Thirty-Eight Million Unemployed or Underemployed in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Unemployment Rate at 10.2 Percent in Jul 2020 In the Global Recession, with Output in the US Reaching a High in Feb 2020 (https://www.nber.org/cycles.html), in the Lockdown of Economic Activity in the COVID-19 Event, Creation of 1.763 Million Nonfarm Payroll Jobs and 1.462 Million Private Payroll Jobs in Jul 2020, Cyclically Stagnating Real Wages, Job Creation, Cyclically Stagnating Real Disposable Income Per Capita, Financial Repression, World Cyclical Slow Growth, and Government Intervention in Globalization: Part IV
Carlos M. Pelaez
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
I Thirty-Eight Million Unemployed or
Underemployed in the Lost Economic Cycle of the Global Recession with Economic
Growth Underperforming
Below Trend Worldwide
IA2 Number of People in Job Stress
IA3 Long-term and
Cyclical Comparison of Employment
IA4 Job Creation
II Stagnating Real Disposable Income and Consumption Expenditures
IIB1 Stagnating Real
Disposable Income and Consumption Expenditures
IB2 Financial
Repression
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
Table VI-6,
updated with every blog comment, shows that exchange rate valuations affect a
large variety of countries, in fact, almost the entire world, in magnitudes
that cause major problems for domestic monetary policy and trade flows. Dollar
devaluation/fluctuation is expected to continue because of zero fed funds rate,
expectations of rising inflation, large budget deficit of the federal
government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now near
zero interest rates indefinitely but with interruptions caused by risk aversion
events. The euro has devalued 34.9 percent relative to the US dollar from the
high on Jul 15, 2008 to Aug 7, 2020. There are complex economic, financial and
political effects of the withdrawal of the UK from the European Union or BREXIT
after the referendum on Jun 23, 2016 (https://next.ft.com/eu-referendum for extensive
coverage by the Financial Times). The
British pound (GBP) devalued 6.4 percent from the trough of USD/₤1.388 on Jan
2, 2009 to USD/₤1.3050 on Aug 7, 2020 and devalued 53.7 percent from the high
of USD/₤2.006 on Jul 15, 2008, exchange rate changes measuring ₤/USD. Such similar event occurred in the week of
Sep 23, 2011 reversing the devaluation of the dollar in the form of sharp
appreciation of the dollar relative to other currencies from all over the world
including the offshore Chinese yuan market. The Bank of England reduced the
Bank Rate to 0.25 percent on Aug 4, 2016, and announced new measures of
quantitative easing
(http://www.bankofengland.co.uk/publications/Pages/news/2016/008.aspx). The Bank of
England increased the policy interest rate by 0.25 percentage points to 0.75
percent at the meeting of its Monetary Policy Committee on Aug 1, 2018 (https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2018/august-2018). Column
“Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There
was a flight to safety in dollar-denominated government assets because of the
arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in
various exchange rates that depreciated sharply against the dollar such as the
South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct
22, 2008. Subsequently, the ZAR appreciated to the trough of ZAR 7.238/USD by
Aug 15, 2010 but now depreciating 143.7 percent to ZAR 17.6397/USD on Aug 7,
2020, which is depreciation of 52.4 percent relative to Oct 22, 2008. An
example from Asia is the Singapore Dollar (SGD) that depreciated at the peak of
SGD 1.553/USD on Mar 3, 2009. The SGD depreciated by 13.2 percent to the trough
of SGD 1.348/USD on Aug 9, 2010 but is now depreciating 1.8 percent at SGD 1.3727/USD
on Aug 7, 2020 relative to the trough of depreciation but still stronger by 11.6
percent relative to the peak of depreciation on Mar 3, 2009. Another example is
the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5,
2008. The BRL appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr
30, 2010, showing depreciation of 213.1 percent relative to the trough to BRL 5.4381/USD
on Aug 7, 2020 but depreciating by 123.8 percent relative to the peak on Dec 5,
2008. At one point in 2011, the Brazilian real traded at BRL 1.55/USD and in
the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation
of more than 20 percent. The Banco Central do Brasil (BCB), Brazil’s central
bank, decreased its policy rate SELIC for ten consecutive meetings (http://www.bcb.gov.br/?INTEREST) of its monetary
policy committee, COPOM. Brazil’s central bank reduced the SELIC rate at its
most recent meeting (https://www.bcb.gov.br/en/pressdetail/2345/nota):
“232nd Meeting of the Monetary Policy Committee
(COPOM) of the Central Bank of Brazil Press Release
05/08/2020
In its 231st meeting, the COPOM unanimously decided
to lower the Selic rate to 2.00 percent per year” (https://www.bcb.gov.br/en/pressdetail/2345/nota). The Banco
Central do Brasil is engaging in repurchase operations in foreign currency
beginning Mar 18, 2020 (https://www.bcb.gov.br/en/pressdetail/2319/nota). The monetary
authorities also provides multiple measures to face the COVID-19 event (https://www.bcb.gov.br/en/pressdetail/2322/nota). The Banco
Central do Brasil also engaged in FX auctions (http://www.bcb.gov.br/en/#!/c/news/1828):
“BC announces FX auctions program 22/08/2013 6:44:00 PM
With the aim of providing FX ‘hedge” (protection) to the
economic agents and liquidity to the FX market, the Banco Central do Brasil
informs that a program of FX swap auctions and US dollar sale auctions with
repurchase program will begin, as of Friday, August 23. This program will last,
at least, until December 31, 2013. The swap auctions will occur every Monday,
Tuesday, Wednesday and Thursday, when US$500 million will be offered per day.
On Fridays, a credit line of US$1 billion will be offered to the market,
through sale auctions with repurchase agreement. If it is considered
appropriate, the Banco Central do Brasil will carry out additional operations.”
Jeffrey T.
Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012,
published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new
measures by Brazil to prevent further appreciation of its currency, including
the extension of the tax on foreign capital for three years terms, subsequently
broadened to five years, and intervention in the foreign exchange market by the
central bank. Jeff Fick, writing on “Brazil shifts tack to woo wary investors,”
on Jun 5, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324299104578527000680111188.html), analyzes the
lifting in the week of Jun 7, 2013, of the tax on foreign transactions designed
in Oct 2010 to contain the flood of foreign capital into Brazil that overvalued
its currency. Jeffrey T. Lewis, writing on “Brazil’s real closes weaker,” on
Jun 14, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323734304578545680335302180.html), analyzes
measures to contain accelerated depreciation such as currency swaps and the
lifting of the 1 percent tax on exchange derivatives on Jun 12, 2013.
Unconventional monetary policy of zero interest rates and quantitative easing
creates trends such as the depreciation of the dollar followed by Table VI-6
but with abrupt reversals during risk aversion. The main effects of
unconventional monetary policy are on valuations of risk financial assets and
not necessarily on consumption and investment or aggregate demand.
Table VI-6,
Exchange Rates
|
|
Peak |
Trough |
∆% P/T |
Aug 07,
2020 |
∆% T Aug 07,
2020 |
∆% P Aug 07, 2020 |
|
EUR USD |
7/15 |
6/7 2010 |
|
08/07/2020 |
|
|
|
Rate |
1.59 |
1.192 |
|
1.1788 |
|
|
|
∆% |
|
|
-33.4 |
|
-1.1 |
-34.9 |
|
JPY USD |
8/18 |
9/15 |
|
08/07/2020
|
|
|
|
Rate |
110.19 |
83.07 |
|
105.93 |
|
|
|
∆% |
|
|
24.6 |
|
-27.5 |
3.9 |
|
CHF USD |
11/21 2008 |
12/8 2009 |
|
08/07/2020 |
|
|
|
Rate |
1.225 |
1.025 |
|
0.9125 |
|
|
|
∆% |
|
|
16.3 |
|
11.0 |
25.5 |
|
USD GBP |
7/15 |
1/2/ 2009 |
|
08/07/2020
|
|
|
|
Rate |
2.006 |
1.388 |
|
1.3050 |
|
|
|
∆% |
|
|
-44.5 |
|
-6.4 |
-53.7 |
|
USD AUD |
7/15 2008 |
10/27 2008 |
|
08/07/2020
|
|
|
|
Rate |
1.0215 |
1.6639 |
|
0.7157 |
|
|
|
∆% |
|
|
-62.9 |
|
16.0 |
-36.8 |
|
ZAR USD |
10/22 2008 |
8/15 |
|
08/07/2020
|
|
|
|
Rate |
11.578 |
7.238 |
|
17.6397 |
|
|
|
∆% |
|
|
37.5 |
-143.7 |
-52.4 |
|
|
SGD USD |
3/3 |
8/9 |
|
08/07/2020
|
|
|
|
Rate |
1.553 |
1.348 |
|
1.3727 |
|
|
|
∆% |
|
|
13.2 |
|
-1.8 |
11.6 |
|
HKD USD |
8/15 2008 |
12/14 2009 |
|
08/07/2020
|
|
|
|
Rate |
7.813 |
7.752 |
|
7.7505 |
|
|
|
∆% |
|
|
0.8 |
|
0.0 |
0.8 |
|
BRL USD |
12/5 2008 |
4/30 2010 |
|
08/07/2020
|
|
|
|
Rate |
2.43 |
1.737 |
|
5.4381 |
|
|
|
∆% |
|
|
28.5 |
|
-213.1 |
-123.8 |
|
CZK USD |
2/13 2009 |
8/6 2010 |
|
08/07/2020
|
|
|
|
Rate |
22.19 |
18.693 |
|
22.323 |
|
|
|
∆% |
|
|
15.7 |
|
-19.4 |
-0.6 |
|
SEK USD |
3/4 2009 |
8/9 2010 |
|
08/07/2020
|
||
|
Rate |
9.313 |
7.108 |
|
8.7509 |
|
|
|
∆% |
|
|
23.7 |
|
-23.1 |
6.0 |
|
CNY USD |
7/20 2005 |
7/15 |
|
08/07/2020
|
|
|
|
Rate |
8.2765 |
6.8211 |
|
6.9678 |
-2.2 |
15.8 |
|
∆% |
|
|
17.6 |
|
Symbols:
USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound;
AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD:
Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY:
Chinese yuan; P: peak; T: trough
Note:
percentages calculated with currencies expressed in units of domestic currency
per dollar; negative sign means devaluation and no sign appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
https://markets.ft.com/data/currencies
There
are major ongoing and unresolved realignments of exchange rates in the
international financial system as countries and regions seek parities that can
optimize their productive structures. Seeking exchange rate parity or exchange
rate optimizing internal economic activities is complex in a world of
unconventional monetary policy of zero interest rates and even negative nominal
interest rates of government obligations such as negative yields for the
two-year government bond of Germany. Regulation, trade and devaluation
conflicts should have been expected from a global recession (Pelaez and Pelaez
(2007), The Global Recession Risk, Pelaez and Pelaez, Government
Intervention in Globalization: Regulation, Trade and Devaluation Wars
(2008a)): “There are significant grounds for concern on the basis of this
experience. International economic cooperation and the international financial
framework can collapse during extreme events. It is unlikely that there will be
a repetition of the disaster of the Great Depression. However, a milder
contraction can trigger regulatory, trade and exchange wars” (Pelaez and
Pelaez, Government Intervention in Globalization: Regulation, Trade and
Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the
Federal Reserve System provides the key exchange rate of US dollars (USD) per
euro (EUR) from Jan 4, 1999 to Jul 31, 2020. US recession dates are in shaded
areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR
on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated
21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of
the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of
the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form
of quantitative easing by suspension of auctions of the 30-year Treasury, which
was equivalent to withdrawing supply from markets. Another depreciation of 17.5
percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the
shaded area of the global recession. The flight to the USD and obligations of
the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct
27, 2008. In the return of the carry trade after stress tests showed sound US
bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov
25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused
sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed
risk appetite depreciated the rate 24.4 percent to USD 1.4875/EUR on May 3, 2011.
The rate appreciated 1.1 percent to USD 1.1822/EUR on Jul 31, 2020, which is
the last point in Chart VI-2. The data in Table VI-6 is obtained from closing
dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-2, US Dollars (USD) per Euro (EUR), Jan 4, 1999 to
Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI 3 provides three currency indexes of
the dollar from Jan 4, 1995 to Jul 31, 2020. Chart VI-3A provides the overnight
fed funds rate and yields of the three-month constant maturity Treasury bill,
the ten-year constant maturity Treasury note and Moody’s Baa bond from Jan 4,
1995 to Jul 7, 2016. Chart VI-3B provides the overnight fed funds rate and
yields of the three-month constant maturity Treasury bill and the ten-year
constant maturity Treasury from Jan 4, 1995 to Aug 6, 2020.
Chart VI-3, US Dollar Currency Indexes, Jan 4, 1995-Jul 31,
2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-3A, US, Overnight Fed Funds Rate, Yield of
Three-Month Treasury Constant Maturity, Yield of Ten-Year Treasury Constant
Maturity and Yield of Moody’s Baa Bond, Jan 4, 1995 to Jul 25, 2016
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart VI-3B, US, Overnight Fed Funds Rate, Yield of
Three-Month Treasury Constant Maturity and Yield of Ten-Year Treasury Constant
Maturity, Jan 4, 1995 to Aug 6, 2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Carry trades induced by zero interest rates increase
capital flows into emerging markets that appreciate exchange rates. Portfolio
reallocations away from emerging markets depreciate their exchange rates in
reversals of capital flows. Chart VI-4A provides the exchange rate of the
Mexican peso (MXN) per US dollar from Nov 8, 1993 to Jul 31, 2020. The first
data point in Chart VI-4A is MXN 3.1520 on Nov 8, 1993. The rate devalued to
11.9760 on Nov 14, 1995 during emerging market crises in the 1990s and the increase
of interest rates in the US in 1994 that stressed world financial markets
(Pelaez and Pelaez, International Financial Architecture 2005, The
Global Recession Risk 2007, 147-77). The MXN depreciated sharply to MXN
15.4060/USD on Mar 2, 2009, during the global recession. The rate moved to MXN
11.5050/USD on May 2, 2011, during the sovereign debt crisis in the euro area.
The rate depreciated to 11.9760 on May 9, 2013. The final data point is MXN 22.2260/USD
on Jul 31, 2020.
Chart VI-4A, Mexican Peso (MXN) per US Dollar (USD), Nov 8,
1993 to Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
In remarkable anticipation in 2005, Professor Raghuram G. Rajan
(2005) warned of low liquidity and high risks of central bank policy rates
approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance
(2009b), 218-9). Professor Rajan excelled in a distinguished career as an
academic economist in finance and was chief economist of the International
Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013,
on “India’s central banker lobbies Fed,” published in the Wall Street
Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed
Raghuram G Rajan, who is the former Governor of the Reserve Bank of India,
which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this
interview, Rajan argues that central banks should avoid unintended consequences
on emerging market economies of inflows and outflows of capital triggered by
monetary policy. Professor Rajan, in an interview with Kartik Goyal of
Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of
breakdown of global policy coordination. Professor Willem Buiter (2014Feb4), a
distinguished economist currently Global Chief Economist at Citigroup (http://www.willembuiter.com/resume.pdf), writing on
“The Fed’s bad manners risk offending foreigners,” on Feb 4, 2014, published in
the Financial Times (http://www.ft.com/intl/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html#axzz2suwrwkFs), concurs with
Raghuram Rajan. Buiter (2014Feb4) argues that international policy cooperation
in monetary policy is both in the interest of the world and the United States.
Portfolio reallocations induced by combination of zero interest rates and risk
events stimulate carry trades that generate wide swings in world capital flows.
In a speech at the Brookings Institution on Apr 10, 2014, Raghuram G. Rajan
(2014Apr10, 1, 10) argues:
“As the world seems to be struggling back to its feet after the
great financial crisis, I want to draw attention to an area we need to be
concerned about: the conduct of monetary policy in this integrated world. A
good way to describe the current environment is one of extreme monetary easing
through unconventional policies. In a world where debt overhangs and the need
for structural change constrain domestic demand, a sizeable portion of the
effects of such policies spillover across borders, sometimes through a weaker
exchange rate. More worryingly, it prompts a reaction. Such competitive easing
occurs both simultaneously and sequentially, as I will argue, and both advanced
economies and emerging economies engage in it. Aggregate world demand may be
weaker and more distorted than it should be, and financial risks higher. To ensure
stable and sustainable growth, the international rules of the game need to be
revisited. Both advanced economies and emerging economies need to adapt, else I
fear we are about to embark on the next leg of a wearisome cycle. A first step
to prescribing the right medicine is to recognize the cause of the sickness.
Extreme monetary easing, in my view, is more cause than medicine. The sooner we
recognize that, the more sustainable world growth we will have.”
Professor Raguram G Rajan, former governor of the Reserve Bank
of India, which is India’s central bank, warned about risks in high valuations
of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor
Rajan demystifies in the interview “competitive easing” by major central banks
as equivalent to competitive devaluation.
Chart VI-4B provides the rate of the Indian rupee (INR) per US
dollar (USD) from Jan 2, 1973 to Jul 31, 2020. The first data point is INR
8.0200 on Jan 2, 1973. The rate depreciated sharply to INR 51.9600 on Mar 3,
2009, during the global recession. The rate appreciated to INR 44.0300/USD on
Jul 28, 2011 in the midst of the sovereign debt event in the euro area. The
rate overshot to INR 68.8000 on Aug 28, 2013. The final data point is INR 74.9000/USD
on Jul 31, 2020.
Chart VI-4B, Indian Rupee (INR) per US Dollar (USD), Jan 2,
1973 to Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-5 provides the exchange rate of JPY (Japan yen)
per USD (US dollars). The first data point on the extreme left is JPY
357.7300/USD for Jan 14, 1971. The JPY has appreciated over the long term
relative to the USD with fluctuations along an evident long-term appreciation.
Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007.
The use of the JPY as safe haven is evident by sharp appreciation during the
global recession to JPY 110.4800/USD on Aug 15, 2008, and to JPY 87.8000/USD on
Jan 21, 2009. The final data point in Chart VI-5 is JPY 105.7800/USD on Jul 31,
2020 for appreciation of 14.8 percent relative to JPY 124.0900/USD on Jun 29,
2007 before the global recession and expansion characterized by recurring bouts
of risk aversion. Takashi Nakamichi and Eleanor Warnock, writing on “Japan
lashes out over dollar, euro,” on Dec 29, 2012, published in the Wall Street
Journal (http://professional.wsj.com/article/SB10001424127887323530404578207440474874604.html?mod=WSJ_markets_liveupdate&mg=reno64-wsj),
analyze the “war of words” launched by Japan’s new Prime Minister Shinzo Abe
and his finance minister Taro Aso, arguing of deliberate devaluations of the
USD and EUR relative to the JPY, which are hurting Japan’s economic activity.
Gerard Baker and Jacob M. Shlesinger, writing on “Bank of Japan’s Kuroda
signals impatience with Abe government,” on May 23, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303480304579579311491068756?KEYWORDS=bank+of+japan+kuroda&mg=reno64-wsj),
analyze concerns of the Governor of the Bank of Japan Haruhiko Kuroda that the
JPY has strengthened relative to the USD, partly eroding earlier
depreciation. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, Jan
4, 1971-Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
The causes of the financial crisis and global recession were
interest rate and housing subsidies and affordability policies that encouraged
high leverage and risks, low liquidity and unsound credit (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). Several past comments of this blog elaborate
on these arguments, among which: 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
Zero interest rates in the United States forever tend to
depreciate the dollar against every other currency if there is no risk aversion
preventing portfolio rebalancing toward risk financial assets, which include
the capital markets and exchange rates of emerging-market economies. The
objective of unconventional monetary policy as argued by Yellen 2011AS) is to
devalue the dollar to increase net exports that increase US economic growth.
Increasing net exports and internal economic activity in the US is equivalent
to decreasing net exports and internal economic activity in other countries.
Continental territory, rich endowment of natural resources,
investment in human capital, teaching and research universities, motivated
labor force and entrepreneurial initiative provide Brazil with comparative
advantages in multiple economic opportunities. Exchange rate parity is critical
in achieving Brazil’s potential but is difficult in a world of zero interest
rates. Chart IV-6 of the Board of Governors of the Federal Reserve System
provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL
1.2074/USD on Jan 4, 1999 to BRL 5.1967/USD on Jul 31, 2020. The rate reached
BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on
Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008
during worldwide flight from risk. The rate appreciated again by 41.3 percent
to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 5.1967/USD
on Jul 31, 2020 for depreciation of 238.0 percent. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US
Dollar (USD) Jan 4, 1999 to Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-7 of the Board of Governors of the Federal
Reserve System provides the history of the BRL beginning with the first data
point of BRL 0.8400/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on
Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD
on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880 on Sep 21, 2001
relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2,
1995 to Jul 31, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
The carry trade from zero interest rates to
leveraged positions in risk financial assets had proved strongest for commodity
exposures but US equities have regained leadership. The DJIA has increased 183.2
percent since the trough of the sovereign debt crisis in Europe on Jul 16, 2010
to Aug 7, 2020; S&P 500 has gained 227.7 percent and DAX 123.5 percent.
Before the current round of risk aversion, almost all assets in the column “∆%
Trough to 08/07/20” in Table VI-4 had double digit gains relative to the trough
around Jul 2, 2010 followed by negative performance but now some valuations of
equity indexes show varying behavior. China’s Shanghai Composite is 40.8
percent above the trough. Japan’s Nikkei
Average is 153.1 percent above the trough. Dow Global is 75.7 percent above the
trough. STOXX 50 of 50 blue-chip European equities (https://www.stoxx.com/index-details?symbol=sx5E) is 28.3
percent above the trough. NYSE Financial Index is 66.0 percent above the
trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 123.5
percent above the trough. Japan’s Nikkei Average is 153.1 percent above the
trough on Aug 31, 2010 and 96.0 percent above the peak on Apr 5, 2010. The
Nikkei Average closed at 27,433.48 on Aug 7, 2020 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 117.8
percent higher than 10,254.43 on Mar 11, 2011, on
the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk
aversion erased the earlier gains of the Nikkei. The dollar appreciated 1.1
percent relative to the euro. The dollar devalued before the new bout of
sovereign risk issues in Europe. The column “∆% week to 08/07/20” in Table VI-4
shows increase of 1.3 percent for China’s Shanghai Composite. The Nikkei increased
2.9 percent. NYSE Financial increased 3.0 percent in the week. Dow Global increased
2.3 percent in the week of Aug 7, 2020. The DJIA increased 3.8 percent and
S&P 500 increased 2.5 percent. DAX of Germany increased 2.9 percent. STOXX
50 increased 1.2 percent. The USD depreciated 0.1 percent. There are still high
uncertainties on European sovereign risks and banking soundness, US and world
growth slowdown and China’s growth tradeoffs. Sovereign problems in the
“periphery” of Europe and fears of slower growth in Asia and the US cause risk
aversion with trading caution instead of more aggressive risk exposures. There
is a fundamental change in Table VI-4 from the relatively upward trend with
oscillations since the sovereign risk event of Apr-Jul 2010. Performance is
best assessed in the column “∆% Peak to 08/07/20” that provides the percentage
change from the peak in Apr 2010 before the sovereign risk event to Jul 31,
2020. Most risk financial assets had gained not only relative to the trough as
shown in column “∆% Trough to 08/07/20” but also relative to the peak in column
“∆% Peak to 08/07/20.” There are now several equity indexes above the peak in
Table VI-4: DJIA 144.8 percent, S&P 500 175.3 percent, DAX 100.2 percent,
Dow Global 43.4 percent, NYSE Financial Index (https://www.nyse.com/quote/index/NYK.ID) 32.2 percent
and Nikkei Average 96.0 percent. STOXX 50 is 8.7 percent above the peak.
Shanghai Composite is 6.0 percent above the peak. The Shanghai Composite
increased 69.09 percent from March 12, 2014, to Aug 7, 2020. The US dollar
strengthened 22.1 percent relative to the peak. The factors of risk aversion
have adversely affected the performance of risk financial assets. The
performance relative to the peak in Apr 2010 is more important than the
performance relative to the trough around early Jul 2010 because improvement
could signal that conditions have returned to normal levels before European
sovereign doubts in Apr 2010.
Table VI-4,
Stock Indexes, Commodities, Dollar and Ten-Year Treasury
|
|
Peak |
Trough |
∆% to
Trough |
∆% Peak to
08/07/ /20 |
∆% Week
08/07/20 |
∆% Trough
to 08/07/ 20 |
|
DJIA |
4/26/ |
7/2/10 |
-13.6 |
144.8 |
3.8 |
183.2 |
|
S&P
500 |
4/23/ |
7/20/ |
-16.0 |
175.3 |
2.5 |
227.7 |
|
NYSE
Finance |
4/15/ |
7/2/10 |
-20.3 |
32.2 |
3.0 |
66.0 |
|
Dow Global |
4/15/ |
7/2/10 |
-18.4 |
43.4 |
2.3 |
75.7 |
|
Asia
Pacific |
4/15/ |
7/2/10 |
-12.5 |
NA |
NA |
NA |
|
Japan
Nikkei Aver. |
4/05/ |
8/31/ |
-22.5 |
96.0 |
2.9 |
153.1 |
|
China
Shang. |
4/15/ |
7/02 |
-24.7 |
6.0 |
1.3 |
40.8 |
|
STOXX 50 |
4/15/10 |
7/2/10 |
-15.3 |
8.7 |
1.2 |
28.3 |
|
DAX |
4/26/ |
5/25/ |
-10.5 |
100.2 |
2.9 |
123.5 |
|
Dollar |
11/25 2009 |
6/7 |
21.2 |
22.1 |
-0.1 |
1.1 |
|
DJ UBS
Comm. |
1/6/ |
7/2/10 |
-14.5 |
NA |
NA |
NA |
|
10-Year T
Note |
4/5/ |
4/6/10 |
3.986 |
2.784 |
2.658 |
0.567 |
T: trough;
Dollar: positive sign appreciation relative to euro (less dollars paid per
euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
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