Increasing Valuations of Risk Financial Assets, World Inflation Waves, United States Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, IMF View of World Economy and Finance, Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk: Part III

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Increasing Valuations of Risk Financial Assets, World Inflation Waves, United States Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, IMF View of World Economy and Finance, Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019

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I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IB1 Theory

IB2 Policy

IB3 Evidence

IB4 Unwinding Strategy

IC United States Inflation

IC Long-term US Inflation

ID Current US Inflation

IE Theory and Reality of Economic History, Cyclical Slow Growth Not Secular Stagnation and Monetary Policy Based on Fear of Deflation

II United States Industrial Production

IIB Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates

IIC IMF View of World Economy and Finance

II 1B Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide

III World Financial Turbulence

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

IID Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates. Long-term economic growth in Japan significantly improved by increasing competitiveness in world markets. Net trade of exports and imports is an important component of the GDP accounts of Japan. Table VB-3 provides quarterly data for net trade, exports and imports of Japan. Net trade had strong positive contributions to GDP growth in Japan in all quarters from IQ2007 to IIQ2009 with exception of IVQ2008, IIIQ2008 and IQ2009. The US recession is dated by the National Bureau of Economic Research (NBER) as beginning in IVQ2007 (Dec) and ending in IIQ2009 (Jun) (http://www.nber.org/cycles/cyclesmain.html). Net trade contributions helped to cushion the economy of Japan from the global recession. Net trade deducted from GDP growth in six of the nine quarters from IVQ2010 to IQ2012. The only strong contribution of net trade was 3.5 percent in IIIQ2011. Net trade added 1.3 percentage points to GDP growth in IQ2013 but deducted 0.1 percentage points in IIQ2013, deducting 1.4 percentage points in IIIQ2013 and 2.1 percentage points in IVQ2013. Net trade deducted 0.9 percentage points from GDP growth in IQ2014. Net trade added 4.0 percentage points to GDP growth in IIQ2014 and deducted 0.2 percentage points in IIIQ2014. Net trade added 1.6 percentage points to GDP growth in IVQ2014. Net trade contributed 0.0 percentage points to GDP growth in IQ2015 and deducted 0.6-percentage points in IIQ2015. Net trade deducted 0.5 percentage points from GDP growth in IIIQ2015. Net trade added 0.2 percentage points to GDP growth in IVQ2015 and added 1.3 percentage points in IQ2016. Net trade contributed 0.3 percentage points to GDP growth in IIQ2016. Net trade added 1.4 percentage points to GDP growth in IIIQ2016 and contributed 1.7 percentage points in IVQ2016.  Net trade contributed 0.3 percentage points to GDP growth in IQ2017 and deducted 1.2 percentage points in IIQ2017. Net trade contributed 2.1 percentage points to GDP growth in IIIQ2017 and added 0.1 percentage-point in IVQ2017. Net trade contributed 0.2 percentage points to GDP growth in IQ2018 and deducted 0.6 percentage points in IIQ2018. Net trade deducted 0.6 percentage points from GDP growth in IIIQ2018 and deducted 1.2 percentage points in IVQ2018. Private consumption assumed the role of driver of Japan’s economic growth but should moderate as in most mature economies.

Table VB-3, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %

	Net Trade	Exports	Imports
2018
I	0.2	0.3	0.0
II	-0.6	0.3	-0.9
III	-0.6	-1.0	0.5
IV	-1.2	0.7	-1.9
2017
I	0.3	1.1	-0.8
II	-1.2	0.0	-1.2
III	2.1	1.7	0.4
IV	0.1	1.5	-1.4
2016
I	1.3	0.2	1.1
II	0.3	-0.4	0.7
III	1.4	1.8	-0.4
IV	1.7	1.9	-0.3
2015
I	0.0	0.7	-0.6
II	-0.6	-2.4	1.8
III	-0.5	1.9	-2.3
IV	0.2	-0.6	0.8
2014
I	-0.9	3.6	-4.5
II	4.0	1.0	3.1
III	-0.2	1.1	-1.3
IV	1.6	2.2	-0.6
2013
I	1.3	1.6	-0.2
II	-0.1	2.1	-2.2
III	-1.4	0.0	-1.3
IV	-2.1	-0.2	-2.0
2012
I	0.6	1.7	-1.1
II	-1.9	-0.5	-1.4
III	-2.0	-2.2	0.2
IV	-0.3	-1.9	1.6
2011
I	-1.4	-0.6	-0.8
II	-4.2	-4.6	0.3
III	3.5	5.4	-1.9
IV	-2.7	-1.6	-1.0
2010
I	1.9	3.3	-1.4
II	0.3	2.8	-2.5
III	0.6	1.6	-1.1
IV	0.0	0.2	-0.3
2009
I	-4.8	-16.2	11.4
II	7.5	4.7	2.9
III	2.1	5.2	-3.2
IV	2.9	4.2	-1.3
2008
I	0.8	1.8	-1.0
II	0.5	-1.4	1.9
III	-0.2	0.1	-0.2
IV	-10.3	-9.2	-1.0
2007
I	1.0	1.6	-0.5
II	0.8	1.6	-0.8
III	2.2	1.7	0.5
IV	1.3	2.0	-0.7

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/index-e.html

http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html

There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-5 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart IV-5 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 93.9 in Jun 2009 to 84.1 in Jan 2012 or minus 10.4 percent and increased to 95.4 in Mar 2019 for gain of 13.4 percent relative to Jan 2012 and increase of 1.6 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials. The recovery from the global recession began in the third quarter of 2009.

Chart IV-5, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2019

Source: Bank of Japan

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

Chart IV-5A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 105.9 in Jun 2009 to 111.5 in Apr 2012 or 5.3 percent but dropped to 100.6 in Mar 2019 or minus 9.8 percent relative to Apr 2012 and fell 5.0 percent to 100.6 in Mar 2019 relative to Jun 2009.

Chart IV-5A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2019

Source: Bank of Japan

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

Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart IV-6 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates. The index increases with carry trades from zero interest rates into commodity futures and declines during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. Measurement that is more careful should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan (for the relation of terms of trade and growth see Pelaez 1979, 1976a). The import corporate goods price index on the yen basis increased from 82.4 in Jun 2009 to 99.6 in Apr 2012 or 20.9 percent and to 97.3 in Mar 2019 or decrease of 2.3 percent relative to Apr 2012 and increase of 18.1 percent relative to Jun 2009.

Chart IV-6, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2019

Source: Bank of Japan

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

Chart IV-6A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 95.0 in Jun 2009 to 131.6 in Apr 2012 or 38.5 percent and to 103.8 in Mar 2019 or minus 21.1 percent relative to Apr 2012 and increase of 9.3 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency decreased 5.0 percent from Jun 2009 to Mar 2019 while the import corporate goods price index increased 9.3 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.5 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability

Chart IV-6A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2019

Source: Bank of Japan

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

Table IV-6B provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Mar 2019. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Mar 2019, the export index on the contract currency basis decreased 6.2 percent and decreased 7.6 percent on the yen basis. For the entire period from Jan 2008 to Mar 2019, the import price index decreased 6.4 percent on the contract currency basis and decreased 7.2 percent on the yen basis. During significant part of the expansion period, prices of Japan’s exports of corporate goods on the contract currency, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while prices of imports of corporate goods on the contract currency, mostly commodities and raw materials, increased 38.5 percent. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.

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

	X-CC	X-Y	M-CC	M-Y
2008/01	107.3	103.3	110.9	104.8
2008/02	107.9	103.9	112.8	106.2
2008/03	108.7	100.7	115.1	103.4
2008/04	109.9	103.2	121.3	110.3
2008/05	110.7	105	124.9	114.9
2008/06	111.9	108	131.6	123.6
2008/07	113.2	109.2	135	126.8
2008/08	112.1	109.2	135.6	129.5
2008/09	111	105.8	129	120.8
2008/10	108.3	98.1	120.2	107
2008/11	106.6	93.5	107.7	93.2
2008/12	105.9	90	98.4	81.9
2009/01	106	89	94.3	77.9
2009/02	105.4	89.6	94.4	79
2009/03	105.2	93.2	93.8	81.9
2009/04	105.5	94.5	93	81.9
2009/05	105.4	92.9	92.5	80
2009/06	105.9	93.9	95	82.4
2009/07	105.4	92.2	98.3	83.7
2009/08	106.3	93.4	98.7	84.4
2009/09	106.3	91.4	100.2	83.4
2009/10	106	90.5	100.2	82.8
2009/11	106.4	90.2	102.2	83.5
2009/12	106.3	90.1	105.1	85.9
2010/01	107.5	91.4	106.8	88.1
2010/02	107.8	90.9	107.5	87.9
2010/03	107.8	91.1	106.8	87.4
2010/04	108.7	93.6	110	92.1
2010/05	108.9	92.1	112	92.4
2010/06	108.2	90.9	110.2	90.1
2010/07	107.5	88.6	110	87.9
2010/08	107.2	87.1	109.6	85.9
2010/09	107.5	86.8	110.2	85.6
2010/10	108.2	86.3	110.7	84.4
2010/11	108.9	87.1	113	86.5
2010/12	109.4	88	115	88.6
2011/01	110.4	88.2	118.1	90.4
2011/02	111.3	89	120.1	91.9
2011/03	111.9	89.1	123.2	93.6
2011/04	112.6	91	127.7	98.6
2011/05	112.3	89.4	130.9	99
2011/06	112.2	88.8	129.4	97.3
2011/07	112	88	130.3	97.1
2011/08	112	86.4	130.6	95.2
2011/09	112.1	86	128.9	93.6
2011/10	111.4	85.2	128.4	93
2011/11	110.2	84.8	127.1	92.8
2011/12	109.7	84.6	127.9	93.6
2012/01	110.1	84.1	126.7	91.8
2012/02	110.7	85.7	127.6	93.7
2012/03	111.3	88.8	130.3	99.5
2012/04	111.5	88.3	131.6	99.6
2012/05	110.6	86.2	130.1	96.7
2012/06	109.6	85	126.9	94
2012/07	108.8	84.1	123.4	91.2
2012/08	109.1	84.2	123.8	91.3
2012/09	109.2	84.2	126.3	92.7
2012/10	109.3	84.7	125.4	92.7
2012/11	109.1	85.8	124.7	93.8
2012/12	108.9	87.7	124.9	96.5
2013/01	109.2	91.6	125.4	101.7
2013/02	109.7	94.8	126.5	105.9
2013/03	109.5	95.4	126.8	107.5
2013/04	108.3	96.2	125.7	109.1
2013/05	107.7	97.6	124	110.4
2013/06	107.3	94.9	123.4	106.8
2013/07	107.2	96.2	122.9	108.2
2013/08	107	94.9	123.2	106.9
2013/09	107	95.9	124.5	109.2
2013/10	107.3	95.5	124.6	108.3
2013/11	107.2	96.6	124.6	110
2013/12	107.2	98.8	125.4	113.6
2014/01	107.3	99	126	114.6
2014/02	106.9	97.7	125.4	112.5
2014/03	106.6	97.6	124.9	112.2
2014/04	106.3	97.5	124.1	111.8
2014/05	106.2	96.8	123.8	110.9
2014/06	105.9	96.7	123.9	111.2
2014/07	106	96.5	123.9	110.9
2014/08	106.1	97.3	123.7	111.6
2014/09	105.9	99.3	122.8	114
2014/10	105.2	99.1	120.7	112.7
2014/11	104.8	103.4	117.8	115.9
2014/12	103.8	104.1	113.8	114
2015/01	102.2	101.2	108.2	106.6
2015/02	101.2	100.1	102.1	100.7
2015/03	101.3	100.9	103.1	102.6
2015/04	101.1	100.2	102	101
2015/05	101.4	101.4	101.6	101.5
2015/06	101.3	102.9	102.5	104.3
2015/07	100.6	101.7	101.5	102.9
2015/08	99.8	100.9	99	100.4
2015/09	98.6	98.2	96.6	96.2
2015/10	97.9	97.3	95.5	95
2015/11	97.5	98	94.9	95.7
2015/12	97.1	97.3	92.9	93.2
2016/01	96.4	94.7	89.9	88.3
2016/02	95.9	92.7	87.5	84.4
2016/03	96.1	92	87.3	83.2
2016/04	96.4	91	88.2	82.4
2016/05	96.5	90.6	88.6	82.4
2016/06	96.5	88.8	89.9	81.6
2016/07	96.9	88.2	90.8	81.5
2016/08	96.9	87.1	90.7	79.9
2016/09	97	87.5	91.1	80.7
2016/10	97.4	88.6	91.1	81.6
2016/11	98.1	91.2	93.8	86.3
2016/12	98.7	95.5	93.7	90.5
2017/01	99.4	95.6	96.1	92.1
2017/02	99.8	95.3	97.6	92.5
2017/03	100.3	95.7	98.4	93.3
2017/04	99.8	93.7	98.3	91.4
2017/05	99.4	94.6	98.1	92.6
2017/06	99.2	93.9	97.1	91
2017/07	99.3	94.9	96.3	91.2
2017/08	99.9	94.4	96.5	90.1
2017/09	100.5	95.5	97.8	91.8
2017/10	101.2	97.2	99.2	94.3
2017/11	101.5	97.4	100.3	95.4
2017/12	101.7	97.7	102.1	97.1
2018/01	101.9	97.1	102.9	96.6
2018/02	102.4	96	104.8	96.6
2018/03	102.6	95.2	104.4	94.9
2018/04	102.2	95.5	104.7	96.1
2018/05	102.7	96.9	106.3	98.8
2018/06	102.7	97	108.2	100.8
2018/07	102.4	97.4	108.3	101.7
2018/08	102.3	97	108	101.2
2018/09	102.2	97.4	108	101.8
2018/10	102.4	98	109.2	103.5
2018/11	102.1	97.9	109.7	104.3
2018/12	100.8	96.2	105.8	100.1
2019/01	100	93.8	102.6	94.9
2019/02	100.2	94.6	102.7	95.8
2019/03	100.6	95.4	103.8	97.3

Note: X-CC: Exports Contract Currency; X-Y: Exports Yen; M-CC: Imports Contract; M-Y: Imports Yen

Source: Bank of Japan

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

Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html  and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from policy interest rates rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Chart IV-5A and associated table at: 3/24/19 https://cmpassocregulationblog.blogspot.com/2019/03/inverted-yield-curve-of-treasury.html https://cmpassocregulationblog.blogspot.com/2019/02/revaluation-of-yuanus-dollar-exchange.html https://cmpassocregulationblog.blogspot.com/2019/01/delays-in-updating-united-states.html https://cmpassocregulationblog.blogspot.com/2018/12/increase-of-interest-rates-by-monetary.html https://cmpassocregulationblog.blogspot.com/2018/11/weaker-world-economic-growth-with.html https://cmpassocregulationblog.blogspot.com/2018/10/contraction-of-valuations-of-risk.html https://cmpassocregulationblog.blogspot.com/2018/09/world-inflation-waves-united-states.html https://cmpassocregulationblog.blogspot.com/2018/08/revision-of-united-states-national.html https://cmpassocregulationblog.blogspot.com/2018/07/continuing-gradual-increases-in-fed.html https://cmpassocregulationblog.blogspot.com/2018/06/world-inflation-waves-united-states.html https://cmpassocregulationblog.blogspot.com/2018/05/dollar-strengthening-world-inflation.html https://cmpassocregulationblog.blogspot.com/2018/04/dollar-appreciation-mediocre-cyclical.html https://cmpassocregulationblog.blogspot.com/2018/03/mediocre-cyclical-united-states_31.html https://cmpassocregulationblog.blogspot.com/2018/03/mediocre-cyclical-united-states.html https://cmpassocregulationblog.blogspot.com/2018/02/twenty-four-million-unemployed-or.html https://cmpassocregulationblog.blogspot.com/2017/12/dollar-devaluation-cyclically.html https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html https://cmpassocregulationblog.blogspot.com/2017/10/dollar-revaluation-and-increase-of.html https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.html https://cmpassocregulationblog.blogspot.com/2017/08/dollar-devaluation-and-interest-rate.html https://cmpassocregulationblog.blogspot.com/2017/07/data-dependent-monetary-policy-with_30.html https://cmpassocregulationblog.blogspot.com/2017/07/dollar-devaluation-and-rising-yields.html https://cmpassocregulationblog.blogspot.com/2017/05/mediocre-cyclical-united-states.html https://cmpassocregulationblog.blogspot.com/2017/04/dollar-devaluation-mediocre-cyclical.html https://cmpassocregulationblog.blogspot.com/2017/04/mediocre-cyclical-economic-growth-with.html https://cmpassocregulationblog.blogspot.com/2017/03/rising-valuations-of-risk-financial.html http://cmpassocregulationblog.blogspot.com/2017/01/rising-valuations-of-risk-financial.html http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2016/11/dollar-revaluation-rising-yields-and.html http://cmpassocregulationblog.blogspot.com/2016/10/mediocre-cyclical-united-states_30.html http://cmpassocregulationblog.blogspot.com/2016/10/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2016/08/and-as-ever-economic-outlook-is.html http://cmpassocregulationblog.blogspot.com/2016/07/business-fixed-investment-has-been-soft.html http://cmpassocregulationblog.blogspot.com/2016/07/financial-asset-values-rebound-from.html http://cmpassocregulationblog.blogspot.com/2016/05/appropriate-for-fed-to-increase.html http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2016/01/closely-monitoring-global-economic-and.html http://cmpassocregulationblog.blogspot.com/2015/12/dollar-revaluation-and-decreasing.html http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.htmlhttp://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html

http://cmpassocregulationblog.blogspot.com/2015/08/fluctuations-of-global-financial.html http://cmpassocregulationblog.blogspot.com/2015/08/turbulence-of-valuations-of-financial_77.html http://cmpassocregulationblog.blogspot.com/2015/06/international-valuations-of-financial_29.html http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate_97.html http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html http://cmpassocregulationblog.blogspot.com/2015/02/financial-and-international.html http://cmpassocregulationblog.blogspot.com/2014/12/valuations-of-risk-financial-assets.html http://cmpassocregulationblog.blogspot.com/2014/09/financial-volatility-mediocre-cyclical.html http://cmpassocregulationblog.blogspot.com/2014/09/geopolitical-and-financial-risks_71.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).

Chart IV-7, Japan, Domestic Corporate Goods Price Index, Monthly, 1960-2019

Source: Bank of Japan

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

The producer price index of the US from 1960 to 2019 in Chart IV-8 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.

Chart IV-8, US, Producer Price Index Finished Goods, Monthly, 1960-2019

Source: US Bureau of Labor Statistics

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

Further insight into inflation of the corporate goods price index (CGPI) of Japan is in Table IV-7. The increase in the tax on value added of consumption caused sharp increases in prices across all segments. Petroleum and coal with weight of 6.0 percent increased 2.9 percent in Mar 2019 and increased 2.9 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 4.1 percent, decreased 0.3 percent in Mar 2019 and increased 1.1 percent in 12 months. In general, most manufactured products had been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. The reversal of carry trades in commodity futures caused decrease in prices of commodities and raw materials while prices of manufactures stabilized. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income (for analysis of terms of trade and growth see Pelaez (1979, 1976a). There are now inflation effects of the intentional policy of devaluing the yen and recent collapse of commodity prices followed by increases.

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

Mar 2019	Weight	Month ∆%	12 Month ∆%
Total	1000.0	0.3	1.3
Food, Beverages	141.6	0.0	0.9
Petroleum & Coal	59.5	2.9	2.9
Production Machinery	41.1	-0.3	1.1
Electronic Components	24.5	-0.4	-0.2
Electric Power, Gas & Water	67.1	0.2	10.6
Iron & Steel	51.7	0.1	2.7
Chemicals	89.2	-0.1	-2.8
Transport Equipment	140.7	0.0	-0.4

Source: Bank of Japan

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

Percentage point contributions to change of the corporate goods price index (CGPI) in Feb 2019 are in Table IV-8, divided into domestic, export and import segments. In the domestic CGPI, increasing 0.3 percent in Mar 2019, the energy shock is evident in the contribution of 0.18 percentage points by petroleum and coal products in renewed carry trades of exposures in commodity futures. The exports CGPI increased 0.4 percent on the basis of the contract currency with contribution of 0.23 percentage points by metals and related products. The imports CGPI increased 1.1 percent on the contract currency basis. Metals and related products contributed 0.16 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide.

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

Groups Mar 2019	Contribution to Change Percentage Points
A. Domestic Corporate Goods Price Index	Monthly Change:  0.3%
Petroleum & Coal Products	0.18
Nonferrous Metals	0.04
Scrap & Waste	0.03
Electric Power, Gas & Water	0.02
Agriculture, Forestry & Fishery Products	0.01
Production Machinery	-0.01
Electronic Components & Devices	-0.01
B. Export Price Index	Monthly Change:    0.4 % contract currency
Metals & Related Products	0.23
Chemicals & Related Products	0.16
Other Primary Products & Manufactured Goods	0.15
General Purpose, Production & Business Oriented Machinery	0.08
Electric & Electronic Products	-0.11
Transportation Equipment	-0.06
C. Import Price Index	Monthly Change: 1.1% contract currency basis
Petroleum, Coal & Natural Gas	0.90
Metals & Related Products	0.16
Chemicals & Related Products	0.03
Electric & Electronic Products	-0.06
Beverages & Foods and Agriculture Products	-0.03

Source: Bank of Japan

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

There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (https://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Dec 2010 to Apr 2019. The index of current prices paid or costs of inputs moved from 16.1 in Dec 2012 to 27.3 in Apr 2019 while the index of current prices received or sales prices moved from 1.1 in Dec 2012 to 14.0 in Apr 2019. The farther the index is from the area of no change at zero, the faster the rate of change. Prices paid or costs of inputs at 27.3 in Apr 2019 are expanding at faster pace than prices received or of sales of products at 14.0. The index of future prices paid or expectations of costs of inputs in the next six months moved from 51.6 in Dec 2012 to 37.1 in Apr 2019 while the index of future prices received or expectation of sales prices in the next six months moved from 25.8 in Dec 2012 to 16.1 in Apr 2019. Prices paid or of inputs at 37.1 in Apr 2019 are expected to increase at a faster pace in the next six months than prices received or prices of sales products at 16.1 in Apr 2019. Prices of sales of finished products are less dynamic than prices of costs of inputs during waves of increases. Prices of costs of costs of inputs fall less rapidly than prices of sales of finished products during waves of price decreases. As a result, margins of prices of sales less costs of inputs oscillate with typical deterioration against producers, forcing companies to manage tightly costs and labor inputs. Instability of sales/costs margins discourages investment and hiring.

Table IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA

		Current Prices Paid	Current Prices Received	Future Prices Paid	Future Prices Received
12/31/2010		28.4	3.4	58	38.6
1/31/2011		35.8	15.8	60	42.1
2/28/2011		45.8	16.9	55.4	27.7
3/31/2011		53.2	20.8	71.4	36.4
4/30/2011		57.7	26.9	56.4	38.5
5/31/2011		69.9	28	68.8	35.5
6/30/2011		56.1	11.2	55.1	19.4
7/31/2011		43.3	5.6	51.1	30
8/31/2011		28.3	2.2	42.4	15.2
9/30/2011		32.6	8.7	53.3	22.8
10/31/2011		22.5	4.5	40.4	18
11/30/2011		18.3	6.1	36.6	25.6
12/31/2011		24.4	3.5	57	36
1/31/2012		26.4	23.1	53.8	30.8
2/29/2012		25.9	15.3	62.4	34.1
3/31/2012		50.6	13.6	66.7	32.1
4/30/2012		45.8	19.3	50.6	22.9
5/31/2012		37.3	12	57.8	22.9
6/30/2012		19.6	1	34	17.5
7/31/2012		7.4	3.7	35.8	16
8/31/2012		16.5	2.4	31.8	14.1
9/30/2012		19.1	5.3	40.4	23.4
10/31/2012		17.2	4.3	44.1	24.7
11/30/2012		14.6	5.6	39.3	15.7
12/31/2012		16.1	1.1	51.6	25.8
1/31/2013		22.6	10.8	38.7	21.5
2/28/2013		26.3	8.1	44.4	13.1
3/31/2013		25.8	2.2	50.5	23.7
4/30/2013		28.4	5.7	44.3	14.8
5/31/2013		20.5	4.5	29.5	14.8
6/30/2013		21	11.3	45.2	17.7
7/31/2013		17.4	1.1	28.3	12
8/31/2013		20.5	3.6	41	19.3
9/30/2013		21.5	8.6	39.8	24.7
10/31/2013		21.7	2.4	45.8	25.3
11/30/2013		17.1	-3.9	42.1	17.1
12/31/2013		15.7	3.6	48.2	27.7
1/31/2014		36.6	13.4	45.1	23.2
2/28/2014		25	15	40	23.8
3/31/2014		21.2	2.4	43.5	25.9
4/30/2014		22.4	10.2	33.7	14.3
5/31/2014		19.8	6.6	31.9	14.3
6/30/2014		17.2	4.3	36.6	16.1
7/31/2014		25	6.8	37.5	18.2
8/31/2014		27.3	8	42	21.6
9/30/2014		23.9	17.4	43.5	32.6
10/31/2014		11.4	6.8	42	26.1
11/30/2014		10.6	0	41.5	25.5
12/31/2014		10.4	6.3	40.6	32.3
1/31/2015		12.6	12.6	33.7	15.8
2/28/2015		14.6	3.4	27	5.6
3/31/2015		12.4	8.2	32	12.4
4/30/2015		19.1	4.3	38.3	13.8
5/31/2015		9.4	1	26	7.3
6/30/2015		9.6	1	24	5.8
7/31/2015		7.4	5.3	27.7	6.4
8/31/2015		7.3	0.9	34.5	10.9
9/30/2015		4.1	-5.2	28.9	7.2
10/31/2015		0.9	-8.5	27.4	7.5
11/30/2015		4.5	-4.5	29.1	11.8
12/31/2015		4	-4	27.3	20.2
1/31/2016		16	4	31	12
2/29/2016		3	-5	14.9	4
3/31/2016		3	-5.9	19.8	7.9
4/30/2016		19.2	2.9	27.9	5.8
5/31/2016		16.7	-3.1	28.1	6.3
6/30/2016		18.4	-1	29.6	7.1
7/31/2016		18.7	1.1	26.4	7.7
8/31/2016		15.5	2.1	25.8	9.3
9/30/2016		17	1.8	41.1	20.5
10/31/2016		22.6	4.7	35.8	30.2
11/30/2016		15.5	2.7	39.1	20.9
12/31/2016		22.6	3.5	42.6	22.6
1/31/2017		36.1	17.6	50.4	27.7
2/28/2017		37.8	19.4	38.8	25.5
3/31/2017		31	8.8	41.6	19.5
4/30/2017		32.8	12.4	37.2	25.5
5/31/2017		20.9	4.5	38.1	22.4
6/30/2017		20	10.8	33.1	13.8
7/31/2017		21.3	11	30.7	15.7
8/31/2017		31	6.2	33.3	21.7
9/30/2017		35.8	13.8	42.3	18.7
10/31/2017		27.3	7	41.4	25
11/30/2017		24.6	9.2	48.5	23.8
12/31/2017		29.7	11.6	50	27.5
1/31/2018		36.2	21.7	52.9	31.2
2/28/2018		48.6	21.5	52.1	25.7
3/31/2018		50.3	22.4	55.9	28
4/30/2018		47.4	20.7	54.8	31.1
5/31/2018		54	23	54	29.5
6/30/2018		52.7	23.3	51.2	27.1
7/31/2018		42.7	22.2	48.7	28.2
8/31/2018		45.2	20	53.3	26.7
9/30/2018		46.3	16.3	56.1	30.9
10/31/2018		42	14.3	52.9	23.5
11/30/2018		44.5	13.1	59.1	31.4
12/31/2018		39.7	12.8	51.9	27.6
1/31/2019		35.9	13.1	47.6	28.3
2/28/2019		27.1	22.9	37.1	30.7
3/31/2019		34.1	18.1	40.6	23.9
4/30/2019		27.3	14	37.1	16.1

Source: Federal Reserve Bank of New York

http://www.ny.frb.org/survey/empire/empiresurvey_overview.html

Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are in Table IV-5A. As in inflation waves throughout the world (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/03/inverted-yield-curve-of-treasury.html) indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the intensity in the beginning of 2011 because of risk aversion frustrating carry trades even induced by zero interest rates. The index of prices paid or prices of inputs moved from 21.1 in Dec 2012 to 21.6 in Apr 2019. The index of current prices received was minus 2.4 in Apr 2013, indicating decrease of prices received. The index of current prices received decreased from 9.1 in Dec 2012 to minus 4.8 in Sep 2015, decreasing to minus 3.4 in Feb 2016. The index of current prices received was 20.0 in Apr 2019. The farther the index is from the area of no change at zero, the faster the rate of change. The index of current prices paid or costs of inputs at 21.6 in Apr 2019 indicates faster expansion than the index of current prices received or sales prices of production in Apr 2019, showing 20.0. Prices paid indicate faster expansion than prices received during most of the history of the index. The index of future prices paid eased to 26.0 in Apr 2019 from 42.0 in Dec 2012 while the index of future prices received increased from 21.7 in Dec 2012 to 25.4 in Apr 2019. Expectations are incorporating faster increases in prices of inputs or costs of production, 26.0 in Apr 2019, than of sales prices of produced goods, 25.4 in Apr 2019, forcing companies to manage tightly costs and labor inputs. Volatility of margins of sales/costs discourages investment and hiring.

Table IV-5A, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Future Prices Paid	Future Prices Received
Dec-10	42.7	5.3	56.3	24.2
Jan-11	48.3	12.6	58.8	34.6
Feb-11	61.4	13.7	68.1	31.6
Mar-11	59.2	17.9	61.5	33.5
Apr-11	52.7	22.9	56.4	36.4
May-11	51.2	20.6	54.8	28.5
Jun-11	36	6.1	40.7	6.8
Jul-11	34.1	5.7	48.2	17.2
Aug-11	23.5	-3.2	42.7	22.8
Sep-11	30.1	6.4	38.4	20.5
Oct-11	22.8	1.7	41.4	27.6
Nov-11	21.8	5.2	34.5	26.2
Dec-11	25	5.6	42.8	21.1
Jan-12	26.1	9.3	47.9	21.8
Feb-12	33.4	10.4	50.9	26.4
Mar-12	17.4	6.9	38.7	24.8
Apr-12	21.8	9.6	37	25.2
May-12	10.1	1.1	40.4	9.2
Jun-12	1.1	-6.4	32.8	16.9
Jul-12	8.1	3.3	27.3	20.3
Aug-12	16.3	6.9	35	23.9
Sep-12	13	2.8	38.4	24.7
Oct-12	17.4	4.8	44.3	14.9
Nov-12	22.2	4.8	45.9	10.6
Dec-12	21.1	9.1	42	21.7
Jan-13	13	0.8	35.2	21.7
Feb-13	12.9	0.3	34.8	23.2
Mar-13	13.3	1.1	35.3	20.4
Apr-13	11.6	-2.4	31	16.8
May-13	12.5	0.4	35.4	19.4
Jun-13	16.7	11.2	29.6	24.2
Jul-13	18.9	5.6	40.2	24.7
Aug-13	17.8	12.8	34.2	23.1
Sep-13	22.3	11.8	37.4	27.1
Oct-13	18.1	9.3	41.8	34.1
Nov-13	23.5	6.7	41.1	36.1
Dec-13	17.6	9.2	40.2	28.1
Jan-14	20.1	8.4	37.7	13.7
Feb-14	16.3	10.2	28.6	19.8
Mar-14	21.1	6.8	33.7	20.6
Apr-14	20.9	10	37.8	21.4
May-14	26.5	17.2	39.2	29.6
Jun-14	25.7	9.3	42.3	30
Jul-14	30.4	14.1	36.6	21.7
Aug-14	21.8	6.1	45	27.7
Sep-14	21.9	7.9	39.3	25.7
Oct-14	24.7	17.4	31.3	21.2
Nov-14	14.5	8.8	32.9	18.1
Dec-14	16.2	12.4	25.5	19.7
Jan-15	12	2.2	31	20.9
Feb-15	6	3.3	34	22.6
Mar-15	1.1	-5.7	30.2	9.7
Apr-15	0.5	-3.4	18.8	14.2
May-15	-14.2	-7.4	24	20.4
Jun-15	9.1	-0.4	39	12.2
Jul-15	17.3	0.4	33.8	16.1
Aug-15	3.3	-3.4	35	8
Sep-15	-2.2	-4.8	26.3	5.1
Oct-15	0.1	-0.5	18	8.2
Nov-15	-6.7	-1.6	23.8	9.4
Dec-15	-7.2	-4.5	24.5	13.7
Jan-16	-1.2	-3.7	19.6	11.5
Feb-16	-3.3	-3.4	12.2	4.6
Mar-16	-1.8	1.3	23.7	14.3
Apr-16	11.5	4	33.7	22.2
May-16	13.6	10.6	25.7	14.6
Jun-16	20.4	1.6	35.8	17.6
Jul-16	12.5	1.3	28.4	22.6
Aug-16	19.4	6.8	31.8	12.7
Sep-16	21.8	10.7	42.7	32.8
Oct-16	11.2	-0.7	41.6	27
Nov-16	27.5	19.3	38.6	28.6
Dec-16	30.8	11.2	45.1	29.6
Jan-17	33.2	24.7	48.5	27.9
Feb-17	29.4	12.3	46.2	24.5
Mar-17	39.2	18.9	53.5	38.4
Apr-17	30.3	14	33	29
May-17	24.6	13.1	43.9	26.4
Jun-17	23.4	17.9	42.3	28.8
Jul-17	19.2	8.6	48.1	30.3
Aug-17	21.9	13.3	37.5	36.6
Sep-17	35.9	24.4	50.4	34
Oct-17	41.3	16.2	59.9	39.6
Nov-17	38.7	12.3	54.7	42
Dec-17	28.2	15	56.6	41.5
Jan-18	35	24.1	55	44.6
Feb-18	44.7	24.5	63.5	48.7
Mar-18	42.6	21.1	62	50.3
Apr-18	53.1	28.3	63.7	47
May-18	51	33.5	62.1	36.4
Jun-18	50.7	31.9	62.1	54.8
Jul-18	60	35	60.1	50.8
Aug-18	55.2	31.9	60.3	58
Sep-18	42.6	22.6	53.1	44.9
Oct-18	42	26.5	56.3	51.1
Nov-18	41.2	25.3	60.3	57.6
Dec-18	38.9	29	60.9	47.9
Jan-19	32.7	24.8	39.9	34.1
Feb-19	21.8	27.7	39.8	29.7
Mar-19	19.7	24.7	47.3	32.4
Apr-19	21.6	20	26	25.4

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-1 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2018. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from central bank policy rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Subsequent risk aversion and flows of capital away from commodities into stocks and high-yield bonds caused sharp decline in the index of prices paid followed by another recent rebound with marginal decline and new increase. The index falls, rebounds and falls again in the final segment but there are no episodes of contraction after 2009 with exception of minus 14.2 in May 2015, minus 2.2 in Sep 2015, minus 2.0 in Oct 2015, minus 6.7 in Nov 2015 and minus 7.2 in Dec 2015. The reading for the index in Jan 2016 is minus 1.2 and minus 3.3 for Feb 2016. The index is minus 1.8 in Mar 2016 and 11.5 in Apr 2016, increasing at 13.6 in May 2016 and 20.4 in Jun 2016. The index reached 12.5 in Jul 2016, 19.4 in Aug 2016 and 21.8 in Sep 2016. The index was 11.2 in Oct 2016 and 21.6 in Apr 2019.

Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2018. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices received in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2016. Prices paid increased at 1.1 in Mar 2015 while prices received contracted at 5.7. There were several contractions of prices paid: 7.4 in May 2015 for prices received with faster contraction of 14.2 of prices paid; minus 2.2 for prices paid in Sep 2015 with minus 4.8 for prices received; and 0.1 for prices paid in Oct 2015 with minus 0.5 for prices received. The index of prices received fell to minus 1.6 in Nov 2015 with minus 6.7 for prices paid and to minus 4.5 in Dec 2015 with minus 7.2 for prices paid. The index of prices received fell to minus 3.4 in Feb 2016 with minus 3.3 for prices paid. The index of prices paid decreased at 1.8 in Mar 2016 with increase at 1.3 for prices received. Prices paid moved to 21.6 in Apr 2019 while prices received moved to 20.0. Prices received relative to prices paid deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy of zero interest rates, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome pursued by unconventional monetary policy.

Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2A of the Federal Reserve Bank of Philadelphia shows current prices paid and current prices received from Jan 2007 to Mar 2017. Current prices paid jumped ahead of current prices received during the contraction from IVQ2007 to IIQ2009 through the carry trade from zero interest rates to exposures in commodity derivatives. There is the same behavior during most of the cyclical expansion after IIIQ2009. Rebalancing of financial investment portfolios away from commodities into equities explains the recent weakness of prices paid. There is a new ongoing carry trade into commodity futures.

Chart IV-2A, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2B of the Federal Reserve Bank of Philadelphia shows Current and Future Prices Received of the Business Outlook Survey from 2007 to Jun 2017. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

Chart IV-2B, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2C of the Federal Reserve Bank of Philadelphia shows Current and Future Prices Received of the Business Outlook Survey from 2007 to Jul 2017. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

Chart IV-2c, Federal Reserve Bank of Philadelphia Business Outlook Survey Current and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2D of the Federal Reserve Bank of Philadelphia shows Current Prices Paid and Current Prices Received o the Business Outlook Survey from 2007 to Sep 2017. Current prices paid are typically above prices received.

Chart IV-2d, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DE of the Federal Reserve Bank of Philadelphia shows Current Prices Paid and Current Prices Received of the Business Outlook Survey from 2007 to Oct 2017. Current prices paid are typically above prices received.

Chart IV-2de, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEf of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Dec 2017.Current prices paid are mostly above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

Chart IV-2DEf, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2Def1 of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Jan 2018. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

Chart IV-2dEf1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices and Future Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2Def2 of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Feb 2018. There is correlation in the direction of the indexes. Prices paid are typically above prices received.

Chart IV-2df2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Piad and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF3 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Mar 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 44 percent of the manufacturers this month. The prices paid diffusion index fell 2 points to 42.6 but remains near last month’s reading, which was the highest since 2011 (see Chart 2). The current prices received index, reflecting the manufacturers own prices, declined 3 points to a reading of 20.7” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0318).

Chart IV-2dEf3, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF4 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Apr 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to the highest reading since Mar 2011 (see Chart 2). The current prices received index, reflecting the manufacturers own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0418).

Chart IV-2dEf4, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to May 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 55 percent of the manufacturers this month, down slightly from 59 percent in April. The prices paid diffusion index fell 4 points but remains at an elevated level (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, increased 7 points to a reading of 36.4, its second consecutive month of increase and highest reading since February 1989.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0518).

Chart IV-2dEf5, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Jun 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “The firms continued to report higher prices for both purchased inputs and their own manufactured goods, although the survey’s price indicators fell modestly from their May readings. Price increases for purchased inputs were reported by 54 percent of the manufacturers this month, but the prices paid diffusion index edged 1 point lower (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, decreased 3 points but remains at a high reading of 33.2. Nearly 34 percent of the firms reported higher prices for their manufactured goods.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0618).

Chart IV-2dEf5, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Jul 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “The manufacturers continued to report higher prices for both purchased inputs and their own manufactured goods. Price increases for purchased inputs were reported by 63 percent of the manufacturers this month, up from 54 percent last month. The index has now risen 30 points since January (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, increased 3 points. Over 36 percent of the firms reported higher prices for their manufactured goods this month.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0718).

Chart IV-2dEf6, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Aug 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0818): “The survey’s current price measures moderated slightly but remain elevated, indicating that price increases for both purchased inputs and the firms’ own manufactured goods remain widespread. The prices paid index fell 8 points. Price increases for purchased inputs were reported by 63 percent of the manufacturers this month. Nearly 35 percent of the firms reported higher prices for their own manufactured goods this month, although the prices received index fell 3 points. In this month’s special questions, the firms were asked to forecast the changes in the prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices, the firms’ median forecast was for an increase of 3.0 percent, the same as when the same question was last asked in May. The firms expect their employee compensation costs (wages plus benefits on a per employee basis) to rise 3.0 percent over the next four quarters, the same as the previous forecast. When asked about the rate of inflation for U.S. consumers over the next year, the firms’ median forecast was 3.0 percent, slightly higher than the 2.5 percent projected in the previous survey. The firms’ forecast for the long-run (10-year average) inflation rate was also 3.0 percent.”

The Business Outlook survey of the FRB of Philadelphia for Sep 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0918): “The survey’s diffusion indexes for prices remained positive but decreased from their readings in August (see Chart 2). On the cost side, 44 percent of the firms reported increases in the prices paid for inputs, down from 63 percent in August, and the prices paid index decreased 15 points to 39.6. With respect to prices received for firms’ own manufactured goods, 25 percent of the firms reported higher prices compared with 35 percent last month. The prices received index decreased 14 points.”

Chart IV-2dEf6, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Oct 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1018): “The survey’s diffusion indexes for prices remained positive but lower than their readings for most of this year (see Chart 2). On the cost side, 42 percent of the firms reported increases in the prices paid for inputs, and the prices paid index, which had fallen 15 points last month, decreased 1 point to 38.2. With respect to prices received for firms’ own manufactured goods, 27 percent of the firms reported higher prices compared with 3 percent that reported decreases. The prices received index increased 5 points.”

Chart IV-2Oct18, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Nov 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1118): “The survey’s diffusion indexes for prices remained positive but lower than their readings for most of this year (see Chart 2). With respect to prices received for firms’ own manufactured goods, 24 percent of the firms reported higher prices compared with 2 percent that reported decreases. The prices received index decreased 2 points. On the cost side, 41 percent of the firms reported increases in the prices paid for inputs. The prices paid index edged up 1 point but remains 24 points lower than its peak in July.”

Chart IV-2Nov18, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Dec 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1218): “The survey’s diffusion indexes for prices remained positive, suggesting continued increases in firms’ input prices and the prices for their own manufactured goods. On the cost side, 42 percent of the firms reported increases in the prices paid for inputs. The prices paid index edged down 1 point and remains 25 points below its peak in July (see Chart 2). The prices received index increased 4 points to 26.2, its highest reading in four months, but 10 points below its peak in May.”

Chart IV-2Dec18, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Jan 2019 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2019/bos0119): “The survey’s diffusion indexes for prices remained positive but decreased from their readings in December. On the cost side, the prices paid index decreased 6 points to 32.7. The index has been trending down since last July and is at its lowest reading in 13 months (see Chart 2). With respect to prices received for firms’ own manufactured goods, 29 percent of the firms reported higher prices, and 4 percent reported lower prices. The prices received index decreased 4 points to 24.8.”

Chart IV-2Jan19, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Feb 2019 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2019/bos0219): “Price pressures originating from purchased inputs continued to abate. The prices paid index decreased 11 points to 21.8. The index has been trending down since last July and is now at its lowest reading since July 2017 (see Chart 2). Over 28 percent of the firms reported higher input prices this month, down from 40 percent last month. With respect to prices received for firms’ own manufactured goods, almost 33 percent of the firms reported higher prices, and 5 percent reported lower prices. The prices received index increased 3 points to 27.7.”

Chart IV-2Feb19, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Mar 2019 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2019/bos0319): “Price pressures arising from purchased inputs continued to ease. The prices paid index decreased 2 points to 19.7. The prices paid index declined for the eighth consecutive month and is at its lowest reading since July 2017 (see Chart 2). Nearly 24 percent of the firms reported higher input prices this month, down from 28 percent last month. With respect to prices received for firms’ own manufactured goods, 26 percent of the firms reported higher prices, down from 33 percent last month. The prices received index decreased 3 points to 24.7.”

Chart IV-2Mar19, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Apr 2019 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2019/bos0419): “With respect to prices received for firms’ own manufactured goods, the prices received index decreased 5 points to 20.0, its lowest reading since December 2017. Nearly 23 percent of the firms reported higher prices, down from 26 percent last month. The prices paid index increased 2 points to 21.6, its first increase in 9 months (see Chart 2). Over 26 percent of the firms reported higher input prices this month, while 5 percent reported lower input prices.”

Chart IV-2Apr19, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

I IMF View of World Economy and Finance. The International Financial Institutions (IFI) consist of the International Monetary Fund, World Bank Group, Bank for International Settlements (BIS) and the multilateral development banks, which are the European Investment Bank, Inter-American Development Bank and the Asian Development Bank (Pelaez and Pelaez, International Financial Architecture (2005), The Global Recession Risk (2007), 8-19, 218-29, Globalization and the State, Vol. II (2008b), 114-48, Government Intervention in Globalization (2008c), 145-54). There are four types of contributions of the IFIs:

1. Safety Net. The IFIs contribute to crisis prevention and crisis resolution.

i. Crisis Prevention. An important form of contributing to crisis prevention is by surveillance of the world economy and finance by regions and individual countries. The IMF and World Bank conduct periodic regional and country evaluations and recommendations in consultations with member countries and jointly with other international organizations. The IMF and the World Bank have been providing the Financial Sector Assessment Program (FSAP) by monitoring financial risks in member countries that can serve to mitigate them before they can become financial crises.

ii. Crisis Resolution. The IMF jointly with other IFIs provides assistance to countries in resolution of those crises that do occur. Recently, the IMF is cooperated with the government of Greece, European Union and European Central Bank in resolving the debt difficulties of Greece as it has done in the past in numerous other circumstances. Programs with other countries involved in the European debt crisis may also be developed.

2. Surveillance. The IMF conducts surveillance of the world economy, finance and public finance with continuous research and analysis. Important documents of this effort are the World Economic Outlook (http://www.imf.org/external/ns/cs.aspx?id=29), Global Financial Stability Report (http://www.imf.org/external/pubs/ft/gfsr/index.htm) and Fiscal Monitor (http://www.imf.org/external/ns/cs.aspx?id=262).

3. Infrastructure and Development. The IFIs also engage in infrastructure and development, in particular, the World Bank Group and the multilateral development banks.

4. Soft Law. Significant activity by IFIs has consisted of developing standards and codes under multiple forums. It is easier and faster to negotiate international agreements under soft law that are not binding but can be very effective (on soft law see Pelaez and Pelaez, Globalization and the State, Vol. II (2008c), 114-25). These norms and standards can solidify world economic and financial arrangements.

The objective of this section is to analyze current projections of the IMF database for the most important indicators.

Table I-1 is constructed with the database of the IMF (http://www.imf.org/external/ns/cs.aspx?id=29) to show GDP in dollars in 2017 and the growth rate of real GDP of the world and selected regional countries from 2017 to 2020. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has changed its measurement of the world economy to 3.8 percent in 2017 and reducing the forecast rate of growth to 3.6 percent in 2018, 3.3 percent in 2019 and 3.6 percent in 2020. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $36,871 billion of world output of $80,145 billion, or 46.0 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2017 to 2020, in contrast with 3.6 percent for the world as a whole. While the world would grow 15.1 percent in the four years from 2017 to 2020, the G7 as a whole would grow 7.6 percent. The difference in dollars of 2017 is high: growing by 15.1 percent would add around $12.1 trillion of output to the world economy, or roughly, over two times the output of the economy of Japan of $4,860 billion but growing by 7.6 percent would add $6.1 trillion of output to the world, or somewhat higher than the output of Japan in 2017. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2017 of $31,792 billion, or 39.7 percent of world output. The EMDEs would grow cumulatively 19.8 percent or at the average yearly rate of 4.6 percent, contributing $6.3 trillion from 2017 to 2020 or the equivalent of somewhat more than one half the GDP of $12,062 billion of China in 2017. The final four countries in Table I-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2017 adds to $18,345 billion, or 22.9 percent of world output, which is equivalent to 49.8 percent of the combined output of the major advanced economies of the G7.

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

	GDP USD Billions 2017	Real GDP ∆% 2017	Real GDP ∆% 2018	Real GDP ∆% 2019	Real GDP ∆% 2020
World	80,145	3.8	3.6	3.3	3.6
G7	36,871	2.2	2.1	1.6	1.5
Canada	1,650	3.0	1.8	1.5	1.9
France	2,588	2.2	1.5	1.3	1.4
DE	3,701	2.5	1.5	0.8	1.4
Italy	1,947	1.6	0.9	0.1	0.9
Japan	4,860	1.9	0.8	1.0	0.5
UK	2,640	1.8	1.4	1.2	1.4
US	19,485	2.2	2.9	2.3	1.9
Euro Area	12,652	2.4	1.8	1.3	1.5
DE	3,701	2.5	1.5	0.8	1.4
France	2,588	2.2	1.5	1.3	1.4
Italy	1,947	1.6	0.9	0.1	0.9
POT	220	2.8	2.1	1.7	1.5
Ireland	332	7.2	6.8	4.2	3.4
Greece	204	1.5	2.1	2.4	2.2
Spain	1,317	3.0	2.5	2.1	1.9
EMDE	31,792	4.8	4.5	4.4	4.8
Brazil	2,053	1.1	1.1	2.1	2.5
Russia	1,578	1.6	2.3	1.6	1.7
India	2,652	7.2	7.1	7.3	7.5
China	12,062	6.8	6.6	6.3	6.1

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

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx). Table I-2 is constructed with the WEO database to provide rates of unemployment from 2016 to 2020 for major countries and regions. In fact, unemployment rates for 2016 in Table I-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high in 2016 for the countries with sovereign debt difficulties in Europe: 11.1 percent for Portugal (POT), 8.4 percent for Ireland, 23.6 percent for Greece, 19.6 percent for Spain and 11.7 percent for Italy, which is lower but still high. The G7 rate of unemployment is 5.4 percent. Unemployment rates are not likely to decrease substantially if relative slow cyclical growth persists in advanced economies.

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

	% Labor Force 2016	% Labor Force 2017	% Labor Force 2018	% Labor Force 2019	% Labor Force 2020
World	NA	NA	NA	NA	NA
G7	5.4	5.0	4.5	4.5	4.4
Canada	7.0	6.3	5.8	5.9	6.0
France	10.1	9.4	9.1	8.8	8.4
DE	4.2	3.8	3.4	3.4	3.3
Italy	11.7	11.3	10.6	10.7	10.5
Japan	3.1	2.8	2.4	2.4	2.4
UK	4.9	4.4	4.1	4.2	4.4
US	4.9	4.4	3.9	3.8	3.7
Euro Area	10.0	9.1	8.2	8.0	7.7
DE	4.2	3.8	3.4	3.4	3.3
France	10.1	9.4	9.1	8.8	8.4
Italy	11.7	11.3	10.6	10.7	10.5
POT	11.1	8.9	7.1	6.8	6.3
Ireland	8.4	6.7	5.7	5.3	5.0
Greece	23.6	21.5	19.6	18.5	17.5
Spain	19.6	17.2	15.3	14.2	14.1
EMDE	NA	NA	NA	NA	NA
Brazil	11.3	12.8	12.3	11.4	10.2
Russia	5.5	5.2	4.8	4.8	4.7
India	NA	NA	NA	NA	NA
China	4.0	3.9	3.8	3.8	3.8

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

Source: IMF World Economic Outlook

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

The database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx) is used to construct the debt/GDP ratios of regions and countries in Table I-3. The concept used is general government debt, which consists of central government debt, such as Treasury debt in the US, and all state and municipal debt. Net debt is provided for all countries except for the only available gross debt for China, Russia and India. The net debt/GDP ratio of the G7 increases from 87.9 in 2016 to 88.5 in 2020. G7 debt is pulled by the high debt of Japan that reaches 153.2 percent of GDP in 2020. US general government debt increases from 81.2 percent of GDP in 2016 to 86.2 percent of GDP in 2020. Debt/GDP ratios of countries with sovereign debt difficulties in Europe are particularly worrisome. General government net debts of Italy, Greece and Portugal exceed 100 percent of GDP or are expected to exceed 100 percent of GDP by 2020. The only country in that group with relatively lower debt/GDP ratio is Spain with 86.2 in 2016, stabilizing to 82.9 in 2020. Ireland’s debt/GDP ratio decreases from 64.4 in 2016 to 51.9 in 2020. Fiscal adjustment, voluntary or forced by defaults, may squeeze further economic growth and employment in many countries as analyzed by Blanchard (2012WEOApr). Defaults could feed through exposures of banks and investors to financial institutions and economies in countries with sounder fiscal affairs.

Table I-3, IMF World Economic Outlook Database Projections, General Government Net Debt as Percent of GDP

	% Debt/ GDP 2016	% Debt/ GDP 2017	% Debt/ GDP 2018	% Debt/ GDP 2019	% Debt/ GDP 2020
World	NA	NA	NA	NA	NA
G7	87.9	86.2	86.0	87.3	88.5
Canada	28.5	27.6	27.9	26.6	25.8
France	87.5	87.5	87.6	88.2	87.7
DE	48.2	44.5	41.0	38.6	36.2
Italy	119.5	119.0	120.1	121.5	122.5
Japan	152.8	151.1	153.2	153.6	153.2
UK	78.8	77.5	77.5	76.2	75.0
US	81.2	80.7	80.8	83.4	86.2
Euro Area	73.7	70.9	68.9	67.9	66.7
DE	48.2	44.5	41.0	38.6	36.2
France	87.5	87.5	87.6	88.2	87.7
Italy	119.5	119.0	120.1	121.5	122.5
POT	113.1	110.1	108.2	107.0	104.0
Ireland	64.4	59.1	55.7	53.6	51.9
Greece*	183.5	181.8	188.1	176.9	169.3
Spain	86.2	84.8	84.1	83.5	82.9
EMDE*	46.9	48.5	51.0	53.0	54.5
Brazil	46.2	51.6	54.1	56.2	58.7
Russia*	16.1	15.5	14.0	13.8	13.9
India*	69.5	69.8	69.8	69.0	67.8
China*	44.2	46.8	50.5	55.4	59.5

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); *General Government Gross Debt as percent of GDP

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

The primary balance consists of revenues less expenditures but excluding interest revenues and interest payments. It measures the capacity of a country to generate sufficient current revenue to meet current expenditures. There are various countries with primary surpluses in 2016: Germany 1.8 percent and Italy 1.3 percent. There are also various countries with expected primary surpluses by 2020: Portugal 3.1 percent, Italy 0.3 percent and so on. Most countries in Table I-4 face significant fiscal adjustment in the future without “fiscal space.” Investors in government securities may require higher yields when the share of individual government debts hit saturation shares in portfolios. 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 (1)

Equation (1) 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}. Expectations by investors of future primary balances of indebted governments may be less optimistic than those in Table I-4 because of government revenues constrained by low growth and government expenditures rigid because of entitlements. Political realities may also jeopardize structural reforms and fiscal austerity.

Table I-4, IMF World Economic Outlook Database Projections of General Government Primary Net Lending/Borrowing as Percent of GDP

	% GDP 2016	% GDP 2017	% GDP 2018	% GDP 2019	% GDP 2020
World	NA	NA	NA	NA	NA
G7	-1.6	-1.3	-1.5	-1.8	-1.4
Canada	-0.4	0.0	-0.1	-0.2	0.0
France	-1.8	-1.0	-0.9	-1.7	-0.8
DE	1.8	1.9	2.4	1.8	1.6
Italy	1.3	1.2	1.4	0.9	0.3
Japan	-2.9	-2.7	-2.9	-2.7	-2.2
UK	-1.4	-0.1	0.1	0.1	0.2
US	-2.3	-2.2	-2.6	-2.9	-2.4
Euro Area	0.4	0.8	1.1	0.6	0.7
DE	1.8	1.9	2.4	1.8	1.6
France	-1.8	-1.0	-0.9	-1.7	-0.8
Italy	1.3	1.2	1.4	0.9	0.3
POT	1.9	0.7	2.6	2.5	3.1
Ireland	1.6	1.7	1.7	1.5	1.5
Greece	3.9	4.1	3.8	3.5	3.5
Spain	-2.0	-0.7	-0.4	-0.2	-0.2
EMDE	-3.1	-2.4	-2.0	-2.7	-2.3
Brazil	-2.5	-1.7	-1.7	-1.8	-1.0
Russia	-3.2	-1.0	3.4	1.4	1.3
India	-2.5	-2.3	-1.9	-1.9	-1.8
China	-2.9	-3.0	-3.8	-5.0	-4.3

*General Government Net Lending/Borrowing

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

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

The database of the World Economic Outlook of the IMF (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx) is used to obtain government net lending/borrowing as percent of GDP in Table I-5. Interest on government debt is added to the primary balance to obtain overall government fiscal balance in Table I-5. For highly indebted countries there is an even tougher challenge of fiscal consolidation. Adverse expectations on the success of fiscal consolidation may drive up yields on government securities that could create hurdles to adjustment, growth and employment.

Table I-5, IMF World Economic Outlook Database Projections of General Government Net Lending/Borrowing as Percent of GDP

	% GDP 2016	% GDP 2017	% GDP 2018	% GDP 2019	% GDP 2020
World	NA	NA	NA	NA	NA
G7	-3.1	-2.8	-2.9	-3.2	-3.0
Canada	-1.1	-0.3	-0.4	-0.6	-0.6
France	-3.6	-2.7	-2.6	-3.3	-2.4
DE	0.9	1.0	1.7	1.1	1.1
Italy	-2.5	-2.4	-2.1	-2.7	-3.4
Japan	-3.7	-3.2	-3.2	-2.8	-2.1
UK	-2.9	-1.8	-1.4	-1.3	-1.2
US	-3.9	-3.8	-4.3	-4.6	-4.4
Euro Area	-1.5	-1.0	-0.6	-1.0	-0.9
DE	0.9	1.0	1.7	1.1	1.1
France	-3.6	-2.7	-2.6	-3.3	-2.4
Italy	-2.5	-2.4	-2.1	-2.7	-3.4
POT	-2.0	-3.0	-0.7	-0.6	-0.1
Ireland	-0.5	-0.3	0.0	0.0	0.2
Greece	0.7	1.0	0.4	-0.2	0.1
Spain	-4.5	-3.1	-2.7	-2.3	-2.3
EMDE	-4.8	-4.3	-3.9	-4.7	-4.3
Brazil	-9.0	-7.9	-6.8	-7.4	-7.0
Russia	-3.6	-1.5	2.8	1.0	0.8
India	-7.2	-7.0	-6.7	-6.9	-6.6
China	-3.7	-3.9	-4.8	-6.1	-5.5

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

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

There were some hopes that the sharp contraction of output during the global recession would eliminate current account imbalances. Table I-6 constructed with the database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx) shows that external imbalances have been maintained in the form of current account deficits and surpluses. China’s current account surplus is 1.8 percent of GDP for 2016 and is projected to stabilize at 0.3 percent of GDP in 2020. At the same time, the current account deficit of the US is 2.3 percent of GDP in 2016 and is projected at 2.6 percent of GDP in 2020. The current account surplus of Germany is 8.5 percent for 2016 and remains at a high 6.8 percent of GDP in 2020. Japan’s current account surplus is 3.9 percent of GDP in 2016 and stabilizes to 3.2 percent of GDP in 2020.

Table I-6, IMF World Economic Outlook Databank Projections, Current Account of Balance of Payments as Percent of GDP

	% CA/ GDP 2016	% CA/ GDP 2017	% CA/ GDP 2018	% CA/ GDP 2019	% CA/ GDP 2020
World	NA	NA	NA	NA	NA
G7	-0.3	-0.1	-0.3	-0.4	-0.5
Canada	-3.2	-2.8	-2.6	-3.1	-2.8
France	-0.8	-0.6	-0.7	-0.4	0.0
DE	8.5	8.0	7.4	7.1	6.8
Italy	2.6	2.8	2.6	2.9	2.6
Japan	3.9	4.0	3.5	3.5	3.6
UK	-5.2	-3.3	-3.9	-4.2	-3.9
US	-2.3	-2.3	-2.3	-2.4	-2.6
Euro Area	3.6	3.2	3.0	2.9	2.8
DE	8.5	8.0	7.4	7.1	6.8
France	-0.8	-0.6	-0.7	-0.4	0.0
Italy	2.6	2.8	2.6	2.9	2.6
POT	0.6	0.5	-0.6	-0.4	-0.5
Ireland	-4.2	8.5	10.0	9.1	8.3
Greece	-1.1	-2.4	-3.4	-2.7	-2.6
Spain	1.9	1.8	0.8	0.8	0.8
EMDE	-0.2	0.0	-0.1	-0.4	-0.5
Brazil	-1.3	-0.4	-0.8	-1.7	-1.6
Russia	1.9	2.1	7.0	5.7	5.1
India	-0.6	-1.8	-2.5	-2.5	-2.4
China	1.8	1.4	0.4	0.4	0.3

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

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

The G7 meeting in Washington on Apr 21, 2006 of finance ministers and heads of central bank governors of the G7 established the “doctrine of shared responsibility” (G7 2006Apr):

“We, Ministers and Governors, reviewed a strategy for addressing global imbalances. We recognized that global imbalances are the product of a wide array of macroeconomic and microeconomic forces throughout the world economy that affect public and private sector saving and investment decisions. We reaffirmed our view that the adjustment of global imbalances:

• Is shared responsibility and requires participation by all regions in this global process;
• Will importantly entail the medium-term evolution of private saving and investment across countries as well as counterpart shifts in global capital flows; and
• Is best accomplished in a way that maximizes sustained growth, which requires strengthening policies and removing distortions to the adjustment process.

In this light, we reaffirmed our commitment to take vigorous action to address imbalances. We agreed that progress has been, and is being, made. The policies listed below not only would be helpful in addressing imbalances, but are more generally important to foster economic growth.

• In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.
• In Europe, further action is needed to implement structural reforms for labor market, product, and services market flexibility, and to encourage domestic demand led growth.
• In Japan, further action is needed to ensure the recovery with fiscal soundness and long-term growth through structural reforms.

Others will play a critical role as part of the multilateral adjustment process.

• In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, lessening reliance on export-led growth strategies, and actions to strengthen financial sectors.

• In oil-producing countries, accelerated investment in capacity, increased economic diversification, enhanced exchange rate flexibility in some cases.

• Other current account surplus countries should encourage domestic consumption and investment, increase micro-economic flexibility and improve investment climates.

We recognized the important contribution that the IMF can make to multilateral surveillance.”

The concern at that time was that fiscal and current account global imbalances could result in disorderly correction with sharp devaluation of the dollar after an increase in premiums on yields of US Treasury debt (see Pelaez and Pelaez, The Global Recession Risk (2007)). The IMF was entrusted with monitoring and coordinating action to resolve global imbalances. The G7 was eventually broadened to the formal G20 in the effort to coordinate policies of countries with external surpluses and deficits.

The database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx) is used to construct Table VI-3 with fiscal and current account imbalances projected for 2017 and 2019. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in .surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

The IMF (http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/c4.pdf) analyzes global imbalances as:

• Global current account imbalances have narrowed by more than a third from

their peak in 2006. Key imbalances—the large deficit of the United States and

the large surpluses of China and Japan—have more than halved.

• The narrowing in imbalances has largely been driven by demand contraction

(“expenditure reduction”) in deficit economies.

• Exchange rate adjustment has facilitated rebalancing in China and the United

States, but in general the contribution of exchange rate changes (“expenditure

switching”) to current account adjustment has been relatively modest.

• The narrowing of imbalances is expected to be durable, as domestic demand in

deficit economies is projected to remain well below pre-crisis trends.

• Since flow imbalances have narrowed but not reversed, net creditor and debtor

positions have widened further. Weak growth has also contributed to still high

ratios of net external liabilities to GDP in some debtor economies.

• Risks of a disruptive adjustment in global current account balances have

decreased, but global demand rebalancing remains a policy priority. Stronger

external demand will be instrumental for reviving growth in debtor countries and

reducing their net external liabilities.”

Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2018 Dollar GDP

	GDP $B 2018	FD %GDP 2017	CAD %GDP 2017	Debt %GDP 2017	FD%GDP 2019	CAD%GDP 2019	Debt %GDP 2019
US	20494	-2.2	-2.3	80.7	-2.9	-2.4	83.4
Japan	4972	-2.7	4.0	151.1	-2.7	3.5	153.6
UK	2829	-0.1	-3.3	77.5	0.1	-4.2	76.2
Euro	12652	0.8	3.2	70.9	0.6	2.9	67.9
Ger	4000	1.9	8.0	44.5	1.8	7.1	38.6
France	2775	-1.0	-0.6	87.5	-1.7	-0.4	88.2
Italy	2072	1.2	2.8	119.0	0.9	2.9	121.5
Can	1711	0.0	-2.8	27.6	-0.2	-3.1	26.6
China	13407	-3.0	1.4	46.8	-4.9	0.4	55.4
Brazil	1868	-1.8	-0.4	51.6	-1.8	-1.7	56.2

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30, 2011, the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt exceeding 100 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table I-8 is constructed with IMF World Economic Outlook database (https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2019.

Table I-8, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2019 USD Billions	Primary Net Lending Borrowing % GDP 2019	General Government Net Debt % GDP 2019
World	87,265
Euro Zone	13,596	0.6	67.9
Portugal	240	2.5	107.0
Ireland	382	1.5	53.6
Greece	220	3.5	176.9**
Spain	1,429	-0.2	83.5
Major Advanced Economies G7	39,841	-1.8	87.3
United States	21,345	-2.9	83.4
UK	2,829	0.1	76.2
Germany	3,964	1.8	38.6
France	2,762	-1.7	88.2
Japan	5,176	-2.7	153.6
Canada	1,739	-0.2	26.6
Italy	2,026	0.9	121.5
China	14,217	-4.9	55.4***

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

The data in Table I-8 are used for some very simple calculations in Table I-9. The column “Net Debt USD Billions 2019” in Table I-9 is generated by applying the percentage in Table I-8 column “General Government Net Debt % GDP 2019” to the column “GDP 2019 USD Billions.” The total debt of France and Germany in 2019 is $3966.2 billion, as shown in row “B+C” in column “Net Debt USD Billions 2019.” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $4505.6 billion, adding rows D+E+F+G+H in column “Net Debt USD billions 2019.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table I-9. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8471.8 billion, which would be equivalent to 126.0 percent of their combined GDP in 2019. Under this arrangement, the entire debt of selected members of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 213.7 percent if including debt of France and 152.3 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks. Analysis of fiscal stress is quite difficult without including another global recession in an economic cycle that is already mature by historical experience.

Table I-9, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions 2019	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	9,231.7
B Germany	1,530.1		$8471.8 as % of $3964 =213.7% $6035.7as % of $3964 =152.3%
C France	2,436.1
B+C	3,966.2	GDP $6726 Total Debt $8,471.8 Debt/GDP: 126.0%
D Italy	2,461.6
E Spain	1,193.2
F Portugal	256.8
G Greece	389.2
H Ireland	204.8
Subtotal D+E+F+G+H	4,505.6

Source: calculation with IMF data IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

World trade projections of the IMF are in Table I-10. There is decreasing growth of the volume of world trade of goods and services from 3.8 percent in 2018 to 3.4 percent in 2019, stabilizing to 3.9 percent in 2020. Growth stabilizes at 3.8 percent on average from 2018 to 2024. World trade would be slower for advanced economies while emerging and developing economies (EMDE) experience faster growth. World economic slowdown would be more challenging with lower growth of world trade.

Table I-10, IMF, Projections of World Trade, USD Billions, USD/Barrel and Annual ∆%

	2018	2019	2020	Average ∆% 2018-2024
World Trade Volume (Goods and Services)	3.8	3.4	3.9	3.8
Exports Goods & Services	3.5	3.2	3.7	3.6
Imports Goods & Services	4.1	3.6	4.0	3.9
Exports Goods & Services
G7	2.8	2.8	2.9	3.0
EMDE	4.3	4.0	4.8	4.5
Imports Goods & Services
G7	3.2	3.1	2.9	3.1
EMDE	5.6	4.6	5.3	5.1
Terms of Trade Goods & Services
G7	-0.6	-0.4	0.2	0.0
EMDE	1.3	-0.9	0.0	0.8
World Crude Oil Price $/Barrel	68.3	59.2	59.0	59.5

Crude Oil: Simple Average of three spot prices: Dated Brent, West Texas Intermediate and the Dubai Fateh

Source: International Monetary Fund World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019.