source: US Bureau of Labor Statistics

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

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