CMP Associates Regulation Blog: Competitive Exchange Rate Policies, Weakening Flows of International Trade, Contraction of Valuations of Risk Financial Assets, Inverted Yield Curve, Recovery Without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle-Age Unemployment, United States International Trade, Annual Revision of US National Accounts PCE Prices, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk: Part II

Competitive Exchange Rate Policies, Weakening Flows of International Trade, Contraction of Valuations of Risk Financial Assets, Inverted Yield Curve, Recovery Without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle-Age Unemployment, United States International Trade, Annual Revision of US National Accounts PCE Prices, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

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

IID United States International Trade

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

IIA United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (https://www.census.gov/foreign-trade/index.html). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (https://cmpassocregulationblog.blogspot.com/2019/07/global-manufacturing-stress-world.html and earlier https://cmpassocregulationblog.blogspot.com/2019/06/fomc-outlook-uncertainty-central-bank.html and earlier https://cmpassocregulationblog.blogspot.com/2019/05/contraction-of-risk-financial-assets.html). The Census Bureau revised data for 2019, 2018, 2017, 2016, 2015, 2014 and 2013. Exports decreased 2.1 percent in Jun 2019 while imports decreased 1.7 percent. The trade deficit decreased from $55,344 million in May 2019 to $55,154 million in Jun 2019. The trade deficit deteriorated to $45,224 million in Feb 2016, improving to $38,454 million in Mar 2016. The trade deficit deteriorated to $38,922 million in Apr 2016, deteriorating to $40,372 million in May 2016 and $43,856 million in Jun 2016. The trade deficit improved to $41,360 million in Jul 2016, moving to $41,681 million in Aug 2016. The trade deficit improved to $39,049 million in Sep 2016, deteriorating to $42,002 million in Oct 2016. The trade deficit deteriorated to $46,631 million in Nov 2016, improving to $43,475 million in Dec 2016. The trade deficit deteriorated to $46,417 million in Jan 2017, improving to $43,103 million in Feb 2017. The trade deficit deteriorated to $44,531 million in Mar 2017 and $47,384 million in Apr 2017, improving to $46,684 million in May 2017. The trade deficit improved to $45,609 million in Jun 2017 and to $44,162 million in Jul 2017. The trade deficit improved to $43,689 million in Aug 2017, improving to $43,571 million in Sep 2017. The trade deficit deteriorated to $45,478 million in Oct 2017, deteriorating to $49,120 million in Nov 2017. The trade deficit deteriorated to 50,376 million in Dec 2017, deteriorating to $52,113 million in Jan 2018. The trade deficit deteriorated to $53,818 million in Feb 2018, improving to $47,177 million in Mar 2018. The trade deficit worsened to $48,218 million in Apr 2018, improving to $44,352 million in May 2018. The trade deficit deteriorated to $47,431 million in Jun 2018, deteriorating to $52,442 million in Jul 2018. The trade deficit deteriorated to $54,889 million in Aug 2018 and deteriorated to $56,094 million in Sep 2018. The trade deficit deteriorated to $56,692 million in Oct 2018 and improved to $53,647 million in Nov 2018. The trade deficit deteriorated to $60,807 million in Dec 2018, improving to $52,700 million in Jan 2019. The trade deficit improved to $50,003 million in Feb 2019, deteriorating to $51,906 million in Mar 2019. The trade deficit improved to $51,224 million in Apr 2019, deteriorating to $55,344 million in May 2019. The trade deficit improved to $55,154 million in Jun 2019.

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

		Exports	Month ∆%	Imports	Month ∆%
Jan-2016	-41,957	179,030	-2.2	220,986	-1.5
Feb-2016	-45,224	180,488	0.8	225,712	2.1
Mar-2016	-38,454	179,884	-0.3	218,338	-3.3
Apr-2016	-38,922	182,164	1.3	221,086	1.3
May-2016	-40,372	183,392	0.7	223,764	1.2
Jun-2016	-43,856	184,470	0.6	228,325	2.0
Jul-2016	-41,360	185,977	0.8	227,337	-0.4
Aug-2016	-41,681	188,034	1.1	229,714	1.0
Sep-2016	-39,049	188,707	0.4	227,757	-0.9
Oct-2016	-42,002	187,115	-0.8	229,117	0.6
Nov-2016	-46,631	185,489	-0.9	232,121	1.3
Dec-2016	-43,475	191,089	3.0	234,564	1.1
Jan-2017	-46,417	192,190	0.6	238,607	1.7
Feb-2017	-43,103	192,602	0.2	235,704	-1.2
Mar-2017	-44,531	192,314	-0.1	236,844	0.5
Apr-2017	-47,384	191,562	-0.4	238,946	0.9
May-2017	-46,684	192,223	0.3	238,908	0.0
Jun-2017	-45,609	194,260	1.1	239,868	0.4
Jul-2017	-44,162	194,747	0.3	238,908	-0.4
Aug-2017	-43,689	195,565	0.4	239,254	0.1
Sep-2017	-43,571	198,166	1.3	241,737	1.0
Oct-2017	-45,478	199,315	0.6	244,792	1.3
Nov-2017	-49,120	202,904	1.8	252,024	3.0
Dec-2017	-50,376	206,700	1.9	257,076	2.0
Jan-2018	-52,113	202,575	-2.0	254,689	-0.9
Feb-2018	-53,818	205,607	1.5	259,425	1.9
Mar-2018	-47,177	209,937	2.1	257,114	-0.9
Apr-2018	-48,218	208,883	-0.5	257,102	0.0
May-2018	-44,352	213,341	2.1	257,692	0.2
Jun-2018	-47,431	210,967	-1.1	258,398	0.3
Jul-2018	-52,442	208,734	-1.1	261,175	1.1
Aug-2018	-54,889	207,758	-0.5	262,647	0.6
Sep-2018	-56,094	209,747	1.0	265,840	1.2
Oct-2018	-56,692	210,124	0.2	266,816	0.4
Nov-2018	-53,647	207,976	-1.0	261,623	-1.9
Dec-2018	-60,807	205,661	-1.1	266,468	1.9
Jan-2019	-52,700	207,382	0.8	260,082	-2.4
Feb-2019	-50,003	209,652	1.1	259,655	-0.2
Mar-2019	-51,906	211,411	0.8	263,317	1.4
Apr-2019	-51,224	206,411	-2.4	257,635	-2.2
May-2019	-55,344	210,689	2.1	266,033	3.3
Jun-2019	-55,154	206,300	-2.1	261,454	-1.7

Source: US Census Bureau

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

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

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

	Balance	∆%	Exports	∆%	Imports	∆%
1960	4,608	(X)	19,626	(X)	15,018	(X)
1961	5,476	18.8	20,190	2.9	14,714	-2.0
1962	4,583	-16.3	20,973	3.9	16,390	11.4
1963	5,289	15.4	22,427	6.9	17,138	4.6
1964	7,006	32.5	25,690	14.5	18,684	9.0
1965	5,333	-23.9	26,699	3.9	21,366	14.4
1966	3,837	-28.1	29,379	10.0	25,542	19.5
1967	4,122	7.4	30,934	5.3	26,812	5.0
1968	837	-79.7	34,063	10.1	33,226	23.9
1969	1,289	54.0	37,332	9.6	36,043	8.5
1970	3,224	150.1	43,176	15.7	39,952	10.8
1971	-1,476	-145.8	44,087	2.1	45,563	14.0
1972	-5,729	288.1	49,854	13.1	55,583	22.0
1973	2,389	-141.7	71,865	44.2	69,476	25.0
1974	-3,884	-262.6	99,437	38.4	103,321	48.7
1975	9,551	-345.9	108,856	9.5	99,305	-3.9
1976	-7,820	-181.9	116,794	7.3	124,614	25.5
1977	-28,352	262.6	123,182	5.5	151,534	21.6
1978	-30,205	6.5	145,847	18.4	176,052	16.2
1979	-23,922	-20.8	186,363	27.8	210,285	19.4
1980	-19,696	-17.7	225,566	21.0	245,262	16.6
1981	-22,267	13.1	238,715	5.8	260,982	6.4
1982	-27,510	23.5	216,442	-9.3	243,952	-6.5
1983	-52,409	90.5	205,639	-5.0	258,048	5.8
1984	-106,702	103.6	223,976	8.9	330,678	28.1
1985	-117,711	10.3	218,815	-2.3	336,526	1.8
1986	-138,279	17.5	227,159	3.8	365,438	8.6
1987	-152,119	10.0	254,122	11.9	406,241	11.2
1988	-118,526	-22.1	322,426	26.9	440,952	8.5
1989	-109,399	-7.7	363,812	12.8	473,211	7.3
1990	-101,719	-7.0	393,592	8.2	495,311	4.7
1991	-66,723	-34.4	421,730	7.1	488,453	-1.4
1992	-84,501	26.6	448,164	6.3	532,665	9.1
1993	-115,568	36.8	465,091	3.8	580,659	9.0
1994	-150,630	30.3	512,626	10.2	663,256	14.2
1995	-158,801	5.4	584,742	14.1	743,543	12.1
1996	-170,214	7.2	625,075	6.9	795,289	7.0
1997	-180,522	6.1	689,182	10.3	869,704	9.4
1998	-229,758	27.3	682,138	-1.0	911,896	4.9
1999	-328,821	43.1	695,797	2.0	1,024,618	12.4
2000	-436,104	32.6	781,918	12.4	1,218,022	18.9
2001	-411,899	-5.6	729,100	-6.8	1,140,999	-6.3
2002	-468,262	13.7	693,104	-4.9	1,161,366	1.8
2003	-532,350	13.7	724,771	4.6	1,257,121	8.2
2004	-654,829	23.0	814,875	12.4	1,469,703	16.9
2005	-772,374	18.0	901,082	10.6	1,673,456	13.9
2006	-827,970	7.2	1,025,969	13.9	1,853,939	10.8
2007	-808,765	-2.3	1,148,197	11.9	1,956,962	5.6
2008	-816,200	0.9	1,287,441	12.1	2,103,641	7.5
2009	-503,583	-38.3	1,056,042	-18.0	1,559,625	-25.9
2010	-635,365	26.2	1,278,493	21.1	1,913,858	22.7
2011	-725,447	14.2	1,482,507	16.0	2,207,954	15.4
2012	-730,446	0.7	1,545,821	4.3	2,276,267	3.1
2013	-689,470	-5.6	1,578,517	2.1	2,267,987	-0.4
2014	-734,482	6.5	1,621,874	2.7	2,356,356	3.9
2015	-745,483	1.5	1,503,328	-7.3	2,248,811	-4.6
2016	-735,326	-1.4	1,451,460	-3.5	2,186,786	-2.8
2017	-793,411	7.9	1,546,473	6.5	2,339,884	7.0
2018	-874,814	10.3	1,665,992	7.7	2,540,806	8.6

Source: US Census Bureau

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

There is recent sharp deterioration of the US trade balance and the three-month moving average in Chart IIA-1 of the US Census Bureau with further improvement in Jan-Feb 2019. There is marginal improvement in Jun 2019.

Chart IIA-1A, US, International Trade Balance, Exports and Imports of Goods and Services and Three-Month Moving Average, USD Billions

Source: US Census Bureau

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

Chart IIA-1A of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. The low average rate of growth of GDP of 2.3 percent during the expansion beginning since IIIQ2009 does not deteriorate further the trade balance. Higher rates of growth may cause sharper deterioration.

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

Source: US Census Bureau

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

Table IIA-2B provides the US international trade balance, exports and imports of goods and services on an annual basis from 1960 to 2018. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit seasonally adjusted at 2.3 percent in IQ2018 decreases to 2.1 percent in IIQ2018. The current account deficit increases to 2.4 percent in IIIQ2018. The current account deficit increases to 2.8 percent in IVQ2018. The current account deficit decreases to 2.5 percent in IQ2019. The absolute value of the net international investment position increases from minus $7.8 trillion in IQ2018 to minus $8.9 trillion in IIQ2018. The absolute value of the net international investment position increases to $9.7 trillion in IIIQ2018. The absolute value of the net international investment position stabilizes at $9.6 trillion in IVQ2018. The absolute value of the net international investment position deteriorates to $9.9 trillion in IQ2019. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets. The final rows of Table IIA-2B show marginal improvement of the trade deficit from $549,699 million in 2011 to lower $537,408 million in 2012 with exports growing 4.3 percent and imports 3.0 percent. The trade balance improved further to deficit of $461,135 million in 2013 with growth of exports of 3.4 percent while imports virtually stagnated. The trade deficit deteriorated in 2014 to $489,584 million with growth of exports of 3.6 percent and of imports of 4.0 percent. The trade deficit deteriorated in 2015 to $498,525 million with decrease of exports of 4.6 percent and decrease of imports of 3.5 percent. The trade deficit deteriorated in 2016 to $502,982 million with decrease of exports of 2.2 percent and decrease of imports of 1.7 percent. The trade deficit deteriorated in 2017 to $550,123 million with growth of exports of 6.2 percent and of imports of 6.8 percent. The trade deficit deteriorated in 2018 to $627,679 million with growth of exports of 6.3 percent and of imports of 7.8 percent. Growth and commodity shocks under alternating inflation waves (https://cmpassocregulationblog.blogspot.com/2019/07/global-manufacturing-stress-world.html) have deteriorated the trade deficit from the low of $383,774 million in 2009.

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

	Balance	Exports		Imports
1960	3,508	25,940		22,432
1961	4,195	26,403	1.8	22,208	-1.0
1962	3,370	27,722	5.0	24,352	9.7
1963	4,210	29,620	6.8	25,410	4.3
1964	6,022	33,341	12.6	27,319	7.5
1965	4,664	35,285	5.8	30,621	12.1
1966	2,939	38,926	10.3	35,987	17.5
1967	2,604	41,333	6.2	38,729	7.6
1968	250	45,543	10.2	45,293	16.9
1969	91	49,220	8.1	49,129	8.5
1970	2,254	56,640	15.1	54,386	10.7
1971	-1,302	59,677	5.4	60,979	12.1
1972	-5,443	67,222	12.6	72,665	19.2
1973	1,900	91,242	35.7	89,342	23.0
1974	-4,293	120,897	32.5	125,190	40.1
1975	12,404	132,585	9.7	120,181	-4.0
1976	-6,082	142,716	7.6	148,798	23.8
1977	-27,246	152,301	6.7	179,547	20.7
1978	-29,763	178,428	17.2	208,191	16.0
1979	-24,565	224,131	25.6	248,696	19.5
1980	-19,407	271,834	21.3	291,241	17.1
1981	-16,172	294,398	8.3	310,570	6.6
1982	-24,156	275,236	-6.5	299,391	-3.6
1983	-57,767	266,106	-3.3	323,874	8.2
1984	-109,072	291,094	9.4	400,166	23.6
1985	-121,880	289,070	-0.7	410,950	2.7
1986	-138,538	310,033	7.3	448,572	9.2
1987	-151,684	348,869	12.5	500,552	11.6
1988	-114,566	431,149	23.6	545,715	9.0
1989	-93,141	487,003	13.0	580,144	6.3
1990	-80,864	535,233	9.9	616,097	6.2
1991	-31,135	578,344	8.1	609,479	-1.1
1992	-39,212	616,882	6.7	656,094	7.6
1993	-70,311	642,863	4.2	713,174	8.7
1994	-98,493	703,254	9.4	801,747	12.4
1995	-96,384	794,387	13.0	890,771	11.1
1996	-104,065	851,602	7.2	955,667	7.3
1997	-108,273	934,453	9.7	1,042,726	9.1
1998	-166,140	933,174	-0.1	1,099,314	5.4
1999	-258,617	969,867	3.9	1,228,485	11.8
2000	-372,517	1,075,321	10.9	1,447,837	17.9
2001	-361,511	1,005,654	-6.5	1,367,165	-5.6
2002	-418,955	978,706	-2.7	1,397,660	2.2
2003	-493,890	1,020,418	4.3	1,514,308	8.3
2004	-609,883	1,161,549	13.8	1,771,433	17.0
2005	-714,245	1,286,022	10.7	2,000,267	12.9
2006	-761,716	1,457,642	13.3	2,219,358	11.0
2007	-705,375	1,653,548	13.4	2,358,922	6.3
2008	-708,726	1,841,612	11.4	2,550,339	8.1
2009	-383,774	1,583,053	-14.0	1,966,827	-22.9
2010	-495,225	1,853,038	17.1	2,348,263	19.4
2011	-549,699	2,125,947	14.7	2,675,646	13.9
2012	-537,408	2,218,354	4.3	2,755,762	3.0
2013	-461,135	2,294,199	3.4	2,755,334	0.0
2014	-489,584	2,376,657	3.6	2,866,241	4.0
2015	-498,525	2,266,691	-4.6	2,765,216	-3.5
2016	-502,982	2,215,839	-2.2	2,718,821	-1.7
2017	-550,123	2,352,546	6.2	2,902,669	6.8
2018	-627,679	2,501,310	6.3	3,128,989	7.8

Source: US Census Bureau

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

Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Jun 2019. There is long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The global recession from IVQ2007 to IIQ2009 reversed the trend of deterioration. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks. There are additional effects for revaluation of the dollar with the Fed orienting interest rate increases while the European Central Bank and the Bank of Japan determine negative nominal interest rates.

Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Jun 2019

Source: US Census Bureau

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

Chart IIA-3 of the US Census Bureau provides US exports SA from Jan 1992 to May 2019. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation.

Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Jun 2019

Source: US Census Bureau

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

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

Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Jun 2019

Source: US Census Bureau

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

There is deterioration of the US trade balance in goods in Table IIA-3 from deficit of $69,434 million in Jun 2018 to deficit of $75,121 million in Jun 2019. The nonpetroleum deficit increased $8,048 million while the petroleum deficit decreased $2,349 million. Total exports of goods decreased 3.5 percent in Jun 2019 relative to a year earlier while total imports increased 0.3 percent. Nonpetroleum exports decreased 3.6 percent from Jun 2018 to Jun 2019 while nonpetroleum imports increased 1.8 percent. Petroleum imports decreased 14.6 percent.

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

	Jun 2019	Jun 2018	∆%
Total Balance	-75,121	-69,434
Petroleum	-1,355	-3,704
Non-Petroleum	-72,806	-64,758
Total Exports	137,135	142,172	-3.5
Petroleum	15,293	15,786	-3.1
Non-Petroleum	121,159	125,716	-3.6
Total Imports	212,255	211,606	0.3
Petroleum	16,649	19,490	-14.6
Non-Petroleum	193,964	190,474	1.8

Details may not add because of rounding and seasonal adjustment

Source: US Census Bureau

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

US exports and imports of goods not seasonally adjusted in Jan-Jun 2019 and Jan-Jun 2018 are in Table IIA-4. The rate of growth of exports was minus 0.9 percent and 0.3 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that decreased 5.4 percent and of mineral fuels that increased 7.6 percent both because prices of raw materials and commodities increase and fall recurrently because of shocks of risk aversion and portfolio reallocations. The US exports a growing amount of crude oil, increasing 7.4 percent in cumulative Jan-Jun 2019 relative to a year earlier. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports decreased 2.8 percent while manufactured imports increased 0.7 percent. Significant part of the US trade imbalance originates in imports of mineral fuels decreasing 9.5 percent and petroleum decreasing 10.3 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation.

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

	Jan-Jun 2019 $ Millions	Jan-Jun 2018 $ Millions	∆%
Exports	824,098	831,886	-0.9
Manufactured	565,232	581,430	-2.8
Agricultural Commodities	67,722	71,617	-5.4
Mineral Fuels	96,590	89,781	7.6
Petroleum	75,848	70,611	7.4
Imports	1,235,753	1,232,372	0.3
Manufactured	1,065,095	1,057,194	0.7
Agricultural Commodities	67,769	66,455	2.0
Mineral Fuels	103,238	114,054	-9.5
Petroleum	96,530	107,631	-10.3

Source: US Census Bureau

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

Table IIA-4A provides the United States balance of trade in goods, exports of goods and imports of goods NSA in millions of US dollars and percent share in Jan-Jun 2019. North America, consisting of Mexico and Canada, have joint share of 33.7 percent of exports and 27.3 of imports. The combined share of North America and Europe is 57.2 percent of exports and 51.4 percent of imports. The share of the Pacific Rim in exports is 23.4 percent and 33.6 percent of imports.

Table IIA-4A United States, Balance of Trade in Goods, Exports in Goods and Imports of Goods, NSA, Millions of US Dollars

Jan-Jun 2019
Region/Country	Balance	Exports	%	Imports	%
Total Census Basis	-411,654	824,098		1,235,753
North America*	-59,927	277,828	33.7	337,755	27.3
Europe	-103,738	193,516	23.5	297,254	24.1
Euro Area	-75,090	125,592	15.2	200,682	16.2
Pacific Rim	-221,957	193,140	23.4	415,097	33.6
China	-167,044	52,000	6.3	219,044	17.7
Japan	-36,042	36,844	4.5	72,886	5.9
Brazil	5,273	20,792	2.5	15,519	1.3

*Canada and Mexico

Source: US Census Bureau

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

The US Bureau of Labor Statistics (BLS) provides measurements of US international terms of trade. The measurement by the BLS is as follows (https://www.bls.gov/mxp/terms-of-trade.htm):

“BLS terms of trade indexes measure the change in the U.S. terms of trade with a specific country, region, or grouping over time. BLS terms of trade indexes cover the goods sector only.

To calculate the U.S. terms of trade index, take the U.S. all-export price index for a country, region, or grouping, divide by the corresponding all-import price index and then multiply the quotient by 100. Both locality indexes are based in U.S. dollars and are rounded to the tenth decimal place for calculation. The locality indexes are normalized to 100.0 at the same starting point.
TT_t=(LOD_t/LOO_t)*100,
where
TT_t=Terms of Trade Index at time t
LOD_t=Locality of Destination Price Index at time t
LOO_t=Locality of Origin Price Index at time t
The terms of trade index measures whether the U.S. terms of trade are improving or deteriorating over time compared to the country whose price indexes are the basis of the comparison. When the index rises, the terms of trade are said to improve; when the index falls, the terms of trade are said to deteriorate. The level of the index at any point in time provides a long-term comparison; when the index is above 100, the terms of trade have improved compared to the base period, and when the index is below 100, the terms of trade have deteriorated compared to the base period.”

Chart IID-3 provides the BLS terms of trade of the US with Canada. The index increases from 100.0 in Dec 2017 to 117.8 in Dec 2018 and decreases to 96.1 in Jun 2019.

Chart IID-3, US Terms of Trade, Monthly, All Goods, Canada, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with the European Union. There is improvement from 100.0 in Dec 2017 to 102.5 in Jun 2019.

Chart IID-4, US Terms of Trade, Monthly, All Goods, European Union, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with the European Union. There is improvement from 100.0 in Dec 2017 to 101.4 in Jun 2019.

Chart IID-4, US Terms of Trade, Monthly, All Goods, European Union, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with Mexico. There is improvement from 100.0 in Dec 2017 to 101.4 in Jun 2019.

Chart IID-5, US Terms of Trade, Monthly, All Goods, Mexico, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with China. There is deterioration from 100.0 in Dec 2017 to 98.0 in Sep 2018, improvement to 100.6 in Apr 2019 with deterioration to 98.8 in Jun 2019.

Chart IID-6, US Terms of Trade, Monthly, All Goods, China, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Chart IID-4 provides the BLS terms of trade of the US with Japan. There is deterioration from 100.0 in Dec 2017 to 97.8 in Jan 2019 and improvement to 98.2 in Jun 2019.

Chart IID-7, US Terms of Trade, Monthly, All Goods, Japan, NSA, Dec 2017=100

Source: Bureau of Labor Statistics https://www.bls.gov/mxp/data.htm

Manufacturing is underperforming in the lost cycle of the global recession. Manufacturing (SIC) in Jun 2019 is lower by 4.4 percent relative to the peak in Jun 2007, as shown in Chart V-3A. Manufacturing (NAICS) in Jun 2019 at 108.3755 is lower by 1.8 percent relative to the peak at 110.3108 in Sep 2007. There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Jun 1919 to Jun 2019. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2987 in Dec 2007 to 153.8501 in Jun 2019. The actual index NSA in Jun 2019 is 107.3417, which is 30.2 percent below trend. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 108.2987 in Dec 2007 to 157.3175 in Jun 2019. The actual index NSA in Jun 2019 is 107.3417, which is 31.8 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Jun 2019. Using trend growth of 2.0 percent per year, the index would increase to 135.9957 in Jun 2019. The output of manufacturing at 107.3417 in Jun 2019 is 21.1 percent below trend under this alternative calculation.

Chart V-3A, United States Manufacturing (NAICS) NSA, Jun 2007 to Jun 2019

Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/g17/Current/default.htm

Chart V-3B provides the civilian noninstitutional population of the United States, or those available for work. The civilian noninstitutional population increased from 231.713 million in Jun 2007 to 259.037 million in Jun 2019 or 27.324 million.

Chart V-3B, United States, Civilian Noninstitutional Population, Million, NSA, Jan 2007 to Jun 2019

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3C provides nonfarm payroll manufacturing jobs in the United States from Jan 2007 to Jun 2019. Nonfarm payroll jobs fell from 13.987 million in Jun 2007 to 12.932 million in Jun 2019, or 1.055 million.

Chart V-3C, United States, Payroll Manufacturing Jobs, NSA, Jun 2007 to Jun 2019, Thousands

Source: US Bureau of Labor Statistics

https://www.bls.gov

Chart V-3D provides the index of US manufacturing (NAICS) from Jan 1972 to Jun 2019. The index continued increasing during the decline of manufacturing jobs after the early 1980s. There are likely effects of changes in the composition of manufacturing with also changes in productivity and trade.

Chart V-3D, United States Manufacturing (NAICS) NSA, Jan 1972 to Jun 2019

Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/g17/Current/default.htm

Chart V3E provides the US noninstitutional civilian population, or those in condition of working, from Jan 1948, when first available, to Jun 2019. The noninstitutional civilian population increased from 170.042 million in Jun 1981 to 259.037 million in Jun 2019, or 88.995 million.

Chart V-3E, United States, Civilian Noninstitutional Population, Million, NSA, Jan 1948 to Jun 2019

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3F provides manufacturing jobs in the United States from Jan 1939 to May 2019. Nonfarm payroll manufacturing jobs decreased from a peak of 18.890 million in Jun 1981 to 12.932 million in Jun 2019.

Chart V-3C, United States, Payroll Manufacturing Jobs, NSA, Jan 1939 to Jun 2019, Thousands

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Table I-13A provides national income without capital consumption by industry with estimates based on the Standard Industrial Classification (SIC). The share of agriculture declines from 8.7 percent in 1948 to 1.7 percent in 1987 while the share of manufacturing declines from 30.2 percent in 1948 to 19.4 percent in 1987. Colin Clark (1957) pioneered the analysis of these trends over long periods.

Table I-13A, US, National Income without Capital Consumption Adjustment by Industry, Annual Rates, Billions of Dollars, % of Total

	1948	% Total	1987	% Total
National Income WCCA	249.1	100.0	4,029.9	100.0
Domestic Industries	247.7	99.4	4,012.4	99.6
Private Industries	225.3	90.4	3,478.8	86.3
Agriculture	21.7	8.7	66.5	1.7
Mining	5.8	2.3	42.5	1.1
Construction	11.1	4.5	201.0	5.0
Manufacturing	75.2	30.2	780.2	19.4
Durable Goods	37.5	15.1	458.4	11.4
Nondurable Goods	37.7	15.1	321.8	8.0
Transportation PUT	21.3	8.5	317.7	7.9
Transportation	13.8	5.5	127.2	3.2
Communications	3.8	1.5	96.7	2.4
Electric, Gas, SAN	3.7	1.5	93.8	2.3
Wholesale Trade	17.1	6.9	283.1	7.0
Retail Trade	28.8	11.6	400.4	9.9
Finance, INS, RE	22.9	9.2	651.7	16.2
Services	21.4	8.6	735.7	18.3
Government	22.4	9.0	533.6	13.2
Rest of World	1.5	0.6	17.5	0.4
	2003.9	11.6	2016.3	11.5
	252.6	1.5	257.9	1.5

Notes: Using 1972 Standard Industrial Classification (SIC). Percentages Calculates from Unrounded Data; WCCA: Without Capital Consumption Adjustment by Industry; RE: Real Estate; PUT: Public Utilities; SAN: Sanitation

Source: US Bureau of Economic Analysis

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

Table I-13B provides national income without capital consumption estimated based on the 2012 North American Industry Classification (NAICS). The share of manufacturing fell from 14.9 percent in 1998 to 9.5 percent in 2018.

Table I-13B, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	1998	% Total	2018	% Total
National Income WCCA	7,744.4	100.0	17,136.5	100.0
Domestic Industries	7,727.0	99.8	16,868.6	98.4
Private Industries	6,793.3	87.7	14,889.6	86.9
Agriculture	72.7	0.9	119.7	0.7
Mining	74.2	1.0	202.7	1.2
Utilities	134.4	1.7	157.7	0.9
Construction	379.2	4.9	902.5	5.3
Manufacturing	1156.4	14.9	1635.3	9.5
Durable Goods	714.9	9.2	964.9	5.6
Nondurable Goods	441.5	5.7	670.4	3.9
Wholesale Trade	512.8	6.6	958.2	5.6
Retail Trade	610.0	7.9	1124.1	6.6
Transportation & WH	246.1	3.2	554.4	3.2
Information	294.3	3.8	629.7	3.7
Finance, Insurance, RE	1280.9	16.5	3058.8	17.8
Professional & Business Services	889.8	11.5	2522.6	14.7
Education, Health Care	607.1	7.8	1764.8	10.3
Arts, Entertainment	290.5	3.8	756.6	4.4
Other Services	244.9	3.3	502.5	2.9
Government	933.7	12.1	1979.0	11.5
Rest of the World	17.4	0.2	267.9	1.6

Notes: Estimates based on 2012 North American Industry Classification System (NAICS). Percentages Calculates from Unrounded Data; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis

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

The current account of the US balance of payments is in Table VI-3A for IQ2018 and IQ2019. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/system/files/2019-06/trans119.pdf):

“The U.S. current-account deficit decreased to $130.4 billion (preliminary) in the first quarter of 2019 from $143.9 billion (revised) in the fourth quarter of 2018, according to statistics released by the Bureau of Economic Analysis (BEA). The deficit was 2.5 percent of current-dollar gross domestic product in the first quarter, down from 2.8 percent in the fourth quarter.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted increased from $116.2 billion in IVQ2017 to $138.4 billion in IVQ2018. The current account deficit seasonally adjusted at annual rate increased from 2.3 percent of GDP in IVQ2017 to 2.5 percent of GDP in IIIQ2018, increasing to 2.6 percent of GDP in IVQ2018. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets.

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

	IQ2018	IQ2019	Difference
Goods Balance	-198,523	-193,115	5,408
X Goods	404,940	410,423	1.4 ∆%
M Goods	-603,462	-603,538	0.0 ∆%
Services Balance	74,700	68,579	-6,121
X Services	207,237	208,132	0.4 ∆%
M Services	-132,537	-139,553	5.3 ∆%
Balance Goods and Services	-123,823	-124,536	713
Exports of Goods and Services and Income Receipts	907,296	932,875	25,579
Imports of Goods and Services and Income Payments	-991,133	-1,032,792	-41,659
Current Account Balance	-83,837	-99,917	-16,080
% GDP	IQ2018	IQ2019	IVQ2018
	2.3	2.5	2.8

X: exports; M: imports

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

Source: Bureau of Economic Analysis

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

Chart VI-3B1, US, Current Account and Components Balances, Quarterly SA

Source: https://www.bea.gov/news/2019/us-international-transactions-first-quarter-2019-and-annual-update

The Bureau of Economic Analysis (BEA) provides analytical insight and data on the 2017 Tax Cuts and Job Act:

“In the international transactions accounts, income on equity, or earnings, of foreign affiliates of U.S. multinational enterprises consists of a portion that is repatriated to the parent company in the United States in the form of dividends and a portion that is reinvested in foreign affiliates. In response to the 2017 Tax Cuts and Jobs Act, which generally eliminated taxes on repatriated earnings, some U.S. multinational enterprises repatriated accumulated prior earnings of their foreign affiliates. In the first, second, and fourth quarters of 2018, the repatriation of dividends exceeded current-period earnings, resulting in negative values being recorded for reinvested earnings. In the first quarter of 2019, dividends were $100.2 billion while reinvested earnings were $40.2 billion (see table below). The reinvested earnings are also reflected in the net acquisition of direct investment assets in the financial account (table 6). For more information, see "How does the 2017 Tax Cuts and Jobs Act affect BEA’s business income statistics?" and "How are the international transactions accounts affected by an increase in direct investment dividend receipts?"”

Chart VI-3B, US, Direct Investment Earnings Receipts and Components

Source: https://www.bea.gov/news/2019/us-international-transactions-first-quarter-2019-and-annual-update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

M_tV(i_t, ·) = P_tY_t (5)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table IIA2-3 provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1087 billion or 6.8 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5094 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.094 trillion in four years, using the fiscal year deficit of $1087 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5094 billion. Federal debt in 2012 was 70.4 percent of GDP (CBO 2015Jan26) and 72.6 percent of GDP in 2013 (http://www.cbo.gov/). This situation may worsen in the future (CBO 2013Sep17):

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

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

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

The most recent CBO long-term budget on Jun 26, 2018 projects US federal debt at 152.0 percent of GDP in 2048 (Congressional Budget Office, The 2018 long-term budget outlook. Washington, DC, Jun 26 https://www.cbo.gov/publication/53919).

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

	2007	2008	2009	2010	2011
Goods & Services	-705	-709	-384	-495	-549
Primary Income	85	130	115	168	211
Secondary Income	-91	-102	-104	-104	-107
Current Account	-711	-681	-373	-431	-445
NGDP	14452	14713	14449	14992	15543
Current Account % GDP	-4.9	-4.6	-2.6	-2.9	-2.9
NIIP	-1279	-3995	-2628	-2512	-4455
US Owned Assets Abroad	20705	19423	19426	21767	22209
Foreign Owned Assets in US	21984	23418	22054	24279	26664
NIIP % GDP	-8.8	-27.1	-18.2	-16.8	-28.7
Exports Goods, Services and Income	2559	2742	2283	2625	2983
NIIP % Exports Goods, Services and Income	-50	-145	-115	-95	-149
DIA MV	5858	3707	4945	5486	5215
DIUS MV	4134	3091	3619	4099	4199
Fiscal Balance	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	-1.1	-3.1	-9.8	-8.7	-8.5
Federal Debt	5035	5803	7545	9019	10128
Federal Debt % GDP	35.2	39.3	52.3	60.9	65.9
Federal Outlays	2729	2983	3518	3457	3603
∆%	2.8	9.3	17.9	-1.7	4.2
% GDP	19.1	20.2	24.4	23.4	23.4
Federal Revenue	2568	2524	2105	2163	2303
∆%	6.7	-1.7	-16.6	2.7	6.5
% GDP	17.9	17.1	14.6	14.6	15.0

	2012	2013	2014	2015	2016
Goods & Services	-537	-462	-490	-500	-505
Primary Income	207	206	210	181	173
Secondary Income	-97	-94	-94	-115	-120
Current Account	-426	-350	-374	-434	-452
NGDP	16197	16785	17522	18219	18707
Current Account % GDP	-2.6	-2.1	-2.1	-2.4	-2.4
NIIP	-4518	-5369	-6945	-7462	-8182
US Owned Assets Abroad	22562	24145	24883	23431	24061
Foreign Owned Assets in US	27080	29513	31828	30892	32242
NIIP % GDP	-27.9	-32.0	-39.6	-41.0	-43.7
Exports Goods, Services and Income	3096	3212	3333	3173	3157
NIIP % Exports Goods, Services and Income	-146	-167	-208	-235	-259
DIA MV	5969	7121	72421	7057	7422
DIUS MV	4662	5815	6370	6729	7596
Fiscal Balance	-1087	-680	-485	-439	-585
Fiscal Balance % GDP	-6.8	-4.1	-2.8	-2.4	-3.2
Federal Debt	11281	11983	12780	13117	14168
Federal Debt % GDP	70.4	72.6	74.1	72.9	76.7
Federal Outlays	3537	3455	3506	3688	3853
∆%	-1.8	-2.3	1.5	5.2	4.5
% GDP	22.1	20.9	20.3	20.5	20.9
Federal Revenue	2450	2775	3022	3250	3268
∆%	6.4	13.3	8.9	7.6	0.6
% GDP	15.3	16.8	17.5	18.1	17.7
	2017
Goods & Services	-568
Primary Income	217
Secondary Income	-115
Current Account	-466
NGDP	19485
Current Account % GDP	2.4
NIIP	-7725
US Owned Assets Abroad	27799
Foreign Owned Assets in US	35524
NIIP % GDP	-39.6
Exports Goods, Services and Income	3408
NIIP % Exports Goods, Services and Income	-227
DIA MV	8910
DIUS MV	8925
Fiscal Balance	-665
Fiscal Balance % GDP	-3.5
Federal Debt	14666
Federal Debt % GDP	76.5
Federal Outlays	3982
∆%	3.3
% GDP	20.8
Federal Revenue	3316
∆%	1.5
% GDP	17.3

Sources:

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

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

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

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

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

Table VI-3C provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit seasonally adjusted at 2.3 percent in IQ2018 decreases to 2.1 percent in IIQ2018. The current account deficit increases to 2.4 percent in IIIQ2018. The current account deficit increases to 2.8 percent in IVQ2018. The current account deficit decreases to 2.5 percent in IQ2019. The absolute value of the net international investment position increases from minus $7.8 trillion in IQ2018 to minus $8.9 trillion in IIQ2018. The absolute value of the net international investment position increases to $9.7 trillion in IIIQ2018. The absolute value of the net international investment position stabilizes at $9.6 trillion in IVQ2018. The absolute value of the net international investment position deteriorates to $9.9 trillion in IQ2019. The BEA explains as follows (https://www.bea.gov/system/files/2019-06/intinv119.pdf):

“The U.S. net international investment position decreased to −$9.93 trillion (preliminary) at the end of the first quarter of 2019 from −$9.55 trillion (revised) at the end of the fourth quarter of 2018, according to statistics released by the Bureau of Economic Analysis (BEA). The $374.4 billion decrease reflected a $1.90 trillion increase in U.S. assets and a $2.27 trillion increase in U.S. liabilities (table 1).”

The BEA explains further (https://www.bea.gov/system/files/2019-06/intinv119.pdf):

“U.S. assets increased $1.90 trillion to $27.14 trillion at the end of the first quarter, reflecting increases in all major categories of assets, particularly in portfolio investment and direct investment assets.

Assets excluding financial derivatives increased $1.83 trillion to $25.58 trillion. The increase resulted from financial transactions of $157.4 billion and other changes in position of $1.68 trillion (table A).
- Financial transactions reflected net U.S. acquisitions of other investment loan assets, direct investment equity assets, and foreign debt securities that were partly offset by net U.S. sales of foreign stocks.
- Other changes in position were driven by foreign stock price increases that raised the equity value of portfolio investment and direct investment assets.
Financial derivatives increased $62.7 billion to $1.55 trillion, reflecting an increase in single-currency interest rate contracts that was partly offset by a decrease in foreign exchange contracts.”

Table VI-3C, US, Current Account, Net International Investment Position and Direct Investment, Dollar Billions, NSA

	IQ2018	IIQ2018	IIIQ2018	IVQ2018	IQ2019
Goods & Services	-124	-152	-174	-178	-124
Primary Income	68	62	63	60	62
Secondary Income	-28	-28	-28	-33	-38
Current Account	-84	-118	-139	-151	-100
Current Account % GDP SA	-2.3	-2.1	-2.4	-2.8	-2.5
NIIP	-7832	-8906	-9701	-9555	-9929
US Owned Assets Abroad	27619	26962	27062	25241	27138
Foreign Owned Assets in US	-35451	-35868	-36763	-34796	-37067
DIA MV	8594	8422	8489	7504	8209
DIA MV Equity	7254	7111	7176	6184	6877
DIUS MV	8830	9004	9606	8583	9441
DIUS MV Equity	7064	7272	7854	6797	7724

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

Chart VI-3CA of the US Bureau of Economic Analysis provides the quarterly and annual US net international investment position (NIIP) NSA in billion dollars. The NIIP deteriorated in 2008, improving in 2009-2011 followed by deterioration after 2012. There is improvement in 2017 and deterioration in 2018.

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

Source: Bureau of Economic Analysis

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

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

Source: Bureau of Economic Analysis

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

Chart VI-3C1 provides the quarterly NSA NIIP.

Chart VI-3C1, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

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

Chart VI-3C2 updates annual and quarterly estimates of the US Net International Investment Position. There is continuing deterioration.

Chart VI-3C2, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

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

Chart VI-10 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jul 1, 1954 at 1.13 percent through Jan 10, 1979, at 9.91 percent per year, to Aug 8, 2019, at 2.12 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1970s (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html), the fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart VI-10 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart VI-10 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart VI-10. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart VI-10 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 2.12 percent on Aug 8, 2019. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

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

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

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

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Aug 8, 2019, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

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

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

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

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

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

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

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

Source: Board of Governors of the Federal Reserve System

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

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

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

Source: Bureau of Labor Statistics

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

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

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

Source: Bureau of Labor Statistics

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

The Congressional Budget Office estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2017 at 3.2 percent per year. The projected path is significantly lower at 1.4 percent per year from 2018 to 2028. The legacy of the economic cycle expansion from IIIQ2009 to IIQ2019 at 2.3 percent on average is in contrast with 3.8 percent on average in the expansion from IQ1983 to IVQ1992 (https://cmpassocregulationblog.blogspot.com/2019/07/dollar-appreciation-in-anticipations-of.html and earlier https://cmpassocregulationblog.blogspot.com/2019/06/mediocre-cyclical-united-states.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 18.8 million or 11.0 percent of the effective labor force in Jun 2019 (https://cmpassocregulationblog.blogspot.com/2019/08/dollar-appreciation-contraction-of.html and earlier https://cmpassocregulationblog.blogspot.com/2019/07/twenty-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/07/fomc-uncertain-outlook-frank-h-knights.html).

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

	Potential GDP	Potential Labor Force	Potential Labor Productivity*
Average Annual ∆%
1950-1973	4.0	1.6	2.4
1974-1981	3.2	2.5	0.7
1982-1990	3.4	1.7	1.7
1991-2001	3.2	1.2	2.0
2002-2007	2.5	1.0	1.5
2008-2017	1.5	0.5	0.9
Total 1950-2017	3.2	1.4	1.7
Projected Average Annual ∆%
2018-2022	2.0	0.6	1.4
2023-2028	1.8	0.4	1.4
2018-2028	1.9	0.5	1.4

*Ratio of potential GDP to potential labor force

Source: CBO, The budget and economic outlook: 2018-2028. Washington, DC, Apr 9, 2018 https://www.cbo.gov/publication/53651 CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015. Aug 2016

Chart IB1-BEO2818 of the Congressional Budget Office provides historical and projected annual growth of United States potential GDP. The projection is of faster growth of real potential GDP.

Chart IB1-BEO2818, CBO Economic Forecast

Source: CBO, The budget and economic outlook: 2018-2028. Washington, DC, Apr 9, 2018 https://www.cbo.gov/publication/53651 CBO (2014BEOFeb4).

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

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

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

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

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

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

Source: Congressional Budget Office

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

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The Congressional Budget Office estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2017 at 3.2 percent per year. The projected path is significantly lower at 1.4 percent per year from 2018 to 2028. The legacy of the economic cycle expansion from IIIQ2009 to IIQ2019 at 2.3 percent on average is in contrast with 3.8 percent on average in the expansion from IQ1983 to IVQ1992 (https://cmpassocregulationblog.blogspot.com/2019/07/dollar-appreciation-in-anticipations-of.html and earlier https://cmpassocregulationblog.blogspot.com/2019/06/mediocre-cyclical-united-states.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 18.8 million or 11.0 percent of the effective labor force in Jun 2019 (https://cmpassocregulationblog.blogspot.com/2019/08/dollar-appreciation-contraction-of.html and earlier https://cmpassocregulationblog.blogspot.com/2019/07/twenty-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (Section I and earlier https://cmpassocregulationblog.blogspot.com/2019/07/fomc-uncertain-outlook-frank-h-knights.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Chart IIA2-6 of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2018. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.

Chart IIA2-6, US, Real GDP, 1960-2018, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

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

Chart IIA-7 provides the US current account deficit on a quarterly basis from 1980 to 2011. The deficit is at a lower level because of growth below potential not only in the US but worldwide. The combination of high government debt and deficit with external imbalance restricts potential prosperity in the US.

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

Source: Bureau of Economic Analysis

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

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There are now temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of four trillion dollars of securities held outright. Net foreign purchases of US long-term securities (row C in Table VA-4) deteriorated from $40.8 billion in Apr 2019 to minus $14.6 billion in May

2019. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Apr 2019 of $36.4 billion deteriorated to minus $5.7 billion in May 2019. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) deteriorated from $10.5 billion in Apr 2019 to $9.2 billion in May 2019. Other transactions (row C2 in Table VA-4) changed from minus $6.2 billion in Apr 2019 to minus $18.2 billion in May 2019. In May 2019,

C = A + B + C2 = -$5.7 billion + $9.2 billion - $18.2 billion = -$14.6 billion.

There are minor rounding errors. There is weakening demand in Table VA-4 in May 2019 in A1 private purchases by residents overseas of US long-term securities of $10.1 billion of which weakening in A11 Treasury securities of $11.8 billion, weakening in A12 of $12.3 billion in agency securities, strengthening of $13.7 billion of corporate bonds and weakening of minus $4.0 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 decreased $15.7 billion with decrease of Treasury securities of $22.0 billion in May 2019. Official purchases of agency securities increased $2.8 billion in May 2019. Row D shows increase in May 2019 of 0.1 billion in purchases of short-term dollar denominated obligations. Foreign holdings of US Treasury bills decreased $7.3 billion (row D1) with foreign official holdings decreasing $9.6 billion while the category “other” decreased $7.4 billion. Foreign private holdings of US Treasury bills increased $2.3 billion in what could be arbitrage of duration exposures and international risks. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations

in risk perceptions.

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

	May 2018 12 Months	May 2019 12 Months	Apr 2019	May 2019
A Foreign Purchases less Sales of US LT Securities	399.1	-4.3	36.4	-5.7
A1 Private	415.5	171.0	53.4	10.1
A11 Treasury	143.7	154.1	44.4	-11.8
A12 Agency	108.8	146.6	14.7	12.3
A13 Corporate Bonds	107.7	54.6	-5.1	13.7
A14 Equities	55.3	-184.3	-0.6	-4.0
A2 Official	-16.4	-175.3	-17.0	-15.7
A21 Treasury	-82.7	-242.5	-27.5	-22.0
A22 Agency	70.0	79.5	10.5	2.8
A23 Corporate Bonds	-0.9	-7.6	0.3	0.8
A24 Equities	-2.8	-4.7	-0.4	2.6
B Net US Purchases of LT Foreign Securities	209.1	281.8	10.5	9.2
B1 Foreign Bonds	240.1	267.9	10.7	10.9
B2 Foreign Equities	-31.0	13.8	-0.2	-1.7
C1 Net Transactions	608.2	277.5	46.9	3.5
C2 Other	-99.0	-168.0	-6.2	-18.2
C Net Foreign Purchases of US LT Securities	509.2	109.5	40.8	-14.6
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	242.5	343.7	-30.7	0.1
D1 US Treasury Bills	57.5	-14.5	-29.5	-7.3
D11 Private	40.6	39.1	-18.4	2.3
D12 Official	16.9	-53.6	-11.1	-9.6
D2 Other	185.1	358.1	-1.2	7.4

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

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

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

Table VA-5 provides major foreign holders of US Treasury securities. China is the largest holder with $1110.2 billion in May 2019, decreasing 0.3 percent from $1113.0 billion in Apr 2019 while decreasing $72.9 billion from May 2018 or 6.2 percent. The United States Treasury estimates US government debt held by private investors at $13,682 billion in Mar 2019 (Fiscal Year 2018). China’s holding of US Treasury securities represents 8.1 percent of US government marketable interest-bearing debt held by private investors (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan increased its holdings from $1048.9 billion in May 2018 to $1101.0 billion in May 2019 or 5.0 percent. The combined holdings of China and Japan in May 2019 add to $2211.2 billion, which is equivalent to 16.2 percent of US government marketable interest-bearing securities held by investors of $13,682 billion in Mar 2019 (Fiscal Year 2018) (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Total foreign holdings of Treasury securities increased from $6215.1 billion in May 2018 to $6539.1 billion in May 2019, or 5.2 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)). Professor Martin Feldstein, at Harvard University, writing on “The Debt Crisis Is Coming Soon,” published in the Wall Street Journal on Mar 20, 2019 (https://www.wsj.com/articles/the-debt-crisis-is-coming-soon-11553122139?mod=hp_opin_pos3), foresees a US debt crisis with deficits moving above $1 trillion and debt above 100 percent of GDP. A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

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

	May 2019	Apr 2019	May 2018
Total	6539.1	6433.6	6215.1
China	1110.2	1113.0	1183.1
Japan	1101.0	1064.0	1048.9
United Kingdom	323.1	300.8	265.0
Brazil	305.7	306.7	299.2
Ireland	270.7	269.7	301.0
Switzerland	231.4	226.9	243.4
Luxembourg	229.6	223.7	208.9
Cayman Islands	216.1	217.2	186.2
Hong Kong	204.0	205.9	191.9
Belgium	190.5	179.8	150.5
Saudi Arabia	179.0	176.6	162.2
Taiwan	172.0	171.1	164.8
India	156.9	155.3	148.9
Singapore	150.4	139.3	118.9
Foreign Official Holdings	4103.9	4062.5	3990.9
A. Treasury Bills	292.7	302.3	346.3
B. Treasury Bonds and Notes	3811.3	3760.2	3644.6