US GDP Growing at SAAR 4.1 Percent in IVQ2020, Gross Private Domestic Investment at SAAR 26.5 Percent and Private Fixed Investment at SAAR 19.1 Percent With Equipment at SAAR 25.7 Percent 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, Mediocre Cyclical United States Economic Growth in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Real Private Fixed Investment, United States Terms of International Trade, United States Housing, United States House Prices, World Inflation Waves, World Cyclical Slow Growth, and Government Intervention in Globalization: Part VIII

US GDP Growing at SAAR 4.1 Percent in IVQ2020, Gross Private Domestic Investment at SAAR 26.5 Percent and Private Fixed Investment at SAAR 19.1 Percent With Equipment at SAAR 25.7 Percent 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, Mediocre Cyclical United States Economic Growth in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Real Private Fixed Investment, United States Terms of International Trade, United States Housing, United States House Prices, World Inflation Waves, World Cyclical Slow Growth, and Government Intervention in Globalization

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021.

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IID United States Terms of International Trade

IIA United States Housing Collapse

IIA1 Sales of New Houses

IIA2 United States House Prices

I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IB1 Theory

IB2 Policy

IB3 Evidence

IB4 Unwinding Strategy

IC United States Inflation

IC Long-term US Inflation

ID Current US Inflation

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

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-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.459 percent at the close of market on Fri Feb 26, 2021 would be equivalent to price of 110.8127 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price increase of 9.4 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. The price loss between Sep 7, 2012 and Sep 14, 2012 would have been 1.7 percent in just five trading days. The price loss between Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. The price loss between Dec 28, 2012 and Jan 4, 2013 would have been 1.7 percent. These losses defy annualizing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. There is a difficult climb from the record federal deficit of 9.8 percent of GDP in 2009 and cumulative deficit of $5090 billion in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012, which is the worst fiscal performance since World War II (https://cmpassocregulationblog.blogspot.com/2018/10/global-contraction-of-valuations-of.html and earlier https://cmpassocregulationblog.blogspot.com/2017/04/mediocre-cyclical-economic-growth-with.html and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier http://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier Section IB at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html). There is no subsequent jump of debt in US peacetime history as the one from 39.4 percent of GDP in 2008 to 65.8 percent of GDP in 2011, 70.3 percent in 2012, 72.2 percent in 2013, 73.7 percent in 2014, 72.5 percent in 2015, 76.4 percent in 2016, 76.1 percent in 2017 and 77.8 percent in 2018 (https://www.cbo.gov/about/products/budget-economic-data#6) (https://cmpassocregulationblog.blogspot.com/2018/10/global-contraction-of-valuations-of.html and earlier https://cmpassocregulationblog.blogspot.com/2017/04/mediocre-cyclical-economic-growth-with.html and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier (http://cmpassocregulationblog.blogspot.com/2016/01/weakening-equities-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/08/monetary-policy-world-inflation-waves.html

and earlier http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). The US is facing an unsustainable debt/GDP path (https://cmpassocregulationblog.blogspot.com/2018/10/global-contraction-of-valuations-of.html and earlier and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2016/12/rising-yields-and-dollar-revaluation.html http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier http://cmpassocregulationblog.blogspot.com/2016/01/weakening-equities-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/08/monetary-policy-world-inflation-waves.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html).

The Chair of the Federal Reserve Board, Jerome H. Powell, at the 61^st Annual Meeting on the National Association for Business Economics, on Oct 28, 2019, in Denver, Colorado, stated (https://www.federalreserve.gov/newsevents/speech/powell20191008a.htm): “Reserve balances are one among several items on the liability side of the Federal Reserve's balance sheet, and demand for these liabilities—notably, currency in circulation—grows over time. Hence, increasing the supply of reserves or even maintaining a given level over time requires us to increase the size of our balance sheet. As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves.¹⁸ That time is now upon us.

I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy, to which I now turn.” On October 25, 2017, at the beginning of the FOMC programmed reduction of the balance sheet, Total Assets of Federal Reserve Banks stood at $4,461,117 million. Total Assets increased $3,128,994 million from $4,461,117 on Oct 25, 2017 to $7,590,111 on Feb 24, 2021. Total Assets of Federal Reserve Banks increased from $3,981,420 million on Feb 20, 2019 to $7,590,111 million on Feb 24, 2021, by $3,608,691 million or 90.6 percent. The policy of reducing the fed funds policy rate requires increasing the balance sheet. The line “Securities Held Outright” increased from $4,019,823 million on Oct 25, 2017 to $7,027,599 on Feb 24, 2021 or $3,007,776 million. Securities Held Outright increased from $3,617,939 million on Jul 1, 2019 to $7,027,599 on Feb 24, 2021 by $3,409,660 million or 94.2 percent. The portfolio of long-term securities (“securities held outright”) for monetary policy consists primarily of $6658 billion, or $6.66 trillion, of which $4,151 billion Treasury nominal notes and bonds, $324 billion of notes and bonds inflation-indexed, $2 billion Federal agency debt securities and $2181 billion mortgage-backed securities ($2,180,678 million). Reserve balances deposited with Federal Reserve Banks reached $3384 billion ($3,384,183 million) or $3.4 trillion (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). The rounded values of $1649 billion of reserves deposited at Federal Reserve Banks and mortgage-backed securities are identical on Dec 19, 2018, by pure coincidence. There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of exposures because of increasing risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table VI-7, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1
12/30/11	1.871	106.8476	5.5
01/06/12	1.957	106.0403	4.7
01/13/12	1.869	106.8664	5.5
01/20/12	2.026	105.3976	4.1
01/27/12	1.893	106.6404	5.3
02/03/12	1.923	106.3586	5.0
02/10/12	1.974	105.8815	4.6
02/17/12	2.000	105.6392	4.3
02/24/12	1.977	105.8535	4.5
03/02/12	1.977	105.8535	4.5
03/09/12	2.031	105.3512	4.0
03/16/12	2.294	102.9428	1.7
03/23/12	2.234	103.4867	2.2
03/30/12	2.214	103.6687	2.4
04/06/12	2.058	105.1010	3.8
04/13/12	1.987	105.7603	4.4
04/20/12	1.959	106.0216	4.7
04/27/12	1.931	106.2836	5.0
05/04/12	1.876	106.8004	5.5
05/11/12	1.845	107.0930	5.8
05/18/12	1.714	108.3393	7.0
05/25/12	1.738	108.1098	6.8
06/01/12	1.454	110.8618	9.5
06/08/12	1.635	109.0989	7.7
06/15/12	1.584	109.5924	8.2
06/22/12	1.676	108.7039	7.4
06/29/12	1.648	108.9734	7.6
07/06/12	1.548	109.9423	8.6
07/13/12	1.49	110.5086	9.1
07/20/12	1.459	110.8127	9.4
07/27/12	1.544	109.9812	8.6
08/03/12	1.569	109.7380	8.4
08/10/12	1.658	108.8771	7.5
08/17/12	1.814	107.3864	6.1
08/24/12	1.684	108.6270	7.3
08/31/12	1.543	109.9910	8.6
9/7/12	1.668	108.7808	7.4
9/14/12	1.863	106.9230	5.6
9/21/12	1.753	107.9666	6.6
9/28/12	1.631	109.1375	7.8
10/05/12	1.737	108.1193	6.8
10/12/12	1.663	108.8290	7.5
10/19/12	1.766	107.8426	6.5
10/26/12	1.748	108.0143	6.7
11/02/12	1.715	108.3297	7.0
11/09/12	1.614	109.3018	7.9
11/16/12	1.584	109.5924	8.2
11/23/12	1.691	108.5598	7.2
11/30/12	1.612	109.3211	7.9
12/7/12	1.625	109.1954	7.8
12/14/12	1.704	108.4351	7.1
12/21/12	1.770	107.8045	6.5
12/28/12	1.699	108.4831	7.1
1/4/13	1.898	106.5934	5.3
1/11/13	1.862	106.9324	5.6
1/18/13	1.840	107.1403	5.8
1/25/13	1.947	106.1338	4.8
2/1/13	2.024	105.4161	4.1
2/8/13	1.949	106.1151	4.8
2/15/13	2.007	105.5741	4.3
2/22/13	1.967	105.9469	4.6
3/1/13	1.842	107.1213	5.8
3/8/13	2.056	105.1195	3.8
3/15/13	1.992	105.7137	4.4
03/22/13	1.931	106.2836	5.0
03/29/13	1.847	107.0741	5.7
04/05/13	1.706	108.4160	7.1
04/12/13	1.719	108.2914	6.9
04/19/13	1.702	108.4543	7.1
04/26/13	1.663	108.8290	7.5
05/3/13	1.742	108.2436	6.9
05/10/13	1.896	106.6122	5.3
05/17/13	1.952	106.0870	4.8
05/24/13	2.009	105.5555	4.2
05/31/13	2.132	104.5015	3.2
06/07/13	2.174	104.0338	2.7
06/14/13	2.125	104.4831	3.2
06/21/13	2.542	100.7288	-0.5
06/28/13	2.486	101.2240	0.0
07/5/13	2.734	99.0519	-2.2
07/12/13	2.585	100.3505	-0.9
07/19/13	2.480	101.2772	0.0
07/26/13	2.565	100.5263	-0.7
08/2/13	2.597	100.2452	-1.0
8/9/13	2.579	100.4032	-0.8
8/16/13	2.829	98.2339	-3.0
8/23/13	2.818	98.3283	-2.9
8/30/13	2.784	98.6205	-2.6
9/6/13	2.941	97.2795	-3.9
9/13/13	2.890	97.7128	-3.5
9/20/13	2.734	99.0519	-2.2
9/27/13	2.626	99.9913	-1.3
10/4/13	2.645	99.8253	-1.4
10/11/13	2.688	99.4508	-1.8
10/18/13	2.588	100.3242	-0.9
10/25/13	2.507	101.0380	-0.2
11/1/13	2.622	100.0262	-1.2
11/8/13	2.750	98.9136	-2.3
11/15/13	2.704	99.3118	-1.9
11/22/13	2.746	98.9482	-2.3
11/29/13	2.743	98.9741	-2.3
12/6/13	2.858	97.9858	-3.2
12/13/13	2.865	97.9260	-3.3
12/20/13	2.891	97.7043	-3.5
12/27/13	3.004	96.7472	-4.5
1/3/2014	2.999	96.7893	-4.4
1/10/14	2.858	97.9858	-3.2
1/17/14	2.818	98.3283	-2.9
1/24/14	2.720	99.1731	-2.1
1/31/14	2.645	99.8253	-1.4
2/7/14	2.681	99.5116	-1.7
2/14/14	2.743	98.9741	-2.3
2/21/14	2.730	99.0865	-2.1
2/28/14	2.655	99.7380	-1.5
3/7/14	2.792	98.5516	-2.7
3/14/14	2.654	99.7468	-1.5
3/21/14	2.743	98.9741	-2.3
3/28/14	2.721	99.1645	-2.1
4/4/14	2.724	99.1385	-2.1
4/11/14	2.628	99.9738	-1.3
4/18/14	2.724	99.1385	-2.1
4/25/14	2.668	99.6248	-1.6
5/2/14	2.583	100.3681	-0.9
5/9/14	2.624	100.0088	-1.2
5/16/14	2.520	100.9320	-0.3
5/23/14	2.532	100.8171	-0.4
5/30/14	2.473	101.3394	0.1
6/6/2014	2.598	100.2364	-1.0
6/13/14	2.605	100.1751	-1.1
6/20/14	2.609	00.1400	-1.1
6/27/14	2.536	100.7818	-0.05
7/4/14	2.641	99.8602	-1.4
7/11/14	2.516	100.9584	-0.3
7/18/14	2.484	101.2417	0.0
7/25/14	2.464	101.4193	0.2
8/1/14	2.497	101.1265	-0.1
8/8/14	2.420	101.8111	0.5
8/15/14	2.341	102.5190	1.2
8/22/14	2.399	101.9988	0.7
8/29/14	2.342	102.5100	1.2
9/5/14	2.457	101.4815	0.2
9/12/14	2.606	10.1663	-1.1
9/19/14	2.576	100.4296	-0.8
9/26/14	2.527	100.8612	-0.4
10/03/14	2.437	101.6595	0.4
10/10/14	2.292	102.9609	1.7
10/17/14	2.197	103.8237	2.5
10/24/14	2.263	103.2234	1.9
10/31/14	2.332	102.6000	1.3
11/07/14	2.302	102.8705	1.6
11/14/14	2.319	102.7171	1.4
11/21/14	2.307	102.8254	1.5
11/28/14	2.165	104.1162	2.8
12/5/14	2.306	102.8344	1.6
12/12/14	2.086	104.8423	3.5
12/19/14	2.185	103.9333	2.6
12/26/14	2.248	103.3595	2.1
01/02/15	2.126	104.4739	3.2
01/09/15	1.973	105.8909	4.6
01/16/15	1.826	107.2727	5.9
01/23/15	1.804	107.4813	6.1
01/30/15	1.683	108.6367	7.3
02/06/15	1.941	106.1899	4.9
02/13/15	2.043	105.2399	3.9
02/20/15	2.119	104.5383	3.2
02/27/15	2.016	105.4905	4.2
03/06/15	2.238	103.4503	2.2
03/13/15	2.103	104.6856	3.4
03/20/15	1.927	106.3211	5.0
03/27/15	1.951	106.0964	4.8
04/02/15	1.911	106.4712	5.1
04/10/15	1.950	106.1057	4.8
04/17/15	1.864	106.9136	5.6
04/24/15	1.917	106.4149	5.1
05/01/15	2.118	104.5475	3.2
05/08/15	2.153	104.2261	2.9
05/15/15	2.136	104.3821	3.1
05/22/15	2.211	103.6961	2.4
05/29/15	2.092	104.7869	3.5
06/05/15	2.400	101.9898	0.7
06/12/15	2.388	102.0972	0.8
06/19/15	2.270	103.1599	1.9
06/26/15	2.473	101.3394	0.1
07/03/15	2.383	102.1420	0.9
07/10/15	2.414	101.8647	0.6
07/17/15	2.346	102.4740	1.2
07/24/15	2.268	103.1781	1.9
07/31/15	2.207	103.7325	2.4
08/07/15	2.164	104.1254	2.8
08/14/15	2.196	103.8328	2.5
08/21/15	2.052	105.1565	3.9
08/28/15	2.182	103.9607	2.7
09/04/15	2.127	104.4647	3.2
09/11/15	2.181	103.9698	2.7
09/18/15	2.131	104.4280	3.1
09/25/15	2.168	104.0887	2.8
10/02/15	1.988	105.7510	4.4
10/09/15	2.096	104.7501	3.4
10/16/15	2.024	105.4161	4.1
10/23/15	2.083	104.8700	3.6
10/30/15	2.150	104.2536	3.0
11/06/15	2.332	102.6000	1.3
11/13/15	2.278	103.0875	1.8
11/20/15	2.260	103.2506	2.0
11/27/15	2.223	103.5868	2.3
12/04/15	2.276	103.1056	1.8
12/11/15	2.134	104.4004	3.1
12/18/15	2.197	103.8237	2.5
12/25/15	2.242	103.4140	2.1
01/01/16	2.269	103.1690	1.9
01/08/16	2.135	104.3913	3.1
01/15/16	2.036	105.3048	4.0
01/22/15	2.048	105.1936	3.9
01/29/16	1.923	106.3586	5.0
02/05/16	1.848	107.0646	5.7
02/12/16	1.744	108.0525	6.7
02/19/16	1.748	108.0143	6.7
02/26/16	1.766	107.8426	6.5
03/04/16	1.884	106.7251	5.4
03/11/16	1.977	105.8535	4.5
03/18/16	1.871	106.8476	5.5
03/25/16	1.900	106.5746	5.3
04/01/16	1.795	107.5667	6.2
04/08/16	1.722	108.2627	6.9
04/15/16	1.752	107.9761	6.6
04/22/16	1.886	106.7063	5.4
04/29/16	1.820	107.3296	6.0
05/06/16	1.780	107.7094	6.4
05/13/16	1.706	108.4160	7.1
05/20/16	1.849	107.0552	5.7
05/27/16	1.851	107.0363	5.7
06/03/16	1.704	108.4351	7.1
06/10/16	1.638	109.0699	7.7
06/17/16	1.618	109.2631	7.9
06/24/16	1.575	109.6797	8.3
07/01/16	1.443	110.9700	9.6
07/08/16	1.366	111.7306	10.3
07/15/16	1.595	109.4857	8.1
07/22/16	1.567	109.7575	8.4
07/29/16	1.458	110.8225	9.4
08/05/16	1.583	109.6021	8.2
08/12/16	1.514	110.2739	8.9
08/19/16	1.580	109.6312	8.3
08/26/16	1.635	109.0989	7.7
09/02/16	1.597	109.4663	8.1
09/09/16	1.675	108.7135	7.4
09/16/16	1.699	108.4831	7.1
09/23/16	1.614	109.3018	7.9
09/30/16	1.602	109.4179	8.1
10/07/16	1.732	108.1671	6.8
10/14/16	1.791	107.6048	6.3
10/21/16	1.738	108.1098	6.8
10/28/16	1.843	107.1119	5.8
11/04/16	1.784	107.6173	6.3
11/11/16	2.152	104.2353	2.9
11/18/16	2.340	102.5280	1.3
11/25/16	2.358	102.3662	1.1
12/01/16	2.389	102.0883	0.8
12/09/16	2.466	101.4015	0.1
12/16/16	2.597	100.2452	-1.0
12/23/16	2.542	100.7289	-0.5
12/30/16	2.447	101.5705	0.3
01/06/17	2.416	101.8469	0.6
01/13/17	2.381	102.1599	0.9
01/20/17	2.466	101.4015	0.1
01/27/17	2.479	101.2861	0.0
02/03/17	2.488	101.2063	-0.1
02/10/17	2.408	101.9183	0.7
02/17/17	2.425	101.7665	0.5
02/24/17	2.314	102.7622	1.5
03/03/17	2.492	101.1708	-0.1
03/10/17	2.584	100.3593	-0.9
03/17/17	2.502	101.0823	-0.2
03/24/17	2.399	101.9888	0.7
03/31/17	2.396	102.0256	0.8
04/07/17	2.373	102.2316	1.0
04/14/17	2.234	103.4867	2.2
04/21/17	2.233	103.4958	2.2
04/28/17	2.286	103.0151	1.7
05/05/17	2.352	102.4201	1.1
05/12/17	2.333	102.5910	1.3
05/19/17	2.243	103.4049	2.1
05/26/17	2.247	103.3686	2.1
06/02/17	2.161	104.1528	2.9
06/09/17	2.199	103.8055	2.5
06/16/17	2.154	104.2170	2.9
06/23/17	2.144	104.3087	3.0
06/30/17	2.304	102.8525	1.6
07/07/17	2.393	102.0524	0.8
07/14/17	2.323	102.6811	1.4
07/21/17	2.233	103.4985	2.2
07/28/17	2.288	102.9970	1.7
08/04/17	2.268	103.1781	1.9
08/11/17	2.189	103.8968	2.6
08/18/17	2.196	103.8328	2.5
08/25/17	2.171	104.0613	2.8
09/01/17	2.157	101.2573	2.9
09/08/17	2.061	105.0733	3.8
09/15/17	2.201	103.7872	2.5
09/22/17	2.263	103.2234	1.9
09/29/17	2.327	102.6450	1.4
10/06/17	2.368	102.2765	1.0
10/13/17	2.278	103.0875	1.8
10/20/17	2.379	102.1778	0.9
10/27/17	2.423	101.7844	0.5
11/03/17	2.343	102.5010	1.2
11/10/17	2.404	101.9541	0.7
11/17/17	2.354	102.4021	1.1
11/24/17	3.343	102.5010	1.2
12/01/17	2.361	102.3393	1.1
12/08/17	2.383	102.1420	0.9
12/15/17	2.355	102.3932	1.1
12/22/17	2.487	101.2151	0.0
12/29/17	2.411	101.8915	0.6
01/05/18	2.475	101.3216	0.1
01/12/18	2.550	100.6583	-0.6
01/19/18	2.638	99.8864	-1.4
01/26/18	2.661	99.6857	-1.6
02/02/18	2.848	98.0713	-3.1
02/09/18	2.830	98.2254	-3.0
02/16/18	2.877	97.8236	-3.4
02/23/18	2.870	97.8833	-3.3
03/02/18	2.855	98.0114	-3.2
03/09/18	2.893	97.6872	-3.5
03/16/18	2.845	98.0969	-3.1
03/23/18	2.826	98.2597	-3.0
03/30/18	2.739	99.0087	-2.2
04/06/18	2.778	98.6721	-2.6
04/13/18	2.825	98.2682	-3.0
04/20/18	2.953	97.1778	-4.0
04/27/18	2.955	97.1609	-4.1
05/04/18	2.943	97.2625	-3.9
05/11/18	2.970	97.0340	-4.2
05/18/18	3.065	96.2350	-5.0
05/25/18	2.928	97.3897	-3.8
06/01/18	2.889	97.7213	-3.5
06/08/18	2.938	97.3049	-3.9
06/15/18	2.922	97.4406	-3.8
06/22/18	2.902	97.6106	-3.6
06/29/18	2.850	98.0542	-3.2
07/06/18	2.821	98.3025	-2.9
07/13/18	2.830	98.2254	-3.0
07/20/18	2.890	97.7128	-3.5
07/27/18	2.959	97.1270	-4.1
08/03/18	2.952	97.1863	-4.0
08/10/18	2.859	97.9772	-3.2
08/17/18	2.870	97.8833	-3.3
08/24/18	2.823	98.2854	-2.9
08/31/18	2.850	98.0542	-3.2
09/07/18	2.936	97.3218	-3.9
08/14/18	2.987	96.8905	-4.3
09/21/18	3.067	96.2182	-5.0
09/28/18	3.055	96.3187	-4.9
10/05/18	3.231	94.8567	-6.3
10/12/18	3.137	95.6344	-5.6
10/19/18	3.198	95.1289	-6.1
10/26/18	3.077	96.1346	-5.1
11/02/18	3.216	94.9803	-6.2
11/09/18	3.188	95.2115	-6.0
11/16/18	3.075	96.1513	-5.0
11/23/18	3.039	96.4529	-4.7
11/30/18	3.014	96.6630	-4.5
12/07/18	2.848	98.0713	-3.1
12/14/18	2.892	97.6957	-3.5
12/21/18	2.791	98.5602	-2.7
12/28/18	2.736	99.0346	-2.2
01/04/19	2.568	99.7119	-1.5
01/11/19	2.700	99.3466	-1.9
01/18/19	2.780	98.6549	-2.6
01/25/19	2.750	98.9136	-2.3
02/01/19	2.691	99.4247	-1.8
02/08/19	2.636	99.039	-1.3
02/15/19	2.667	99.6335	-1.6
02/22/19	2.652	99.7642	-1.5
03/01/19	2.747	98.9395	-2.3
03/08/19	2.630	99.9563	-1.3
03/15/19	2.593	100.2803	-1.0
03/22/19	2.453	101.5171	0.3
03/29/19	2.416	101.8469	0.6
04/05/19	2.503	101.0734	-0.2
04/12/19	2.557	100.5967	-0.7
04/19/19	2.564	100.5351	-0.7
04/26/19	2.505	101.0557	-0.2
05/03/19	2.526	100.8700	-0.4
05/10/19	2.457	101.4815	0.2
05/17/19	2.398	102.0077	0.7
05/24/19	2.323	102.6811	1.4
05/31/19	2.141	104.3362	3.0
06/07/19	2.082	104.8792	3.6
06/14/19	2.095	104.7593	3.5
06/21/19	2.062	105.0640	3.8
06/28/19	2.006	105.5834	4.3
07/05/19	2.045	105.2214	3.9
07/12/19	2.107	104.6487	3.3
07/19/19	2.049	105.1843	3.9
07/26/19	2.080	104.8977	3.6
08/02/19	1.860	106.9513	5.6
08/09/19	1.736	108.1289	6.8
08/16/19	1.540	110.0202	8.7
08/23/19	1.526	110.1567	8.8
08/30/19	1.504	110.3716	9.0
09/06/19	1.554	109.8839	8.5
09/13/19	1.894	106.6310	5.3
09/20/19	1.754	107.9570	6.6
09/27/19	1.676	108.7039	7.4
10/04/19	1.515	110.2641	8.9
10/11/19	1.753	107.9666	6.6
10/18/19	1.749	108.0047	6.7
10/25/19	1.800	107.5193	6.2
11/01/19	1.716	108.3202	7.0
11/08/19	1.929	106.3024	5.0
11/15/19	1.835	107.1876	5.9
11/22/19	1.773	107.7760	6.4
11/29/19	1.782	107.6903	6.4
12/06/19	1.838	107.1592	5.8
12/13/19	1.820	107.3296	6.0
12/20/19	1.915	106.4337	5.1
12/27/19	1.869	106.8664	5.5
01/03/20	1.791	107.6048	6.3
01/10/20	1.826	107.2727	5.9
01/17/20	1.836	107.1781	5.8
01/24/20	1.678	108.6847	9.3
01/31/20	1.521	110.2055	8.8
02/07/20	1.579	109.6409	8.3
02/14/20	1.587	109.5633	8.2
02/21/20	1.473	110.6753	9.3
02/28/20	1.148	113.9161	12.5
03/06/20	0.709	118.4650	17.0
03/13/20	0.955	115.8912	14.5
03/20/20	0.949	115.9533	14.5
03/27/20	0.731	118.2322	16.8
04/03/20	0.592	119.7116	18.2
04/10/20	0.729	118.2536	16.8
04/17/20	0.657	119.0192	17.5
04/20/20	0.598	119.6473	18.2
05/01/20	0.637	119.2304	17.7
05/08/20	0.679	118.7832	17.3
05/15/20	0.641	119.1877	17.7
05/22/20	0.661	118.9747	17.5
05/29/20	0.649	119.1025	17.6
06/05/20	0.912	116.3365	14.9
06/12/20	0.700	118.5604	17.1
06/19/20	0.686	118.7089	17.2
06/26/20	0.643	119.1664	17.7
07/03/20	0.673	118.8470	17.4
07/10/20	0.632	119.2838	17.8
07/17/20	0.627	119.3372	17.9
07/24/20	0.587	119.7652	18.3
07/31/20	0.540	120.2704	18.8
08/07/20	0.567	119.9799	18.5
08/14/20	0.708	118.4756	17.0
08/21/20	0.633	119.2731	17.8
08/28/20	0.733	118.2111	16.7
09/04/20	0.722	118.3274	16.9
09/11/20	0.672	118.8576	17.4
09/18/20	0.689	118.6771	17.2
09/25/20	0.660	118.9853	17.5
10/02/20	0.698	118.5816	17.1
10/09/20	0.778	117.7366	16.3
10/16/20	0.738	118.1583	16.7
10/23/20	0.842	117.0656	15.6
10/30/20	0.858	116.8985	15.4
11/06/20	0.818	117.3167	15.9
11/13/20	0.895	116.5131	15.1
11/20/20	0.832	117.1702	15.7
11/27/20	0.846	117.0238	15.6
12/04/20	0.971	115.7260	14.3
12/11/20	0.887	116.5963	15.1
12/18/20	0.940	116.0464	14.6
12/22/20	0.933	116.1188	14.7
01/01/21	0.913	116.3262	14.9
01/08/21	1.105	114.3528	12.9
01/15/21	1.097	114.4343	13.0
01/22/21	1.090	114.5056	13.1
01/29/21	1.090	114.5056	13.1
02/05/21	1.168	113.7136	12.3
02/12/21	1.199	113.4005	12.0
02/19/21	1.344	111.9490	10.6
02/26/21	1.459	110.8127	9.4

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

Table VI-7B provides the maturity distribution and average length in months of marketable interest-bearing debt held by private investors from 2007 to 2020. Total debt held by investors increased from $3635 billion in 2007 to $15,992 billion in Sep 2020 (Fiscal Year 2020) or increase by 339.9 percent. There are two concerns with the maturity distribution of US debt. (1) Growth of debt is moving total debt to the point of saturation in investors’ portfolio. In a new environment of risk appetite and nonzero fed funds rates with economic growth at historical trend of around 3 percent, yields on risk financial assets are likely to increase. Placement of new debt may require increasing interest rates in an environment of continuing placement of debt by the US Treasury without strong fiscal constraints. (2) Refinancing of maturing debt is likely to occur in an environment of higher interest rates, exerting pressure on future fiscal budgets. In Sep (fiscal year 2020), $6374 billion or 39.9 percent of outstanding debt held by investors matures in less than a year and $5568 billion or 34.8 percent of total debt matures in one to five years. Debt maturing in five years or less adds to $11,942 billion or 74.7 percent of total outstanding debt held by investors of $15,992 billion. This historical episode may be remembered as one in which the US managed its government debt with short-dated instruments during record low long-dated yields and on the verge of fiscal pressures on all interest rates. This strategy maximizes over time interest payments on government debt by taxpayers that is precisely the opposite of the objective of sound debt management and taxpayer welfare.

Table VI-7B, Maturity Distribution and Average Length in Months of Marketable Interest-Bearing Public Debt Held by Private Investors, Billions of Dollars

End of Fiscal Year or Month	2007	2008	2009	2010	2011	2012
Total*	3635	4745	6229	7676	7951	9040
<1 Year	1176	2042	2605	2480	2504	2897
1-5 Years	1310	1468	2075	2956	3085	3852
5-10 Years	678	719	995	1529	1544	1488
10-20 Years	292	352	351	341	309	271
>20 Years	178	163	204	371	510	533
Average Months	58	49	49	57	60	55

End of Fiscal Year or Month		2013	2014	2015	2016	2017
Total*		9518	9829	10379	11184	11643
<1 Year		2940	2932	2923	3321	3263
1-5 Years		4135	4217	4356	4478	4746
5-10 Years		1648	1814	2084	2219	2321
10-20 Years		231	223	184	168	152
>20 Years		565	644	832	998	1161
Average Months		55	56	61	63	66
End of Fiscal Year or Month	2018	2019	2020	2020 Sep
Total*	12881	14225	15,992	15,992
<1 Year	3794	4147	6374	6374
1-5 Years	5181	5822	5568	5568
5-10 Years	2445	2625	2332	2332
10-20 Years	121	105	242	242
>20 Years	1339	1526	1376	1406
Average Months	65	65	56	56

*Amount Outstanding Privately Held

Source: United States Treasury. 2020 Dec. Treasury Bulletin. Washington, Dec 2020

https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/

Table VI-7C provides additional information required for understanding the deficit/debt situation of the United States. The table is divided into four parts: Treasury budget in the 2021 fiscal year beginning on Oct 1, 2020 and ending on Sep 30, 2021; federal fiscal data for the years from 2009 to 2019; federal fiscal data for the years from 2005 to 2008; and Treasury debt held by the public from 2005 to 2019. Receipts increased 0.8 percent in the cumulative fiscal year 2021 ending in Jan 2021 relative to the cumulative in fiscal year 2020. Individual income taxes decreased 3.8 percent relative to the same fiscal period a year earlier. Outlays increased 22.7 percent relative to a year earlier. There are also receipts, outlays, deficit and debt for fiscal years 2013, 2014, 2015, 2016, 2017, 2018 and 2019. In fiscal year 2019, the deficit reached $984.4 billion or 4.6 percent of GDP. Outlays of 4,446.6 billion were 21.0 percent of GDP and receipts of $3,462.2 billion were 16.3 percent of GDP. It is quite difficult for the US to raise receipts above 18 percent of GDP. Total revenues of the US from 2009 to 2012 accumulate to $9021.2 billion, or $9.0 trillion, while expenditures or outlays accumulate to $14,104.5 billion, or $14.1 trillion, with the deficit accumulating to $5083.3 billion, or $5.1 trillion. Revenues decreased 6.5 percent from $9652.5 billion in the four years from 2005 to 2008 to $9021.2 billion in the years from 2009 to 2012. Decreasing revenues were caused by the global recession from IVQ2007 (Dec) to IIQ2009 (Jun) and by growth of only 1.9 percent on average in the cyclical expansion from IIIQ2009 to IVQ2020. In contrast, the expansion from IQ1983 to IIQ1994 was at the average annual growth rate of 3.7 percent and at 7.9 percent from IQ1983 to IVQ1983 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2021/01/us-gdp-growing-at-saar-40-percent-in.html). Because of mediocre GDP growth, there are 32.8 million unemployed or underemployed in the United States for an effective unemployment/underemployment rate of 19.0 percent (https://cmpassocregulationblog.blogspot.com/2021/02/increasing-valuations-of-risks.html and earlier https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html). Weakness of growth and employment creation is analyzed in II Collapse of United States Dynamism of Income Growth and Employment Creation (Section II and earlier https://cmpassocregulationblog.blogspot.com/2021/01/cumulative-growth-of-us-manufacturing.html). In contrast with the decline of revenue, outlays or expenditures increased 30.1 percent from $10,838.2 billion, or $10.8 trillion, in the four years from 2005 to 2008, to $14,104.5 billion, or $14.1 trillion, in the four years from 2009 to 2012. Increase in expenditures by 30.1 percent while revenue declined by 6.5 percent caused the increase in the federal deficit from $1185.8 billion in 2005-2008 to $5083.3 billion in 2009-2012. Federal revenue was 14.8 percent of GDP on average in the years from 2009 to 2012, which is well below 17.3 percent of GDP on average from 1962 to 2019. Federal outlays were 23.3 percent of GDP on average from 2009 to 2012, which is well above 20.1 percent of GDP on average from 1962 to 2019. The lower part of Table VI-7C shows that debt held by the public swelled from $5803 billion in 2008 to $13,117 billion in 2015, by $7314 billion or 126.0 percent. Debt held by the public as percent of GDP or economic activity jumped from 39.4 percent in 2008 to 79.2 percent in 2019, which is well above the average of 41.7 percent from 1962 to 2019. The United States faces tough adjustment because growth is unlikely to recover, creating limits on what can be obtained by increasing revenues, while continuing stress of social programs restricts what can be obtained by reducing expenditures. The Congressional Budget Office (CBO) provides a preliminary estimate of the impact of Public Law 116-136 of Mar 27, 2020, CARES Act or Coronavirus Aid, Relief and Economic Security Act (https://www.cbo.gov/system/files/2020-04/hr748.pdf). This preliminary estimate finds that the CARES Act “will increase federal deficits by about $1.8 trillion over the 2020-2030 period (https://www.cbo.gov/system/files/2020-04/hr748.pdf).

Table VI-7C, US, Treasury Budget in Fiscal Year to Date Million Dollars

Jan 2021	Fiscal Year 2021	Fiscal Year 2020	∆%
Receipts	1,188,021	1,178,800	0.8
Outlays	1,923,752	1,567,986	22.7
Deficit	-735,732	-389,187
Individual Income Tax	578,572	601,518	-3.8
Corporation Income Tax	85,344	75,905	12.4
Social Insurance	315,720	300,840	4.9
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
Fiscal Year 2019	3,462.2	4,446.6	-984.4
% GDP	16.3	21.0	-4.6
Fiscal Year 2018	3,329.9	4,109.0	-779.1
% GDP	16.4	20.2	-3.8
Fiscal Year 2017	3,316.2	3,981.6	-665.4
% GDP	17.2	20.6	-3.5
Fiscal Year 2016	3,268.0	3,852.6	-584.7
% GDP	17.6	20.8	-3.2
Fiscal Year 2015	3,249.9	3,691.8	-442.0
% GDP	18.0	20.4	-2.4
Fiscal Year 2014	3,021.5	3,506.3	-484.8
% GDP	17.4	20.2	-2.8
Fiscal Year 2013	2,775.1	3,454.9	-679.8
% GDP	16.7	20.8	-4.1
Fiscal Year 2012	2,450.0	3,526.6	-1,076.6
% GDP	15.3	22.0	-6.7
Fiscal Year 2011	2,303.5	3,603.1	-1,299.6
% GDP	15.0	23.4	-8.4
Fiscal Year 2010	2,162.7	3,457.1	-1,294.4
% GDP	14.6	23.3	-8.7
Fiscal Year 2009	2,105.0	3,517.7	-1,412.7
% GDP	14.6	24.4	-9.8
Total 2009-2012	9,021.2	14,104.5	-5,083.3
Average % GDP 2009-2012	14.8	23.3	-8.4
Fiscal Year 2008	2,524.0	2,982.5	-458.6
% GDP	17.1	20.2	-3.1
Fiscal Year 2007	2,568.0	2,728.7	-160.7
% GDP	18.0	19.1	-1.1
Fiscal Year 2006	2,406.9	2,655.1	-248.2
% GDP	17.6	19.5	-1.8
Fiscal Year 2005	2,153.6	2,472.0	-318.3
% GDP	16.8	19.3	-2.5
Total 2005-2008	9,652.5	10,838.2	-1,185.8
Average % GDP 2005-2008	17.4	19.5	-2.1
Debt Held by the Public	Billions of Dollars	Percent of GDP
2005	4,592	35.8
2006	4,829	35.4
2007	5,035	35.2
2008	5,803	39.4
2009	7,545	52.3
2010	9,019	60.8
2011	10,128	65.8
2012	11,281	70.3
2013	11,983	72.2
2014	12,780	73.7
2015	13,117	72.5
2016	14,168	76.4
2017	14,666	76.0
2018	15,750	77.4
2019	16,803	79.2

Source: https://www.fiscal.treasury.gov/reports-statements/mts/

https://www.treasury.gov/press-center/press-releases/Pages/sm0184.aspx https://home.treasury.gov/news/press-releases/sm806 CBO, The budget and economic outlook: 2018 to 2028. Washington, DC, Apr 9 https://www.cbo.gov/publication/53651

CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370 CBO, An update to the budget and economic outlook: 2016 to 2026. Washington, DC, Aug 23, 2016.

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

CBO (2012NovMBR). CBO (2011AugBEO); Office of Management and Budget 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan. CBO. 2012AugBEO. Budget and Economic Outlook. Washington, DC, Aug 22. CBO. 2012Jan31. Historical budget data. Washington, DC, Jan 31. CBO. 2012NovCDR. Choices for deficit reduction. Washington, DC. Nov. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO (2013Aug12). 2013AugHBD. Historical budget data—August 2013. Washington, DC, Congressional Budget Office, Aug. CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, Historical budget data—April 2014 release. Washington, DC, Congressional Budget Office, Apr. Congressional Budget Office, August 2014 baseline: an update to the budget and economic outlook: 2014 to 2024. Washington, DC, CBO, Aug 27, 2014. CBO, Monthly budget review: summary of fiscal year 2014. Washington, DC, Congressional Budget Office, Nov 10, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

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

Table VI-7E, US, Congressional Budget Office, 40-Year Averages of Revenues and Outlays Before and After Update of the US National Income Accounts by the Bureau of Economic Analysis, % of GDP 

	Before Update	After Update
Revenues
Individual Income Taxes	8.2	7.9
Social Insurance Taxes	6.2	6.0
Corporate Income Taxes	1.9	1.9
Other	1.6	1.6
Total Revenues	17.9	17.4
Outlays
Mandatory	10.2	9.9
Discretionary	8.6	8.4
Net Interest	2.2	2.2
Total Outlays	21.0	20.4
Deficit	-3.1	-3.0
Debt Held by the Public	39.2	38.0

Source: CBO (2013Aug12Av). Kim Kowaleski and Amber Marcellino.

Table VI-7F provides the long-term budget outlook of the CBO for 2018, 2028 and 2048. Revenues increase from 16.6 percent of GDP in 2018 to 19.8 percent in 2047. The growing stock of debt raises net interest spending from 1.6 percent of GDP in 2018 to 3.8 percent in 2028 and 6.3 percent 2048. Total spending increases from 20.6 percent of GDP in 2018 to 29.3 percent in 2048. Federal debt held by the public rises to 152.0 percent of GDP in 2048. US fiscal affairs are in an unsustainable path with tough rigidities in spending and revenues.

Table IIA1-9, Congressional Budget Office, Long-term Budget Outlook, % of GDP

	2018	2028	2048
Revenues	16.6	18.5	19.8
Total Noninterest Spending	19.0	20.6	23.1
Social Security	4.9	6.0	6.3
Medicare	2.9	4.2	5.9
Medicaid, CHIP and Exchange Subsidies	2.3	2.5	3.3
Other	8.9	7.9	7.6
Net Interest	1.6	3.1	6.3
Total Spending	20.6	23.6	29.3
Revenues Minus Total Noninterest Spending	-2.4	-2.1	-3.3
Revenues Minus Total Spending	-3.9	-5.1	-9.5
Federal Debt Held by the Public	78.0	96.0	152.0

Source: CBO, The 2018 long-term budget outlook. Washington, DC, Jun 26, 2018 https://www.cbo.gov/publication/53919

Chart IIA1-LTB18 of the CBO illustrates the rigidity of major health care programs and social security with limited upside potential in taxes.

Chart IIA1-LTB18, The extended baseline of CBO 2018-2048,

Source: CBO, The 2018 long-term budget outlook. Washington, DC, Jun 26, 2018 https://www.cbo.gov/publication/53919

Recovery of growth rates of the US economy is critical to resolving fiscal sustainability. The revealing Chart VI-7LTBO of the Congressional Budget Office (CBO) provides alternative paths of the debt/GDP ratio according to assumptions on the growth of productivity, federal borrowing rates and rates of excess cost growth for federal spending on Medicare and Medicaid. The extended baseline projects debt/GDP of 150.0 percent in 2047. With lower rate of growth of productivity, the debt/GDP ratio would increase to 244 percent in 2047. The debt/GDP ratio would be much lower at 85 percent in 2047 with higher rate of productivity growth.

Chart VI-LTBO, Congressional Budget Office, Paths of Federal Debt under Alternative Rates of Productivity Growth, Labor Force Participation and Other Assumptions

Source: Congressional Budget Office, The 2016 long-term budget outlook. Washington, DC, Jul 12 https://www.cbo.gov/publication/51580

Table VI-7G of the Congressional Budget Office (CBO) provides the data in Chart VI-LTBO. Economy policy must focus intensively on stimulating productivity growth that would recover the high rates of economic growth of the US over the long-term.

Table VI-7G, Congressional Budget Office, Long-term Budget Outlook, % of GDP, Alternative Paths of Federal Debt According to the Rate of Productivity Growth

		Given Different Labor Force Participation Rates, Productivity Growth Rates, Federal Borrowing Rates, and Rates of Excess Cost Growth for Federal Spending on Medicare and Medicaida
	Extended Baseline	Given Rates That Lower Projected Deficits	Given Rates That Raise Projected Deficits
2000	34
2001	31
2002	33
2003	35
2004	36
2005	36
2006	35
2007	35
2008	39
2009	52
2010	61
2011	66
2012	70
2013	73
2014	74
2015	73
2016	77
2017	77	77	77
2018	77	76	79
2019	78	76	80
2020	79	76	82
2021	80	76	84
2022	81	77	86
2023	83	77	89
2024	84	77	91
2025	85	77	94
2026	87	78	97
2027	89	78	101
2028	91	78	105
2029	93	79	108
2030	95	79	113
2031	97	79	117
2032	99	80	122
2033	102	80	127
2034	105	81	133
2035	107	81	138
2036	110	82	145
2037	113	82	151
2038	116	83	158
2039	120	83	165
2040	123	84	173
2041	127	84	182
2042	130	84	190
2043	134	85	200
2044	138	85	210
2045	142	85	220
2046	146	85	232
2047	150	85	244

Source: CBO, The 2017 Long-term Budget Outlook. Washington, DC, Mar 30, 2017 https://www.cbo.gov/publication/52480 https://www.cbo.gov/about/products/budget-economic-data#1

Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury and the overnight fed funds rate from Jan 2, 1962 to Feb 25, 2021. The yield of the ten-year constant maturity Treasury stood at 7.67 percent on Feb 16, 1977. A peak was reached at 15.21 percent on Oct 26, 1981 during the inflation control effort by the Fed. There is a second local peak in Chart VI-8 on May 3, 1984 at 13.94 percent followed by another local peak at 8.14 percent on Nov 21, 1994 during another inflation control effort (see Appendix I The Great Inflation). There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. The fed funds rate was 1.18 percent on Jun 23, 2003 and the ten-year yield 3.36 percent. Yields rose again to 4.89 percent on Jun 14, 2004 with the fed funds rate at 1.02 percent and the ten-year yield stood at 5.23 percent on Jul 5, 2006. At the onset of the financial crisis on Sep 17, 2007, the fed funds rate was 5.33 percent and the ten-year yield 4.48 percent. On Dec 26, 2008, the fed funds rate was 0.09 percent and the ten-year yield 2.16 percent. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and reached 1.54 percent on Feb 25, 2021 with the fed funds rate at 0.07 percent. Chart VI-8A provides the fed funds rate and the yield of the ten-year constant maturity Treasury from Jan 2, 2001 to Feb 25, 2021. The final data point for Feb 25, 2021, shows the fed funds rate at 0.07 percent and the yield of the ten-year constant maturity Treasury at 1.54 percent. There has been a trend of decline of yields with oscillations. During periods of risk aversion investors seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth, there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 in the text 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-8, US, Overnight Federal Funds Rate and Ten-Year Treasury Constant Maturity Yield, Jan 2, 1962 to Feb 25, 2021

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

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

Chart VI-8A provides the fed funds rate and the yield of the ten-year constant maturity Treasury from Jan 2, 2001 to Feb 25, 2021. The final data point for Feb 25, 2021, shows the fed funds rate at 0.07 percent and the yield of the ten-year constant maturity Treasury at 1.54 percent. There has been a trend of decline of yields with oscillations. During periods of risk aversion investors seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth, there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 in the text 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-8A, US, Overnight Federal Funds Rate and Ten-Year Treasury Constant Maturity Yield, Jan 2, 2001 to Feb 25, 2021

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

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

Chart VI-9 of the Board of Governors of the Federal Reserve System provides securities held outright by Federal Reserve banks from 2002 to 2021. The first data point in Chart VI-9 is the level for Dec 18, 2002 of $629,407 million and the final data point in Chart VI-9 is level of $7,027,599 million on Feb 24, 2021. On October 25, 2017, at the beginning of the FOMC programmed reduction of the balance sheet, Total Assets of Federal Reserve Banks stood at $4,461,117 million. Total Assets increased $3,128,994 million from $4,461,117 on Oct 25, 2017 to $7,590,111 on Feb 24, 2021. Total Assets of Federal Reserve Banks increased from $3,981,420 million on Feb 20, 2019 to $7,590,111 million on Feb 24, 2021 by $3,608,691 million or 90.6 percent. The policy of reducing the fed funds policy rate requires increasing the balance sheet. The line “Securities Held Outright” increased from $4,019,823 million on Oct 25, 2017 to $7,027,599 on Feb 24, 2021 or $3,007,776 million. Securities Held Outright increased from $3,617,939 million on Jul 24, 2019 to $7,027,599 on Feb 24, 2021 by $3,409,660 million or 94.2 percent. The Chair of the Federal Reserve Board, Jerome H. Powell, at the 61^st Annual Meeting on the National Association for Business Economics, on Oct 28, 2019, in Denver, Colorado, stated (https://www.federalreserve.gov/newsevents/speech/powell20191008a.htm): “Reserve balances are one among several items on the liability side of the Federal Reserve's balance sheet, and demand for these liabilities—notably, currency in circulation—grows over time. Hence, increasing the supply of reserves or even maintaining a given level over time requires us to increase the size of our balance sheet. As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves.¹⁸ That time is now upon us.

I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy, to which I now turn.”

Chart VI-9, US, Securities Held Outright by Federal Reserve Banks, Wednesday Level, Dec 25, 2002 to Feb 24, 20201 USD Millions

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm

Chart VI-9A of the Board of Governors of the Federal Reserve System provides Total Assets by Federal Reserve banks from 2002 to 2021 (https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H41). The first data point in Chart VI-9A is the level for Dec 18, 2002 of $720,761 million and the final data point in Chart VI-9A is level of $7,590,111 million on Feb 24, 2021. On October 25, 2017, at the beginning of the FOMC programmed reduction of the balance sheet, Total Assets of Federal Reserve Banks stood at $4,461,117 million. Total Assets increased $3,128,994 million from $4,461,117 on Oct 25, 2017 to $7,590,111 on Feb 24, 2021. Total Assets of Federal Reserve Banks increased from $3,981,420 million on Feb 20, 2019 to $7,590,111 million on Feb 24, 2021, by $3,608,691 million or 90.6 percent. The policy of reducing the fed funds policy rate requires increasing the balance sheet. The Chair of the Federal Reserve Board, Jerome H. Powell, at the 61^st Annual Meeting on the National Association for Business Economics, on Oct 28, 2019, in Denver, Colorado, stated (https://www.federalreserve.gov/newsevents/speech/powell20191008a.htm): “Reserve balances are one among several items on the liability side of the Federal Reserve's balance sheet, and demand for these liabilities—notably, currency in circulation—grows over time. Hence, increasing the supply of reserves or even maintaining a given level over time requires us to increase the size of our balance sheet. As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves.¹⁸ That time is now upon us.

I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy, to which I now turn.”

Chart VI-9A, US, Total Assets by Federal Reserve Banks, Wednesday Level, Dec 25, 2002 to Feb 24, 2021, USD Millions

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.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 Feb 25, 2021, at 0.07 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 https://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html https://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 0.07 percent on Feb 25, 2021. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

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

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

It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 9.91 percent on Jan 10, 1979, at the beginning in Chart VI-10, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (https://cmpassocregulationblog.blogspot.com/2018/10/global-contraction-of-valuations-of.html and earlier https://cmpassocregulationblog.blogspot.com/2017/04/mediocre-cyclical-economic-growth-with.html and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier and earlier http://cmpassocregulationblog.blogspot.com/2016/12/rising-yields-and-dollar-revaluation.html http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier http://cmpassocregulationblog.blogspot.com/2016/01/weakening-equities-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html

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

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Feb 25, 2021, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

Chart VI-11 of the Board of Governors of the Federal Reserve System provides the fed funds rate and the prime bank loan rate in business days from Aug 4, 1955 to Feb 25, 2021. The overnight fed funds rate was 2.0 percent on Aug 4, 1955 and the bank prime rate 3.25 percent. The fed funds overnight rate is the rate charged by a depository institution with idle reserves deposited at a federal reserve bank to exchange its deposits overnight to another depository institution in need of reserves. In a sense, it is the marginal cost of funding for a bank in the United States, or the cost of a unit of additional funding. The fed funds rate is the rate charged by a bank to another bank in an uncollateralized overnight loan. The fed funds rate is the traditional policy rate or rate used to implement policy directives of the Federal Open Market Committee (FOMC). Thus, there should be an association between the fed funds rate or cost of funding of a bank and its prime lending rate. Such an association is verified in Chart VI-11 with the rates moving quite closely over time. On January 10, 1979, the fed funds rate was set at 9.91 percent and banks set their prime lending rate at 11.75 percent. On Dec 16, 2008, the policy determining committee of the Fed decided (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm): “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to ¼ percent.” On Dec 14, 2016 (https://www.federalreserve.gov/newsevents/press/monetary/20161214a.htm), “the Committee decided to raise the target level for the federal funds rate to ½ to ¾ percent.” On Mar 15, 2017, “the Committee decided to raise the federal funds rate to ¾ to 1 percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170315a.htm). The FOMC raised the fed funds rate to 1 to 1 ¼ percent at its meeting on Jun 14, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170201a.htm). The FOMC increased the fed funds rate to 1¼ to 1½ percent on Dec 13, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20171213a.htm). The FOMC increased the fed funds rate to 1½ to 1¾ percent on Mar 21, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180321a.htm). The FOMC increased the fed funds rate to 1¾ to 2.0 percent on Jun 13, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm). The FOMC increased the fed funds rate to 2.0 to 2¼ percent on Sep 26, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180926a.htm). The FOMC increased the fed funds rate to 2¼ to 2½ percent on Dec 19, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20181219a.htm). The FOMC decreased the fed funds rate to 2 to 2¼ percent on Jul 31, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm). The FOMC decreased the fed funds rate to 1¾ to 2.0 percent on Sep 18, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm).

The FOMC decreased the fed funds rate to 1½ to 1¾ percent on Oct 30, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20191030a.htm). The FOMC decreased the fed funds rate to 1 to 1¼ percent on Mar 3, 2020 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm). The FOMC decreased the fed funds rate to 0 to ¼ percent on Mar 15, 2020 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm). On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues.

The final segment of Chart VI-11 shows similar movement of the fed funds rate and the prime bank loan rate following the fixing of the fed funds rate to approximately zero. In the final data point of Chart VI-11 on Feb 25, 2021, the fed funds rate is 0.07 percent and the prime rate 3.25 percent. 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 Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero-interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash. The yields of Treasury securities inverted on Mar 22, 2019 with the ten-year yield at 2.44 percent below those of 2.49 percent for one-month, 2.48 percent for two months, 2.46 percent for three months, 2.48 percent for six months and 2.45 percent for one year (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). The final segment after 2001 shows the effects of unconventional monetary policy of extremely low, below inflation fed funds rate in lowering yields. This was an important cause of the global recession and financial crisis inducing as analyzed by Taylor (2018Oct 19, 2) “search for yield, excessive risk taking, a boom and bust in the housing market, and eventually the financial crisis and recession.” Monetary policy deviated from the Taylor Rule (Taylor 2018Oct19 see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2019Oct19 and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html)). An explanation is in the research of Adrian, Estrella and Shin (2018, 21-22): “Our findings suggest that the monetary tightening of 2004-2006 period ultimately did achieve a slowdown in real activity not because of its impact on the level of longer term interest rates, but rather because of its impact on the slope of the yield curve. In fact, while the level of the 10-year yield only increased 38 basis points between June 2004 and 2006, the term spread declined 325 basis points (from 3.44 to .19 percent). The fact that the slope flattened meant that intermediary profitability was compressed, thus shifting the supply of credit, and hence inducing changes in real activity. The 18 month lag between the end of the tightening cycle, and the beginning of the recession is perfectly compatible with effective monetary tightening.” See (https://www.newyorkfed.org/research/capital_markets/ycfaq.html). A major difference in the current cycle is the balance sheet of the Fed with purchases used to lower interest rates in specific segments and maturities such as mortgage-backed securities and longer terms.

Chart VI-11, US, Fed Funds Rate and Prime Bank Loan, Aug 4, 1955 to Feb 25, 2021, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

Lending has become more complex over time. The critical fact of current world financial markets is the combination of “unconventional” monetary policy with intermittent shocks of financial risk aversion. There are two interrelated unconventional monetary policies. First, unconventional monetary policy consists of (1) reducing short-term policy interest rates toward the “zero bound” such as fixing the fed funds rate at 0 to ¼ percent by decision of the Federal Open Market Committee (FOMC) since Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). Second, unconventional monetary policy also includes a battery of measures to also reduce long-term interest rates of government securities and asset-backed securities such as mortgage-backed securities. When inflation is low, the central bank lowers interest rates to stimulate aggregate demand in the economy, which consists of consumption and investment. When inflation is subdued and unemployment high, monetary policy would lower interest rates to stimulate aggregate demand, reducing unemployment. When interest rates decline to zero, unconventional monetary policy would consist of policies such as large-scale purchases of long-term securities to lower their yields. A major portion of credit in the economy is financed with long-term asset-backed securities. Loans for purchasing houses, automobiles and other consumer products are bundled in securities that in turn are sold to investors. Corporations borrow funds for investment by issuing corporate bonds. Loans to small businesses are also financed by bundling them in long-term bonds. Securities markets bridge the needs of higher returns by investors obtaining funds from savers that are channeled to consumers and business for consumption and investment. Lowering the yields of these long-term bonds could lower costs of financing purchases of consumer durables and investment by business. The essential mechanism of transmission from lower interest rates to increases in aggregate demand is portfolio rebalancing. Withdrawal of bonds in a specific maturity segment or directly in a bond category such as currently mortgage-backed securities causes reductions in yield that are equivalent to increases in the prices of the bonds. There can be secondary increases in purchases of those bonds in private portfolios in pursuit of their increasing prices. Lower yields translate into lower costs of buying homes and consumer durables such as automobiles and also lower costs of investment for business.

Monetary policy can lower short-term interest rates quite effectively. Lowering long-term yields is somewhat more difficult. The critical issue is that monetary policy cannot ensure that increasing credit at low interest cost increases consumption and investment. There is a large variety of possible allocation of funds at low interest rates from consumption and investment to multiple risk financial assets. Monetary policy does not control how investors will allocate asset categories. A critical financial practice is to borrow at low short-term interest rates to invest in high-risk, leveraged financial assets. Investors may increase in their portfolios asset categories such as equities, emerging market equities, high-yield bonds, currencies, commodity futures and options and multiple other risk financial assets including structured products. If there is risk appetite, the carry trade from zero interest rates to risk financial assets will consist of short positions at short-term interest rates (or borrowing) and short dollar assets with simultaneous long positions in high-risk, leveraged financial assets such as equities, commodities and high-yield bonds. Low interest rates may induce increases in valuations of risk financial assets that may fluctuate in accordance with perceptions of risk aversion by investors and the public. During periods of muted risk aversion, carry trades from zero interest rates to exposures in risk financial assets cause temporary waves of inflation that may foster instead of preventing financial instability (Section I and earlier https://cmpassocregulationblog.blogspot.com/2017/06/fomc-interest-rate-increase-planned.html and earlier https://cmpassocregulationblog.blogspot.com/2017/05/dollar-devaluation-world-inflation.html). During periods of risk aversion such as fears of disruption of world financial markets and the global economy resulting from collapse of the European Monetary Union, carry trades are unwound with sharp deterioration of valuations of risk financial assets. More technical discussion is in IA Appendix: Transmission of Unconventional Monetary Policy at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html.

Chart VI-12 of the Board of Governors of the Federal Reserve System provides the fed funds rate, prime bank loan rate and the yield of a corporate bond rated Baa by Moody’s. On Jan 10, 1979, the fed funds rate was fixed at 9.91 percent and banks fixed the prime loan rate at 11.75 percent. Reflecting differences in risk, the fed funds rate was 8.76 percent on Jan 2, 1986, the prime rate 9.50 percent and the Baa Corporate bond yield 11.38 percent. The yield of the Baa corporate bond collapsed toward the bank prime loan rate after the end of extreme risk aversion in the beginning of 2009. The final data point in Chart VI-12 is for Jul 7, 2016, with the fed funds rate at 0.40 percent, the bank prime rate at 3.50 percent and the yield of the Baa corporate bond at 4.19 percent. Empirical tests of the transmission of unconventional monetary policy to actual increases in consumption and investment or aggregate demand find major hurdles (see IA Appendix: Transmission of Unconventional Monetary Policy at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html).

http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html).

Chart VI-12, US, Fed Funds Rate, Prim Bank Loan Rate and Yield of Moody’s Baa Corporate Bond, Business Days, Aug 4, 1955 to Jul 7, 2016, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

Chart VI-12A of the Board of Governors of the Federal Reserve System provides the overnight fed funds rate and the bank prime rate on business days from Jan 5, 2007 to Feb 25, 2021. There is a jump in the rates and yield with the increase in fed funds rates target range from 0 to ½ percent to ¼ to ½ percent on Dec 16, 2015 by the Federal Open Market Committee (http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm), ½ to ¾ percent on Dec 14, 2016 (https://www.federalreserve.gov/newsevents/press/monetary/20161214a.htm) and ¾ to 1 percent on Mar 15, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170315a.htm). The FOMC raised the fed funds rate to 1 to 1¼ percent at its meeting on Jun 14, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170201a.htm). The FOMC increased the fed funds rate to 1¼ to 1½ percent on Dec 13, 2017 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20171213a.htm). The FOMC increased the fed funds rate to 1½ to 1¾ percent on Mar 21, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180321a.htm). The FOMC increased the fed funds rate to 1¾ to 2.0 percent on Jun 13, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm). The FOMC increased the fed funds rate to 2.0 to 2¼ percent on Sep 26, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180926a.htm). The FOMC increased the fed funds rate to 2¼ to 2½ percent on Dec 19, 2018 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20181219a.htm). The FOMC decreased the fed funds rate to 2 to 2¼ on Jul 31, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm). The FOMC decreased the fed funds rate to 1¾ to 2.0 percent on Sep 18, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm). The FOMC decreased the fed funds rate to 1½ to 1¾ on Oct 30, 2019 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20191030a.htm). The FOMC decreased the fed funds rate to 1 to 1¼ percent on Mar 3, 2020 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm). The FOMC decreased the fed funds rate to 0 to ¼ percent on Mar 15, 2020 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm). On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues. The final segment of Chart VI-11 shows similar movement of the fed funds rate and the prime bank loan rate following the fixing of the fed funds rate to approximately zero. In the final data point of Chart VI-12A on Feb 25, 2021, the fed funds rate is 0.07 percent and the prime rate 3.25 percent. 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.hl 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 Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero-interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash. The yields of Treasury securities inverted on Mar 22, 2019 with the ten-year yield at 2.44 percent below those of 2.49 percent for one-month, 2.48 percent for two months, 2.46 percent for three months, 2.48 percent for six months and 2.45 percent for one year (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). Unconventional monetary policy of extremely low interest rates was an important cause of the global recession and financial crisis inducing as analyzed by Taylor (2018Oct 19, 2) “search for yield, excessive risk taking, a boom and bust in the housing market, and eventually the financial crisis and recession.” Monetary policy deviated from the Taylor Rule (Taylor 2018Oct19 see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2019Oct19 and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html)). An explanation is in the research of Adrian, Estrella and Shin (2018, 21-22): “Our findings suggest that the monetary tightening of 2004-2006 period ultimately did achieve a slowdown in real activity not because of its impact on the level of longer term interest rates, but rather because of its impact on the slope of the yield curve. In fact, while the level of the 10-year yield only increased 38 basis points between June 2004 and 2006, the term spread declined 325 basis points (from 3.44 to .19 percent). The fact that the slope flattened meant that intermediary profitability was compressed, thus shifting the supply of credit, and hence inducing changes in real activity. The 18 month lag between the end of the tightening cycle, and the beginning of the recession is perfectly compatible with effective monetary tightening.” See (https://www.newyorkfed.org/research/capital_markets/ycfaq.html). A major difference in the current cycle is the balance sheet of the Fed with purchases used to lower interest rates in specific segments and maturities such as mortgage-backed securities and longer terms.

Chart VI-12A, US, Fed Funds Rate and Prime Bank Loan Rate, Business Days, Jan 5, 2007 to Feb 25, 2021, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

Chart VI-12B of the Board of Governors of the Federal Reserve System provides the fed funds rate and prime bank loan rate on business days from Jan 2, 2001 to Feb 25, 2021. The behavior over time is that of controlled interest rates. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero-interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash. The final segment shows the repetition of this policy with minute increases in interest rates. 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 Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero-interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash. The yields of Treasury securities inverted on Mar 22, 2019 with the ten-year yield at 2.44 percent below those of 2.49 percent for one-month, 2.48 percent for two months, 2.46 percent for three months, 2.48 percent for six months and 2.45 percent for one year (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). The final segment after 2001 shows the effects of unconventional monetary policy of extremely low, below inflation fed funds rate in lowering yields. This was an important cause of the global recession and financial crisis inducing as analyzed by Taylor (2018Oct 19, 2) “search for yield, excessive risk taking, a boom and bust in the housing market, and eventually the financial crisis and recession.” Monetary policy deviated from the Taylor Rule (Taylor 2018Oct19 see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2019Oct19 and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html)). An explanation is in the research of Adrian, Estrella and Shin (2018, 21-22): “Our findings suggest that the monetary tightening of 2004-2006 period ultimately did achieve a slowdown in real activity not because of its impact on the level of longer term interest rates, but rather because of its impact on the slope of the yield curve. In fact, while the level of the 10-year yield only increased 38 basis points between June 2004 and 2006, the term spread declined 325 basis points (from 3.44 to .19 percent). The fact that the slope flattened meant that intermediary profitability was compressed, thus shifting the supply of credit, and hence inducing changes in real activity. The 18 month lag between the end of the tightening cycle, and the beginning of the recession is perfectly compatible with effective monetary tightening.” See (https://www.newyorkfed.org/research/capital_markets/ycfaq.html). A major difference in the current cycle is the balance sheet of the Fed with purchases used to lower interest rates in specific segments and maturities such as mortgage-backed securities and longer terms.

Chart VI-12B, US, Fed Funds Rate and Prime Bank Loan Rate, Business Days, Jan 2, 2001 to Feb 25, 2021, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

Interest rate risk in the US is showing amplifying fluctuations. Chart VI-13 of the Board of Governors provides the conventional mortgage rate for a fixed-rate 30-year mortgage. The rate stood at 5.87 percent on Jan 8, 2004, increasing to 6.79 percent on Jul 6, 2006. The rate bottomed at 3.35 percent on May 2, 2013. Fear of duration risk in longer maturities such as mortgage-backed securities caused continuing increases in the conventional mortgage rate that rose to 4.51 percent on Jul 11, 2013, 4.58 percent on Aug 22, 2013 and 3.42 percent on Oct 6, 2016, which is the last data point in Chart VI-13. The thirty-year mortgage rate was 2.97 percent on Feb 25, 2021 (http://www.freddiemac.com/finance/ http://www.freddiemac.com/pmms/index.html). The current decline of yields is encouraging a surge in mortgage applications that could be reversed in a new increase. Shayndi Raice and Nick Timiraos, writing on “Banks cut as mortgage boom ends,” on Jan 16, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303754404579310940019239208), analyze the drop in mortgage applications to a 13-year low, as measured by the Mortgage Bankers Association. Nick Timiraos, writing on “Demand for home loans plunges,” on Apr 24, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304788404579522051733228402?mg=reno64-wsj), analyzes data in Inside Mortgage Finance that mortgage lending of $235 billion in IQ2014 is 58 percent lower than a year earlier and 23 percent below IVQ2013. Mortgage lending collapsed to the lowest level in 14 years. In testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm): “One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.”

Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Oct 6, 2016

Source: Board of Governors of the Federal Reserve System

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

Table IIB-8, US, Fed Funds Rate, Thirty Year Treasury Bond and Conventional Mortgage Rate, Monthly, Percent per Year, Dec 2012 to Jan 2020

	Fed Funds Rate	Yield of Thirty Year Constant Maturity	Conventional Mortgage Rate
2012-12	0.16	2.88	3.35
2013-01	0.14	3.08	3.41
2013-02	0.15	3.17	3.53
2013-03	0.14	3.16	3.57
2013-04	0.15	2.93	3.45
2013-05	0.11	3.11	3.54
2013-06	0.09	3.4	4.07
2013-07	0.09	3.61	4.37
2013-08	0.08	3.76	4.46
2013-09	0.08	3.79	4.49
2013-10	0.09	3.68	4.19
2013-11	0.08	3.8	4.26
2013-12	0.09	3.89	4.46
2014-01	0.07	3.77	4.43
2014-02	0.07	3.66	4.3
2014-03	0.08	3.62	4.34
2014-04	0.09	3.52	4.34
2014-05	0.09	3.39	4.19
2014-06	0.1	3.42	4.16
2014-07	0.09	3.33	4.13
2014-08	0.09	3.2	4.12
2014-09	0.09	3.26	4.16
2014-10	0.09	3.04	4.04
2014-11	0.09	3.04	4
2014-12	0.12	2.83	3.86
2015-01	0.11	2.46	3.67
2015-02	0.11	2.57	3.71
2015-03	0.11	2.63	3.77
2015-04	0.12	2.59	3.67
2015-05	0.12	2.96	3.84
2015-06	0.13	3.11	3.98
2015-07	0.13	3.07	4.05
2015-08	0.14	2.86	3.91
2015-09	0.14	2.95	3.89
2015-10	0.12	2.89	3.8
2015-11	0.12	3.03	3.94
2015-12	0.24	2.97	3.96
2016-01	0.34	2.86	3.87
2016-02	0.38	2.62	3.66
2016-03	0.36	2.68	3.69
2016-04	0.37	2.62	3.61
2016-05	0.37	2.63	3.6
2016-06	0.38	2.45	3.57
2016-07	0.39	2.23	3.44
2016-08	0.4	2.26	3.44
2016-09	0.4	2.35	3.46
2016-10	0.4	2.5	3.47
2016-11	0.41	2.86	3.77
2016-12	0.54	3.11	4.2
2017-01	0.65	3.02	4.15
2017-02	0.66	3.03	4.17
2017-03	0.79	3.08	4.2
2017-04	0.9	2.94	4.05
2017-05	0.91	2.96	4.01
2017-06	1.04	2.8	3.9
2017-07	1.15	2.88	3.97
2017-08	1.16	2.8	3.88
2017-09	1.15	2.78	3.81
2017-10	1.15	2.88	3.9
2017-11	1.16	2.8	3.92
2017-12	1.3	2.77	3.95
2018-01	1.41	2.88	4.03
2018-02	1.42	3.13	4.33
2018-03	1.51	3.09	4.44
2018-04	1.69	3.07	4.47
2018-05	1.7	3.13	4.59
2018-06	1.82	3.05	4.57
2018-07	1.91	3.01	4.53
2018-08	1.91	3.04	4.55
2018-09	1.95	3.15	4.63
2018-10	2.19	3.34	4.83
2018-11	2.2	3.36	4.87
2018-12	2.27	3.10	4.64
2019-01	2.40	3.04	4.46
2019-02	2.40	3.02	4.37
2019-03	2.41	2.98	4.27
2019-04	2.42	2.94	4.14
2019-05	2.39	2.82	4.07
2019-06	2.38	2.57	3.80
2019-07	2.40	2.57	3.77
2019-08	2.13	2.12	3.62
2019-09	2.04	2.16	3.61
2019-10	1.83	2.19	3.69
2019-11	1.55	2.28	3.70
2019-12	1.55	2.30	3.72
2020-01	1.55	2.22	3.62
2020-02	1.58	1.97	3.47
2020-03	0.65	1.46	3.45
2020-04	0.05	1.27	3.31
2020-05	0.05	1.38	3.23
2020-06	0.08	1.49	3.16
2020-07	0.09	1.31	3.02
2020-08	0.10	1.36	2.94
2020-09	0.09	1.42	2.89
2020-10	0.09	1.57	2.83
2020-11	0.09	1.62	2.77
2020-12	0.09	1.67	2.68
2021-01	0.09	1.82	2.4

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/H15/default.htm

http://www.freddiemac.com/pmms/pmms30.html

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

https://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

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

VII Economic Indicators. Crude oil input in refineries decreased 4.2 percent to 14,121 thousand barrels per day on average in the four weeks ending on Feb 19, 2021 from 14,743 thousand barrels per day in the four weeks ending on Feb 12, 2021, as shown in Table VII-1. The rate of capacity utilization in refineries continues at low level of 79.3 percent on Feb 19, 2021, which is lower than 88.2 percent on Feb 21, 2020 and close to 82.5 percent on Feb 12, 2021. Hurricane Harvey reduced capacity utilization with recent recovery followed by decline 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 and marginal recovery. Imports of crude oil increased 5.8 percent from 2,502 thousand barrels per day on average in the four weeks ending on Feb 12, 2021 to 2,646 thousand barrels per day in the week of Feb 19, 2021. The Energy Information Administration (EIA) informs that: “US crude oil imports averaged 4.6 million barrels per day last week, decreased by 1.3 million barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 5.7 million barrels per day, 13.3 percent less than the same four-week period last year” (https://www.eia.gov/petroleum/supply/weekly/). Marginally decreased utilization in refineries with increased imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 1.2 million barrels from 461.8 million barrels on Feb 12 to 463.0 million barrels on Feb 19. The US Energy Information Administration (EIA) states: “US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million in the previous week. At 490.9 million barrels [on Apr 24, 2015], US crude oil inventories are at the highest level for this time of year in at least 80 years” (https://www.eia.gov/petroleum/supply/weekly/). Motor gasoline production decreased 2.7 percent to 8,461 thousand barrels per day in the week of Feb 19 from 8,695 thousand barrels per day on average in the week of Feb 12. Gasoline stocks changed 0.0 million barrels and stocks of fuel oil decreased 5.0 million barrels. Supply of gasoline changed from 8,902 thousand barrels per day on Feb 21, 2020, to 7,810 thousand barrels per day on Feb 19, 2021, or by minus 12.3 percent, while fuel oil supply increased 6.4 percent. Part of the prior fall in consumption of gasoline had been due to high prices and part to the growth recession while current decline originates in the lockdown of economic activity 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. WTI crude oil price traded at $59.12/barrel on Feb 19, 2021, increasing 10.8 percent relative to $53.36/barrel on Feb 21, 2020. Gasoline prices increased 6.8 percent from Feb 24, 2020 to Feb 22, 2021. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been weakening.

Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	02/19/21	02/12/21	02/21/20
Crude Oil Refineries Input	14,121 Week       ∆%: -4.2%	14,743	16,052
Refinery Capacity Utilization %	79.3	82.5	88.2
Motor Gasoline Production	8,461 Week    ∆%: -2.7%	8,695	9,617
Distillate Fuel Oil Production	4,369 Week     ∆%: -4.9%	4,593	4,878
Crude Oil Imports	2,646 Week      ∆%: 5.8%	2,502	3,188
Motor Gasoline Supplied	7,810 ∆% 2020/2019 = -12.3%	7,967	8,902
Distillate Fuel Oil Supplied	4,223 ∆% 2020/2019 = 6.4%	4,315	3,969
	02/19/21	02/12/21	02/21/20
Crude Oil Stocks Million B	463.0 ∆= 1.2 MB	461.8	443.3
Motor Gasoline Million B	257.1 ∆= 0.0 MB	257.1	256.4
Distillate Fuel Oil Million B	152.7 ∆= -5.0 MB	157.7	138.5
WTI Crude Oil Price $/B	59.12 ∆% 2021/2020 10.8	59.50	53.36
	02/22/21	02/15/21	02/24/20
Regular Motor Gasoline $/G	2.633 ∆% 2021/2020 = 6.8	2.501	2.466

B: barrels; G: gallon

Source: US Energy Information Administration

https://www.eia.gov/petroleum/supply/weekly/

Chart VII-1 of the US Energy Information Administration (EIA) shows commercial stocks of crude oil in the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations followed by sharp increases alternating with declines. Stocks reached 463,042 thousand barrels in the week of Feb 19, 2021.

Chart VII-1, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Chart VII-2 of the US Energy Information Administration provides US average retail prices of regular gasoline. The US average was $2.633/gallon on Feb 22, 2021, increasing $0.167 relative to the price a year earlier on a comparable day.

Chart VII-2, US, Regular Gasoline Prices

Source: US Energy Information Administration

https://www.eia.gov/petroleum/weekly/

There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. The peak in Chart VII-3 is $145.18/barrel on Jul 14, 2008 in the midst of deep global recession, falling to $33.87/barrel on Dec 19, 2008 (data for US Energy Information Administration http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D). Prices collapsed in the flight to government obligations caused by proposals of withdrawing “toxic assets” in the Troubled Asset Relief Program (TARP), as analyzed by Cochrane and Zingales (2009). Risk appetite with zero interest rates after stress tests of US banks resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. The price of the crude oil contract was $61.49/barrel on Feb 22, 2021.

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/RCLC1D.htm

There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 111,000 from 841,000 on Feb 13, 2021 to 730,000 on Feb 20, 2021 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. The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf). Claims not adjusted for seasonality decreased 131,734 from 842,047 on Feb 13, 2021 to 710,313 on Feb 20, 2021.

Table VII-2, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Feb 20, 2021	730,000	710,313	807,750
Feb 13, 2021	841,000	842,047	828,250
Change	_-111,000	-131,734	-20,500
Jan 30, 2021	848,000	868,053	836,750
Prior Year	220,000	199,278	210,000

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://www.dol.gov/ui/data.pdf

Table VII-2A provides the SA and NSA number of insured unemployment that decreased 143,320 NSA from 4,971,347 on Feb 6, 2021 to 4,828,027 on Feb 13, 2021 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. The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Table VII-2A, US, Insured Unemployment

	SA	NSA	4-week MA SA
Feb 13, 2021	4,419,000	4,828,027	4,547,000
Feb 06, 2021	4,520,000	4,971,347	4,638,500
Change	-101,000	-143,320	-91,500
Jan 30, 2021	4,558,000	5,038,661	4,752,250
Prior Year	1,693,000	2,061,669	1,713,250

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://www.dol.gov/ui/data.pdf

Table VII-3 provides seasonally adjusted and not seasonally adjusted claims in the comparable week for the years from 2001 to 2020. Data for earlier years are less comparable because of population and labor force growth. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted decreased from 605,668 on Feb 21, 2009 to 203,049 on Feb 23, 2019 and 199,278 on Feb 22, 2020, increasing to 710,313 on Feb 20, 2021 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. There is strong indication of significant decline in the level of layoffs in the US before the COVID-19 event. Hiring has not recovered (https://cmpassocregulationblog.blogspot.com/2021/02/total-nonfarm-hires-move-from-5864.html and earlier https://cmpassocregulationblog.blogspot.com/2021/01/total-nonfarm-hires-jump-from-5864.html). There is continuing unemployment and underemployment of 32.8 million or 19.0 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2021/02/increasing-valuations-of-risks.html and earlier https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Feb 24, 2001	357,591	386,000
Feb 23, 2002	367,504	398,000
Feb 22, 2003	387,536	421,000
Feb 21, 2004	328,171	359,000
Feb 19, 2005	303,814	318,000
Feb 25, 2006	272,478	293,000
Feb 24, 2007	299,000	322,000
Feb 23, 2008	330,013	354,000
Feb 21, 2009	605,668	655,000
Feb 20, 2010	458,160	500,000
Feb 19, 2011	380,985	394,000
Feb 25, 2012	334,242	365,000
Feb 23, 2013	310,512	342,000
Feb 22, 2014	312,665	341,000
Feb 21, 2015	280,639	305,000
Feb 20, 2016	248,870	272,000
Feb 18, 2017	239,322	247,000
Feb 24, 2018	196,294	215,000
Feb 23, 2019	203,049	224,000
Feb 22, 2020	199,278	220,000
Feb 20, 2021	710,313	730,000

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://oui.doleta.gov/unemploy/claims.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the three months from Nov 2020 to Jan 2021, CPI inflation for all items seasonally adjusted was 2.8 percent in annual equivalent, obtained by calculating accumulated inflation from Nov 2020 to Jan 2021 and compounding for a full year. In the 12 months ending in Jan 2021, CPI inflation of all items not seasonally adjusted was 1.4 percent. Inflation in Jan 2021 seasonally adjusted was 0.3 percent relative to Dec 2020, or 3.7 percent annual equivalent (https://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 1.4 percent in 12 months, 0.8 percent in annual equivalent Nov 2020-Jan 2021 and 0.0 percent in Jan 2021 or 0.0 percent in annual equivalent. The Wall Street Journal provides the yields of US Treasury securities at the close of market on Dec 31, 2020 (http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000). The shortest term is 0.033 percent for one month, 0.041 percent for three months, 0.060 percent for six months, 0.093 percent for one year, 0.121 percent for two years, 0.281 percent for three years, 0.733 percent for five years, 1.126 percent for seven years, 1.415 percent for ten years and 2.152 percent for 30 years. The Irving Fisher (1930) definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by the Wall Street Journal, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Inflation in Jun 2017 is low in 12 months because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (https://www.federalreserve.gov/aboutthefed.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.

Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	% RI	∆% 12 Months Jan 2021/Jan 2020 NSA	∆% Annual Equivalent Nov 2020 to Jan 2021 SA	∆% Jan 2021/Dec 2020 SA
CPI All Items	100.000	1.4	2.8	0.3
CPI ex Food and Energy	79.726	1.4	0.8	0.0

% RI: Percent Relative Importance

Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/

Professionals use a variety of techniques in measuring interest rate risk (Fabozzi, Buestow and Johnson, 2006, Chapter Nine, 183-226):

• Full valuation approach in which securities and portfolios are shocked by 50, 100, 200 and 300 basis points to measure their impact on asset values
• Stress tests requiring more complex analysis and translation of possible events with high impact even if with low probability of occurrence into effects on actual positions and capital
• Value at Risk (VaR) analysis of maximum losses that are likely in a time horizon
• Duration and convexity that are short-hand convenient measurement of changes in prices resulting from changes in yield captured by duration and convexity
• Yield volatility

Analysis of these methods is in Pelaez and Pelaez (International Financial Architecture (2005), 101-162) and Pelaez and Pelaez, Globalization and the State, Vol. (I) (2008a), 78-100). Frederick R. Macaulay (1938) introduced the concept of duration in contrast with maturity for analyzing bonds. Duration is the sensitivity of bond prices to changes in yields. In economic jargon, duration is the yield elasticity of bond price to changes in yield, or the percentage change in price after a percentage change in yield, typically expressed as the change in price resulting from change of 100 basis points in yield. The mathematical formula is the negative of the yield elasticity of the bond price or –[dB/d(1+y)]((1+y)/B), where d is the derivative operator of calculus, B the bond price, y the yield and the elasticity does not have dimension (Hallerbach 2001). The duration trap of unconventional monetary policy is that duration is higher the lower the coupon and higher the lower the yield, other things being constant. Coupons and yields are historically low because of unconventional monetary policy. Duration dumping during a rate increase may trigger the same crossfire selling of high duration positions that magnified the credit crisis. Traders reduced positions because capital losses in one segment, such as mortgage-backed securities, triggered haircuts and margin increases that reduced capital available for positioning in all segments, causing fire sales in multiple segments (Brunnermeier and Pedersen 2009; see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 217-24). Financial markets are currently experiencing fear of duration and riskier asset classes resulting from the debate within and outside the Fed on increasing interest rates. Table VIII-2 provides the rate of the yield curve of Treasury securities on Feb 26, 2021, Dec 31, 2013, May 1, 2013, Feb 26, 2020, and Feb 27, 2006 (no data for Feb 26, 2006). There is oscillating steepening of the yield curve for longer maturities, which are also the ones with highest duration. The 10-year yield increased from 1.45 percent on Jul 26, 2012 to 3.04 percent on Dec 31, 2013 and 1.44 percent on Feb 26, 2021, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Dec 31, 2013, at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.3778 with instantaneous increase of the yield to 3.04 percent for loss of 13.6 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 1.44 percent would jump instantaneously from yield of 1.44 percent on Feb 26, 2021 to 4.59 percent as occurred on Feb 27, 2006 (no data for Feb 26, 2006) when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 1.44 percent would drop from 100 to 74.9648 after an instantaneous increase of the yield to 4.59 percent. The price loss would be 25.0 percent. Losses absorb capital available for positioning triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). What is the path of adjustment of zero interest rates on fed funds and artificially low bond yields? There is no painless exit from unconventional monetary policy. Chris Dieterich, writing on “Bond investors turn to cash,” on Jul 25, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323971204578625900935618178.html), uses data of the Investment Company Institute (https://www.ici.org/) in showing withdrawals of $43 billion in taxable mutual funds in Jun, which is the largest in history, with flows into cash investments such as $8.5 billion in the week of Jul 17 into money-market funds.

Table VIII-2, United States, Treasury Yields

	02/26/21	12/31/13	05/01/13	02/26/20	02/27/06
1 M	0.04	0.01	0.03	1.59	4.48
2M	0.04	NA	NA	1.56	NA
3 M	0.04	0.07	0.06	1.53	4.62
6 M	0.05	0.10	0.08	1.42	4.76
1 Y	0.08	0.13	0.11	1.26	4.76
2 Y	0.14	0.38	0.20	1.16	4.74
3 Y	0.30	0.78	0.30	1.14	4.71
5 Y	0.75	1.75	0.65	1.14	4.66
7 Y	1.15	2.45	1.07	1.25	4.61
10 Y	1.44	3.04	1.66	1.33	4.59
20 Y	2.08	3.72	2.44	1.64	4.74
30 Y	2.17	3.96	2.83	1.81	4.55

M: Months; Y: Years; 30Y Data only available for 09/05/2006

Source: United States Treasury

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

There are collateral effects of unconventional monetary policy. Chart VIII-1 of the Board of Governors of the Federal Reserve System provides the rate on the overnight fed funds rate and the yields of the 10-year constant maturity Treasury and the Baa seasoned corporate bond. Table VIII-3 provides the data for selected points in Chart VIII-1. There are two important economic and financial events, illustrating the ease of inducing carry trade with extremely low interest rates and the resulting financial crash and recession of abandoning extremely low interest rates.

• The Federal Open Market Committee (FOMC) lowered the target of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85). 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. 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 by the penalty in the form of low interest rates and unsound credit decisions. 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). The FOMC implemented increments of 25 basis points of the fed funds target from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006, as shown in Chart VIII-1. The gradual exit from the first round of unconventional monetary policy from 1.00 percent in Jun 2004 (http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm) to 5.25 percent in Jun 2006 (http://www.federalreserve.gov/newsevents/press/monetary/20060629a.htm) caused the financial crisis and global recession.
• On Dec 16, 2008, the policy determining committee of the Fed decided (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm): “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” Policymakers emphasize frequently that there are tools to exit unconventional monetary policy at the right time. At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states that: “The Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” Perception of withdrawal of $2671 billion, or $2.7 trillion, of bank reserves (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1), would cause Himalayan increase in interest rates that would provoke another recession. There is no painless gradual or sudden exit from zero interest rates because reversal of exposures created on the commitment of zero interest rates forever.

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

Dan Strumpf and Pedro Nicolaci da Costa, writing on “Fed’s Yellen: Stock Valuations ‘Generally are Quite High,’” on May 6, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-cites-progress-on-bank-regulation-1430918155?tesla=y ), quote Chair Yellen at open conversation with Christine Lagarde, Managing Director of the IMF, finding “equity-market valuations” as “quite high” with “potential dangers” in bond valuations. The DJIA fell 0.5 percent on May 6, 2015, after the comments and then increased 0.5 percent on May 7, 2015 and 1.5 percent on May 8, 2015.

Fri May 1	Mon 4	Tue 5	Wed 6	Thu 7	Fri 8
DJIA 18024.06 -0.3% 1.0%	18070.40 0.3% 0.3%	17928.20 -0.5% -0.8%	17841.98 -1.0% -0.5%	17924.06 -0.6% 0.5%	18191.11 0.9% 1.5%

There are two approaches in theory considered by Bordo (2012Nov20) and Bordo and Lane (2013). The first approach is in the classical works of Milton Friedman and Anna Jacobson Schwartz (1963a, 1987) and Karl Brunner and Allan H. Meltzer (1973). There is a similar approach in Tobin (1969). Friedman and Schwartz (1963a, 66) trace the effects of expansionary monetary policy into increasing initially financial asset prices: “It seems plausible that both nonbank and bank holders of redundant balances will turn first to securities comparable to those they have sold, say, fixed-interest coupon, low-risk obligations. But as they seek to purchase these they will tend to bid up the prices of those issues. Hence they, and also other holders not involved in the initial central bank open-market transactions, will look farther afield: the banks, to their loans; the nonbank holders, to other categories of securities-higher risk fixed-coupon obligations, equities, real property, and so forth.”

The second approach is by the Austrian School arguing that increases in asset prices can become bubbles if monetary policy allows their financing with bank credit. Professor Michael D. Bordo provides clear thought and empirical evidence on the role of “expansionary monetary policy” in inflating asset prices (Bordo2012Nov20, Bordo and Lane 2013). Bordo and Lane (2013) provide revealing narrative of historical episodes of expansionary monetary policy. Bordo and Lane (2013) conclude that policies of depressing interest rates below the target rate or growth of money above the target influences higher asset prices, using a panel of 18 OECD countries from 1920 to 2011. Bordo (2012Nov20) concludes: “that expansionary money is a significant trigger” and “central banks should follow stable monetary policies…based on well understood and credible monetary rules.” Taylor (2007, 2009) explains the housing boom and financial crisis in terms of expansionary monetary policy. Professor Martin Feldstein (2016), at Harvard University, writing on “A Federal Reserve oblivious to its effects on financial markets,” on Jan 13, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/a-federal-reserve-oblivious-to-its-effect-on-financial-markets-1452729166), analyzes how unconventional monetary policy drove values of risk financial assets to high levels. Quantitative easing and zero interest rates distorted calculation of risks with resulting vulnerabilities in financial markets.

Another hurdle of exit from zero interest rates is “competitive easing” that Professor Raghuram Rajan, governor of the Reserve Bank of India, characterizes as disguised “competitive devaluation” (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). The fed has been considering increasing interest rates. The European Central Bank (ECB) announced, on Mar 5, 2015, the beginning on Mar 9, 2015 of its quantitative easing program denominated as Public Sector Purchase Program (PSPP), consisting of “combined monthly purchases of EUR 60 bn [billion] in public and private sector securities” (http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html). Expectation of increasing interest rates in the US together with euro rates close to zero or negative cause revaluation of the dollar (or devaluation of the euro and of most currencies worldwide). US corporations suffer currency translation losses of their foreign transactions and investments (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) while the US becomes less competitive in world trade (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), Government Intervention in Globalization (2008c)). The DJIA fell 1.5 percent on Mar 6, 2015 and the dollar revalued 2.2 percent from Mar 5 to Mar 6, 2015. The euro has devalued 31.7 percent relative to the dollar from the high on Jul 15, 2008 to Feb 26, 2021.

Fri 27 Feb	Mon 3/2	Tue 3/3	Wed 3/4	Thu 3/5	Fri 3/6
USD/ EUR 1.1197 1.6% 0.0%	1.1185 0.1% 0.1%	1.1176 0.2% 0.1%	1.1081 1.0% 0.9%	1.1030 1.5% 0.5%	1.0843 3.2% 1.7%

Chair Yellen explained the removal of the word “patience” from the advanced guidance at the press conference following the FOMC meeting on Mar 18, 2015 (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150318.pdf):

“In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient. Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 percent inflation.”

Exchange rate volatility is increasing in response of “impatience” in financial markets with monetary policy guidance and measures:

Fri Mar 6	Mon 9	Tue 10	Wed 11	Thu 12	Fri 13
USD/ EUR 1.0843 3.2% 1.7%	1.0853 -0.1% -0.1%	1.0700 1.3% 1.4%	1.0548 2.7% 1.4%	1.0637 1.9% -0.8%	1.0497 3.2% 1.3%

Fri Mar 13	Mon 16	Tue 17	Wed 18	Thu 19	Fri 20
USD/ EUR 1.0497 3.2% 1.3%	1.0570 -0.7% -0.7%	1.0598 -1.0% -0.3%	1.0864 -3.5% -2.5%	1.0661 -1.6% 1.9%	1.0821 -3.1% -1.5%

Fri Apr 24	Mon 27	Tue 28	Wed 29	Thu 30	May Fri 1
USD/ EUR 1.0874 -0.6% -0.4%	1.0891 -0.2% -0.2%	1.0983 -1.0% -0.8%	1.1130 -2.4% -1.3%	1.1223 -3.2% -0.8%	1.1199 -3.0% 0.2%

In a speech at Brown University on May 22, 2015, Chair Yellen stated (http://www.federalreserve.gov/newsevents/speech/yellen20150522a.htm):

“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain.”

The US dollar appreciated 3.8 percent relative to the euro in the week of May 22, 2015:

Fri May 15	Mon 18	Tue 19	Wed 20	Thu 21	Fri 22
USD/ EUR 1.1449 -2.2% -0.3%	1.1317 1.2% 1.2%	1.1150 2.6% 1.5%	1.1096 3.1% 0.5%	1.1113 2.9% -0.2%	1.1015 3.8% 0.9%

The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, warned on Jun 4, 2015, that: (http://blog-imfdirect.imf.org/2015/06/04/u-s-economy-returning-to-growth-but-pockets-of-vulnerability/):

“The Fed’s first rate increase in almost 9 years is being carefully prepared and telegraphed. Nevertheless, regardless of the timing, higher US policy rates could still result in significant market volatility with financial stability consequences that go well beyond US borders. I weighing these risks, we think there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident. Even after the first rate increase, a gradual rise in the federal fund rates will likely be appropriate.”

The President of the European Central Bank (ECB), Mario Draghi, warned on Jun 3, 2015 that (http://www.ecb.europa.eu/press/pressconf/2015/html/is150603.en.html):

“But certainly one lesson is that we should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility…the Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance.”

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).

At the press conference after the meeting of the FOMC on Sep 17, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150917.pdf 4):

“The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent. These developments may restrain U.S. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.”

Some equity markets fell on Fri Sep 18, 2015:

Fri Sep 11	Mon 14	Tue 15	Wed 16	Thu 17	Fri 18
DJIA 16433.09 2.1% 0.6%	16370.96 -0.4% -0.4%	16599.85 1.0% 1.4%	16739.95 1.9% 0.8%	16674.74 1.5% -0.4%	16384.58 -0.3% -1.7%
Nikkei 225 18264.22 2.7% -0.2%	17965.70 -1.6% -1.6%	18026.48 -1.3% 0.3%	18171.60 -0.5% 0.8%	18432.27 0.9% 1.4%	18070.21 -1.1% -2.0%
DAX 10123.56 0.9% -0.9%	10131.74 0.1% 0.1%	10188.13 0.6% 0.6%	10227.21 1.0% 0.4%	10229.58 1.0% 0.0%	9916.16 -2.0% -3.1%

Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Chair Yellen, in a lecture on “Inflation dynamics and monetary policy,” on Sep 24, 2015 (http://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm), states that (emphasis added):

· “The economic outlook, of course, is highly uncertain”

· “Considerable uncertainties also surround the outlook for economic activity”

· “Given the highly uncertain nature of the outlook…”

Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of financial assets?

Lingling Wei, writing on Oct 23, 2015, on China’s central bank moves to spur economic growth,” published in the Wall Street Journal (http://www.wsj.com/articles/chinas-central-bank-cuts-rates-1445601495), analyzes the reduction by the People’s Bank of China (http://www.pbc.gov.cn/ http://www.pbc.gov.cn/english/130437/index.html) of borrowing and lending rates of banks by 50 basis points and reserve requirements of banks by 50 basis points. Paul Vigna, writing on Oct 23, 2015, on “Stocks rally out of correction territory on latest central bank boost,” published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2015/10/23/stocks-rally-out-of-correction-territory-on-latest-central-bank-boost/), analyzes the rally in financial markets following the statement on Oct 22, 2015, by the President of the European Central Bank (ECB) Mario Draghi of consideration of new quantitative measures in Dec 2015 (https://www.youtube.com/watch?v=0814riKW25k&rel=0) and the reduction of bank lending/deposit rates and reserve requirements of banks by the People’s Bank of China on Oct 23, 2015. The dollar revalued 2.8 percent from Oct 21 to Oct 23, 2015, following the intended easing of the European Central Bank. The DJIA rose 2.8 percent from Oct 21 to Oct 23 and the DAX index of German equities rose 5.4 percent from Oct 21 to Oct 23, 2015.

Fri Oct 16	Mon 19	Tue 20	Wed 21	Thu 22	Fri 23
USD/ EUR 1.1350 0.1% 0.3%	1.1327 0.2% 0.2%	1.1348 0.0% -0.2%	1.1340 0.1% 0.1%	1.1110 2.1% 2.0%	1.1018 2.9% 0.8%
DJIA 17215.97 0.8% 0.4%	17230.54 0.1% 0.1%	17217.11 0.0% -0.1%	17168.61 -0.3% -0.3%	17489.16 1.6% 1.9%	17646.70 2.5% 0.9%
Dow Global 2421.58 0.3% 0.6%	2414.33 -0.3% -0.3%	2411.03 -0.4% -0.1%	2411.27 -0.4% 0.0%	2434.79 0.5% 1.0%	2458.13 1.5% 1.0%
DJ Asia Pacific 1402.31 1.1% 0.3%	1398.80 -0.3% -0.3%	1395.06 -0.5% -0.3%	1402.68 0.0% 0.5%	1396.03 -0.4% -0.5%	1415.50 0.9% 1.4%
Nikkei 225 18291.80 -0.8% 1.1%	18131.23 -0.9% -0.9%	18207.15 -0.5% 0.4%	18554.28 1.4% 1.9%	18435.87 0.8% -0.6%	18825.30 2.9% 2.1%
Shanghai 3391.35 6.5% 1.6%	3386.70 -0.1% -0.1%	3425.33 1.0% 1.1%	3320.68 -2.1% -3.1%	3368.74 -0.7% 1.4%	3412.43 0.6% 1.3%
DAX 10104.43 0.1% 0.4%	10164.31 0.6% 0.6%	10147.68 0.4% -0.2%	10238.10 1.3% 0.9%	10491.97 3.8% 2.5%	10794.54 6.8% 2.9%

Ben Leubsdorf, writing on “Fed’s Yellen: December is “Live Possibility” for First Rate Increase,” on Nov 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-december-is-live-possibility-for-first-rate-increase-1446654282) quotes Chair Yellen that a rate increase in “December would be a live possibility.” The remark of Chair Yellen was during a hearing on supervision and regulation before the Committee on Financial Services, US House of Representatives (http://www.federalreserve.gov/newsevents/testimony/yellen20151104a.htm) and a day before the release of the employment situation report for Oct 2015 (Section I). The dollar revalued 2.4 percent during the week. The euro has devalued 31.7 percent relative to the dollar from the high on Jul 15, 2008 to Feb 26, 2021.

Fri Oct 30	Mon 2	Tue 3	Wed 4		Thu 5	Fri 6
USD/ EUR 1.1007 0.1% -0.3%	1.1016 -0.1% -0.1%	1.0965 0.4% 0.5%	1.0867 1.3% 0.9%		1.0884 1.1% -0.2%	1.0742 2.4% 1.3%

The release on Nov 18, 2015 of the minutes of the FOMC (Federal Open Market Committee) meeting held on Oct 28, 2015 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20151028.htm) states:

“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions [for interest rate increase] could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period… It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow.”

Markets could have interpreted a symbolic increase in the fed funds rate at the meeting of the FOMC on Dec 15-16, 2015 (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) followed by “shallow” increases, explaining the sharp increase in stock market values and appreciation of the dollar after the release of the minutes on Nov 18, 2015:

Fri Nov 13	Mon 16	Tue 17	Wed 18	Thu 19	Fri 20
USD/ EUR 1.0774 -0.3% 0.4%	1.0686 0.8% 0.8%	1.0644 1.2% 0.4%	1.0660 1.1% -0.2%	1.0735 0.4% -0.7%	1.0647 1.2% 0.8%
DJIA 17245.24 -3.7% -1.2%	17483.01 1.4% 1.4%	17489.50 1.4% 0.0%	17737.16 2.9% 1.4%	17732.75 2.8% 0.0%	17823.81 3.4% 0.5%
DAX 10708.40 -2.5% -0.7%	10713.23 0.0% 0.0%	10971.04 2.5% 2.4%	10959.95 2.3% -0.1%	11085.44 3.5% 1.1%	11119.83 3.8% 0.3%

In testimony before The Joint Economic Committee of Congress on Dec 3, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20151203a.htm), Chair Yellen reiterated that the FOMC (Federal Open Market Committee) “anticipates that even after employment and inflation are near mandate-consistent levels, economic condition may, for some time, warrant keeping the target federal funds rate below the Committee views as normal in the longer run.” Todd Buell and Katy Burne, writing on “Draghi says ECB could step up stimulus efforts if necessary,” on Dec 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/draghi-says-ecb-could-step-up-stimulus-efforts-if-necessary-1449252934), analyze that the President of the European Central Bank (ECB), Mario Draghi, reassured financial markets that the ECB will increase stimulus if required to raise inflation the euro area to targets. The USD depreciated 3.1 percent on Thu Dec 3, 2015 after weaker than expected measures by the European Central Bank. DJIA fell 1.4 percent on Dec 3 and increased 2.1 percent on Dec 4. DAX fell 3.6 percent on Dec 3.

Fri Nov 27	Mon 30	Tue 1	Wed 2	Thu 3	Fri 4
USD/ EUR 1.0594 0.5% 0.2%	1.0565 0.3% 0.3%	1.0634 -0.4% -0.7%	1.0616 -0.2% 0.2%	1.0941 -3.3% -3.1%	1.0885 -2.7% 0.5%
DJIA 17798.49 -0.1% -0.1%	17719.92 -0.4% -0.4%	17888.35 0.5% 1.0%	17729.68 -0.4% -0.9%	17477.67 -1.8% -1.4%	17847.63 0.3% 2.1%
DAX 11293.76 1.6% -0.2%	11382.23 0.8% 0.8%	11261.24 -0.3% -1.1%	11190.02 -0.9% -0.6%	10789.24 -4.5% -3.6%	10752.10 -4.8% -0.3%

At the press conference following the meeting of the FOMC on Dec 16, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20151216.pdf page 8):

“And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we've emphasized, gradual manner. It's been a long time since the Federal Reserve has raised interest rates, and I think it's prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this.”

The implication of this statement is that the state of the art is not accurate in analyzing the effects of monetary policy on financial markets and economic activity. The US dollar appreciated and equities fluctuated:

Fri Dec 11	Mon 14	Tue 15	Wed 16	Thu 17	Fri 18
USD/ EUR 1.0991 -1.0% -0.4%	1.0993 0.0% 0.0%	1.0932 0.5% 0.6%	1.0913 0.7% 0.2%	1.0827 1.5% 0.8%	1.0868 1.1% -0.4%
DJIA 17265.21 -3.3% -1.8%	17368.50 0.6% 0.6%	17524.91 1.5% 0.9%	17749.09 2.8% 1.3%	17495.84 1.3% -1.4%	17128.55 -0.8% -2.1%
DAX 10340.06 -3.8% -2.4%	10139.34 -1.9% -1.9%	10450.38 -1.1% 3.1%	10469.26 1.2% 0.2%	10738.12 3.8% 2.6%	10608.19 2.6% -1.2%

On January 29, 2016, the Policy Board of the Bank of Japan introduced a new policy to attain the “price stability target of 2 percent at the earliest possible time” (https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf). The new framework consists of three dimensions: quantity, quality and interest rate. The interest rate dimension consists of rates paid to current accounts that financial institutions hold at the Bank of Japan of three tiers zero, positive and minus 0.1 percent. The quantitative dimension consists of increasing the monetary base at the annual rate of 80 trillion yen. The qualitative dimension consists of purchases by the Bank of Japan of Japanese government bonds (JGBs), exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITS). The yen devalued sharply relative to the dollar and world equity markets soared after the new policy announced on Jan 29, 2016:

Fri 22	Mon 25	Tue 26	Wed 27	Thu 28	Fri 29
JPY/ USD 118.77 -1.5% -0.9%	118.30 0.4% 0.4%	118.42 0.3% -0.1%	118.68 0.1% -0.2%	118.82 0.0% -0.1%	121.13 -2.0% -1.9%
DJIA 16093.51 0.7% 1.3%	15885.22 -1.3% -1.3%	16167.23 0.5% 1.8%	15944.46 -0.9% -1.4%	16069.64 -0.1% 0.8%	16466.30 2.3% 2.5%
Nikkei 16958.53 -1.1% 5.9%	17110.91 0.9% 0.9%	16708.90 -1.5% -2.3%	17163.92 1.2% 2.7%	17041.45 0.5% -0.7%	17518.30 3.3% 2.8%
Shanghai 2916.56 0.5% 1.3	2938.51 0.8% 0.8%	2749.79 -5.7% -6.4%	2735.56 -6.2% -0.5%	2655.66 -8.9% -2.9%	2737.60 -6.1% 3.1%
DAX 9764.88 2.3% 2.0%	9736.15 -0.3% -0.3%	9822.75 0.6% 0.9%	9880.82 1.2% 0.6%	9639.59 -1.3% -2.4%	9798.11 0.3% 1.6%

In testimony on the Semiannual Monetary Policy Report to the Congress on Feb 10-11, 2016, Chair Yellen (http://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm) states: “U.S. real gross domestic product is estimated to have increased about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment.”

Jon Hilsenrath, writing on “Yellen Says Fed Should Be Prepared to Use Negative Rates if Needed,” on Feb 11, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/yellen-reiterates-concerns-about-risks-to-economy-in-senate-testimony-1455203865), analyzes the statement of Chair Yellen in Congress that the FOMC (Federal Open Market Committee) is considering negative interest rates on bank reserves. The Wall Street Journal provides yields of two and ten-year sovereign bonds with negative interest rates on shorter maturities where central banks pay negative interest rates on excess bank reserves:

Sovereign Yields 2/12/16	Japan	Germany	USA
2 Year	-0.168	-0.498	0.694
10 Year	0.076	0.262	1.744

On Mar 10, 2016, the European Central Bank (ECB) announced (1) reduction of the refinancing rate by 5 basis points to 0.00 percent; decrease the marginal lending rate to 0.25 percent; reduction of the deposit facility rate to 0,40 percent; increase of the monthly purchase of assets to €80 billion; include nonbank corporate bonds in assets eligible for purchases; and new long-term refinancing operations (https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310.en.html). The President of the ECB, Mario Draghi, stated in the press conference (https://www.ecb.europa.eu/press/pressconf/2016/html/is160310.en.html): “How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases…We don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”

The dollar devalued relative to the euro and open stock markets traded lower after the announcement on Mar 10, 2016, but stocks rebounded on Mar 11:

Fri 4	Mon 7	Tue 8	Wed 9	Thu10	Fri 11
USD/ EUR 1.1006 -0.7% -0.4%	1.1012 -0.1% -0.1%	1.1013 -0.1% 0.0%	1.0999 0.1% 0.1%	1.1182 -1.6% -1.7%	1.1151 -1.3% 0.3%
DJIA 17006.77 2.2% 0.4%	17073.95 0.4% 0.4%	16964.10 -0.3% -0.6%	17000.36 0.0% 0.2%	16995.13 -0.1% 0.0%	17213.31 1.2% 1.3%
DAX 9824.17 3.3% 0.7%	9778.93 -0.5% 0.5%	9692.82 -1.3% -0.9%	9723.09 -1.0% 0.3%	9498.15 -3.3% -2.3%	9831.13 0.1% 3.5%

At the press conference after the FOMC meeting on Sep 21, 2016, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160921.pdf ): “However, the economic outlook is inherently uncertain.” In the address to the Jackson Hole symposium on Aug 26, 2016, Chair Yellen states: “I believe the case for an increase in in federal funds rate has strengthened in recent months…And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course” (http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm). In a speech at the World Affairs Council of Philadelphia, on Jun 6, 2016 (http://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm), Chair Yellen finds that “there is considerable uncertainty about the economic outlook.” There are fifteen references to this uncertainty in the text of 18 pages double-spaced. In the Semiannual Monetary Policy Report to the Congress on Jun 21, 2016, Chair Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20160621a.htm), “Of course, considerable uncertainty about the economic outlook remains.” Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of financial assets?

What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20210127a.htm): The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” (emphasis added). There are multiple new policy measures, including purchases of Treasury securities and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.” In the Opening Remarks to the Press Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective. We believe monetary policy is in a good place to achieve these outcomes. Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

In the Introductory Statement on Jul 25, 2019, in Frankfurt am Main, the President of the European Central Bank, Mario Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity.

The Federal Open Market Committee (FOMC) decided to lower the target range of the federal funds rate by 0.50 percent to 1.0 to 1¼ percent on Mar 3, 2020 in a decision outside the calendar meetings (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm):

March 03, 2020

Federal Reserve issues FOMC statement

For release at 10:00 a.m. EST

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

For media inquiries, call 202-452-2955.

Implementation Note issued March 3, 2020

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

The decision is based on “the coronavirus poses evolving risks to economic activity” (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm). The FOMC states that it “will use its tools and act as appropriate to support the economy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm).

The decisions of the FOMC (Federal Open Market Committee) depend on incoming data. There are unexpected swings in valuations of risk financial assets by “carry trades” from interest rates below inflation to exposures in stocks, commodities and their derivatives. Another issue is the unexpected “data surprises” such as the sharp decline in 12 months rates of increase of real disposable income, or what is left after taxes and inflation, and the price indicator of the FOMC, prices of personal consumption expenditures (PCE) excluding food and energy. There is no science or art of monetary policy that can deal with this uncertainty.

Real Disposable Personal Income	Real Personal Consumption Expenditures	Prices of Personal Consumption Expenditures	PCE Prices Excluding Food and Energy
∆%12M	∆%12M	∆%12M	∆%12M
6/2017	6/2017	6/2017	6/2017
1.2	2.4	1.4	1.5

In presenting the Semiannual Monetary Policy Report to Congress on Jul 17, 2018, the Chairman of the Board of Governors of the Federal Reserve System, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm): “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data.”

At an address to The Clearing House and The Bank Policy Institute Annual Conference (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm), in New York City, on Nov 27, 2018, the Vice Chairman of the Fed, Richard H. Clarida, analyzes the data dependence of monetary policy. An important hurdle is critical unobserved parameters of monetary policy (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm): “But what if key parameters that describe the long-run destination of the economy are unknown? This is indeed the relevant case that the FOMC and other monetary policymakers face in practice. The two most important unknown parameters needed to conduct‑‑and communicate‑‑monetary policy are the rate of unemployment consistent with maximum employment, u*, and the riskless real rate of interest consistent with price stability, r*. As a result, in the real world, monetary policy should, I believe, be data dependent in a second sense: that incoming data can reveal at each FOMC meeting signals that will enable it to update its estimates of r* and u* in order to obtain its best estimate of where the economy is heading.” Current robust economic growth, employment creation and inflation close to the Fed’s 2 percent objective suggest continuing “gradual policy normalization.” Incoming data can be used to update u^* and r^* in designing monetary policy that attains price stability and maximum employment. Clarida also finds that the current expansion will be the longest in history if it continues into 2019. In an address at The Economic Club of New York, New York City, Nov 28, 2018 (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm), the Chairman of the Fed, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm): “For seven years during the crisis and its painful aftermath, the Federal Open Market Committee (FOMC) kept our policy interest rate unprecedentedly low--in fact, near zero--to support the economy as it struggled to recover. The health of the economy gradually but steadily improved, and about three years ago the FOMC judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. We therefore began to raise our policy rate gradually toward levels that are more normal in a healthy economy. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.” The market focused on policy rates “just below the broad range of estimates of the level that would be neutral for the economy—that is, neither speeding up nor slowing down growth.” There was a relief rally in the stock market of the United States:

Fri 23	Mon 26	Tue 27	Wed 28	Thu 29	Fri 30
USD/EUR 1.1339 0.7% 0.6%	1.1328 0.1% 0.1%	1.1293 0.4% 0.3%	1.1368 -0.3% -0.7%	1.1394 -0.5% -0.2%	1.1320 0.2% 0.6%
DJIA 24285.95 -4.4% -0.7%	24640.24 1.5% 1.5%	24748.73 1.9% 0.4%	25366.43 4.4% 2.5%	25338.84 4.3% -0.1%	25538.46 5.2% 0.8%

At a meeting of the American Economic Association in Atlanta on Friday, January 4, 2019, the Chairman of the Fed, Jerome H. Powell, stated that the Fed would be “patient” with interest rate increases, adjusting policy “quickly and flexibly” if required (https://www.aeaweb.org/webcasts/2019/us-federal-reserve-joint-interview). Treasury yields declined and stocks jumped.

Fri 28	Mon 31	Tue 1	Wed 2	Thu 3	Fri 4
10Y Note 2.736	2.683	2.683	2.663	2.560	2.658
2Y Note 2.528	2.500	2.500	2.488	2.387	2.480
DJIA 23062.40 2.7% -0.3%	23327.46 1.1% 1.1%	23327.46 1.1% 0.0%	23346.24 1.2% 0.1%	22686.22 -1.6% -2.8%	23433.16 1.6% 3.3%
Dow Global 2718.19 1.3% 0.8%	2734.40 0.6% 0.6%	2734.40 0.6% 0.0%	2729.74 0.4% -0.2%	2707.29 -0.4% -0.8%	2773.12 2.0% 2.4%

Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. The FOMC statement on Jun 19, 2019 analyzes uncertainty in the outlook (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619a.htm): “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” In the Semiannual Monetary Policy Report to the Congress, on Jul 10, 2019, Chair Jerome H. Powell states (https://www.federalreserve.gov/newsevents/testimony/powell20190710a.htm): “Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data.

”(emphasis added). European Central Bank President, Mario Draghi, stated at a meeting on “Twenty Years of the ECB’s Monetary Policy,” in Sintra, Portugal, on Jun 18, 2019, that (https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190618~ec4cd2443b.en.html): “In this environment, what matters is that monetary policy remains committed to its objective and does not resign itself to too-low inflation. And, as I emphasised at our last monetary policy meeting, we are committed, and are not resigned to having a low rate of inflation forever or even for now. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required. In our recent deliberations, the members of the Governing Council expressed their conviction in pursuing our aim of inflation close to 2% in a symmetric fashion. Just as our policy framework has evolved in the past to counter new challenges, so it can again. In the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity. The harmonized index of consumer prices of the euro zone increased 1.2 percent in the 12 months ending in May 2019 and the PCE inflation excluding food and energy increased 1.6 percent in the 12 months ending in Apr 2019. Inflation below 2 percent with symmetric targets in both the United States and the euro zone together with apparently weakening economic activity could lead to interest rate cuts. Stock markets jumped worldwide in renewed risk appetite during the week of Jun 19, 2019 in part because of anticipation of major central bank rate cuts and also because of domestic factors:

Fri 14	Mon 17	Tue 18	Wed 19	Thu 20	Fri 21
DJIA 26089.61 0.4% -0.1%	26112.53 0.1% 0.1%	26465.54 1.4% 1.4%	26504.00 1.6% 0.1%	26753.17 2.5% 0.9%	26719.13 2.4% -0.1%
Dow Global 2998.79 0.2% -0.4%	2999.93 0.0% 0.0%	3034.59 1.2% 1.2%	3050.80 1.7% 0.5%	3077.81 2.6% 0.9%	3081.62 2.8% 0.1%
DJ Asia Pacific NA	NA	NA	NA	NA	NA
Nikkei 21116.89 1.1% 0.4%	21124.00 0.0% 0.0%	20972.71 -0.7% -0.7%	21333.87 1.0% 1.7%	21462.86 1.6% 0.6%	21258.64 0.7% -1.0%
Shanghai 2881.97 1.9% -1.0%	2887.62 0.2% 0.2%	2890.16 0.3% 0.1%	2917.80 1.2% 1.0%	2987.12 3.6% 2.4%	3001.98 4.2% 0.5%
DAX 12096.40 0.4% -0.6%	12085.82 -0.1% -0.1%	12331.75 1.9% 2.0%	12308.53 1.8% -0.2%	12355.39 2.1% 0.4%	12339.92 2.0% -0.1%
BOVESPA 98040.06 0.2% -0.7%	97623.25 -0.4% -0.4%	99404.39 1.4% 1.8%	100303.41 2.3% 0.9%	100303.41 2.3% 0.0%	102012.64 4.1% 1.7%

Chart VIII-1, Fed Funds Rate and Yields of  Ten-year Treasury Constant Maturity and Baa Seasoned Corporate Bond, Jan 2, 2001 to Oct 6, 2016 

Source: Board of Governors of the Federal Reserve System

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

Chart VIII-1A, Fed Funds Rate and Yield of Ten-year Treasury Constant Maturity, Jan 2, 2001 to Feb 25, 2021

Source: Board of Governors of the Federal Reserve System

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

Table VIII-3, Selected Data Points in Chart VIII-1, % per Year

	Fed Funds Overnight Rate	10-Year Treasury Constant Maturity	Seasoned Baa Corporate Bond
1/2/2001	6.67	4.92	7.91
10/1/2002	1.85	3.72	7.46
7/3/2003	0.96	3.67	6.39
6/22/2004	1.00	4.72	6.77
6/28/2006	5.06	5.25	6.94
9/17/2008	2.80	3.41	7.25
10/26/2008	0.09	2.16	8.00
10/31/2008	0.22	4.01	9.54
4/6/2009	0.14	2.95	8.63
4/5/2010	0.20	4.01	6.44
2/4/2011	0.17	3.68	6.25
7/25/2012	0.15	1.43	4.73
5/1/2013	0.14	1.66	4.48
9/5/2013	0.089	2.98	5.53
11/21/2013	0.09	2.79	5.44
11/26/13	0.09	2.74	5.34 (11/26/13)
12/5/13	0.09	2.88	5.47
12/11/13	0.09	2.89	5.42
12/18/13	0.09	2.94	5.36
12/26/13	0.08	3.00	5.37
1/1/2014	0.08	3.00	5.34
1/8/2014	0.07	2.97	5.28
1/15/2014	0.07	2.86	5.18
1/22/2014	0.07	2.79	5.11
1/30/2014	0.07	2.72	5.08
2/6/2014	0.07	2.73	5.13
2/13/2014	0.06	2.73	5.12
2/20/14	0.07	2.76	5.15
2/27/14	0.07	2.65	5.01
3/6/14	0.08	2.74	5.11
3/13/14	0.08	2.66	5.05
3/20/14	0.08	2.79	5.13
3/27/14	0.08	2.69	4.95
4/3/14	0.08	2.80	5.04
4/10/14	0.08	2.65	4.89
4/17/14	0.09	2.73	4.89
4/24/14	0.10	2.70	4.84
5/1/14	0.09	2.63	4.77
5/8/14	0.08	2.61	4.79
5/15/14	0.09	2.50	4.72
5/22/14	0.09	2.56	4.81
5/29/14	0.09	2.45	4.69
6/05/14	0.09	2.59	4.83
6/12/14	0.09	2.58	4.79
6/19/14	0.10	2.64	4.83
6/26/14	0.10	2.53	4.71
7/2/14	0.10	2.64	4.84
7/10/14	0.09	2.55	4.75
7/17/14	0.09	2.47	4.69
7/24/14	0.09	2.52	4.72
7/31/14	0.08	2.58	4.75
8/7/14	0.09	2.43	4.71
8/14/14	0.09	2.40	4.69
8/21/14	0.09	2.41	4.69
8/28/14	0.09	2.34	4.57
9/04/14	0.09	2.45	4.70
9/11/14	0.09	2.54	4.79
9/18/14	0.09	2.63	4.91
9/25/14	0.09	2.52	4.79
10/02/14	0.09	2.44	4.76
10/09/14	0.08	2.34	4.68
10/16/14	0.09	2.17	4.64
10/23/14	0.09	2.29	4.71
11/13/14	0.09	2.35	4.82
11/20/14	0.10	2.34	4.86
11/26/14	0.10	2.24	4.73
12/04/14	0.12	2.25	4.78
12/11/14	0.12	2.19	4.72
12/18/14	0.13	2.22	4.78
12/23/14	0.13	2.26	4.79
12/30/14	0.06	2.20	4.69
1/8/15	0.12	2.03	4.57
1/15/15	0.12	1.77	4.42
1/22/15	0.12	1.90	4.49
1/29/15	0.11	1.77	4.35
2/05/15	0.12	1.83	4.43
2/12/15	0.12	1.99	4.53
2/19/15	0.12	2.11	4.64
2/26/15	0.11	2.03	4.47
3/5/215	0.11	2.11	4.58
3/12/15	0.11	2.10	4.56
3/19/15	0.12	1.98	4.48
3/26/15	0.11	2.01	4.56
4/03/15	0.12	1.92	4.47
4/9/15	0.12	1.97	4.50
4/16/15	0.13	1.90	4.45
4/23/15	0.13	1.96	4.50
5/1/15	0.08	2.05	4.65
5/7/15	0.13	2.18	4.82
5/14/15	0.13	2.23	4.97
5/21/15	0.12	2.19	4.94
5/28/15	0.12	2.13	4.88
6/04/15	0.13	2.31	5.03
6/11/15	0.13	2.39	5.10
6/18/15	0.14	2.35	5.17
6/25/15	0.13	2.40	5.20
7/1/15	0.13	2.43	5.26
7/9/15	0.13	2.32	5.20
7/16/15	0.14	2.36	5.24
7/23/15	0.13	2.28	5.13
7/30/15	0.14	2.28	5.16
8/06/15	0.14	2.23	5.15
8/20/15	0.15	2.09	5.13
8/27/15	0.14	2.18	5.33
9/03/15	0.14	2.18	5.35
9/10/15	0.14	2.23	5.35
9/17/15	0.14	2.21	5.39
9/25/15	0.14	2.13	5.29
10/01/15	0.13	2.05	5.36
10/08/15	0.13	2.12	5.40
10/15/15	0.13	2.04	5.33
10/22/15	0.12	2.04	5.30
10/29/15	0.12	2.19	5.40
11/05/15	0.12	2.26	5.44
11/12/15	0.12	2.32	5.51
11/19/15	0.12	2.24	5.44
11/25/15	0.12	2.23	5.44
12/03/15	0.13	2.33	5.51
12/10/15	0.14	2.24	5.43
12/17/15	0.37	2.24	5.45
12/23/15	0.36	2.27	5.53
12/30/15	0.35	2.31	5.54
1/07/2016	0.36	2.16	5.44
01/14/16	0.36	2.10	5.46
01/20/16	0.37	2.01	5.41
01/29/16	0.38	2.00	5.48
02/04/16	0.38	1.87	5.40
02/11/16	0.38	1.63	5.26
02/18/16	0.38	1.75	5.37
02/25/16	0.37	1.71	5.27
03/03/16	0.37	1.83	5.30
03/10/16	0.36	1.93	5.23
03/17/16	0.37	1.91	5.11
03/24/16	0.37	1.91	4.97
03/31/16	0.25	1.78	4.90
04/07/16	0.37	1.70	4.76
04/14/16	0.37	1.80	4.79
04/21/16	0.37	1.88	4.79
04/28/16	0.37	1.84	4.73
05/05/16	0.37	1.76	4.62
05/12/16	0.37	1.75	4.66
05/19/16	0.37	1.85	4.70
05/26/16	0.37	1.83	4.69
06/02/16	0.37	1.81	4.64
06/09/16	0.37	1.68	4.53
06/16/16	0.38	1.57	4.47
06/23/16	0.39	1.74	4.60
06/30/16	0.36	1.49	4.41
07/07/16	0.40	1.40	4.19
07/14/16	0.40	1.53	4.23
07/21/16	0.40	1.57	4.25
07/28/16	0.40	1.52	4.20
08/04/16	0.40	1.51	4.27
08/11/16	0.40	1.57	4.27
08/18/16	0.40	1.53	4.23
08/25/16	0.40	1.58	4.21
09/01/16	0.40	1.57	4.19
09/08/16	0.40	1.61	4.28
09/15/16	0.40	1.71	4.43
09/22/16	0.40	1.63	4.32
09/29/16	0.40	1.56	4.23
10/06/16	0.40	1.75	4.36
10/13/16	0.40	1.75	NA*
10/20/16	0.41	1.76	NA*
10/27/16	0.41	1.85	NA*
11/03/16	0.41	1.82	NA*
11/09/16	0.41	2.07	NA*
11/17/16	0.41	2.29	NA*
11/23/16	0.40	2.36	NA*
12/01/16	0.40	2.45	NA*
12/08/16	0.41	2.40	NA*
12/15/16	0.66	2.60	NA*
12/22/16	0.66	2.55	NA*
12/29/16	0.66	2.49	NA*
01/05/17	0.66	2.37	NA*
01/12/17	0.66	2.36	NA*
01/19/17	0.66	2.42	NA*
01/26/17	0.66	2.51	NA*
02/02/17	0.66	2.48	NA*
02/09/17	0.66	2.40	NA*
02/16/17	0.66	2.45	NA*
02/23/17	0.66	2.38	NA*
03/02/17	0.66	2.49	NA*
03/09/17	0.66	2.60	NA*
03/16/17	0.91	2.53	NA*
03/23/17	0.91	2.41	NA*
03/30/17	0.91	2.42	NA*
04/06/17	0.91	2.34	NA*
04/13/17	0.91	2.24	NA*
04/21/17	0.91	2.24	NA*
04/27/17	0.91	2.30	NA*
05/04/17	0.91	2.36	NA*
05/11/17	0.91	2.39	NA*
05/18/17	0.91	2.23	NA*
05/25/17	0.91	2.25	NA*
06/01/17	0.90	2.21	NA*
06/08/17	0.91	2.19	NA*
06/15/17	1.16	2.16	NA*
06/22/17	1.16	2.15	NA*
06/29/17	1.16	2.27	NA*
07/06/17	1.16	2.37	NA*
07/13/17	1.16	2.35	NA*
07/20/17	1.16	2.27	NA*
07/27/17	1.16	2.32	NA*
08/03/17	1.16	2.24	NA*
08/10/17	1.16	2.20	NA*
08/17/17	1.16	2.19	NA*
08/24/17	1.16	2.19	NA*
08/31/17	1.07	2.12	NA*
09/07/17	1.16	2.05	NA*
09/14/17	1.16	2.20	NA*
09/21/17	1.16	2.27	NA*
09/28/17	1.16	2.31	NA*
10/05/17	1.16	2.35	NA*
10/12/17	1.16	2.33	NA*
10/19/17	1.16	2.33	NA*
10/26/17	1.16	2.46	NA*
11/02/17	1.16	2.35	NA*
11/09/17	1.16	2.32	NA*
11/16/17	1.16	2.37	NA*
11/22/17	1.16	2.32	NA*
11/30/17	1.16	2.42	NA*
12/07/17	1.16	2.37	NA*
12/14/17	1.41	2.35	NA*
12/21/17	1.42	2.48	NA*
12/28/17	1.42	2.43	NA*
01/04/18	1.42	2.46	NA*
01/11/18	1.42	2.54	NA*
01/18/18	1.42	2.62	NA*
01/25/18	1.42	2.63	NA*
02/01/18	1.42	2.78	NA*
02/08/18	1.42	2.85	NA*
02/15/18	1.42	2.90	NA*
02/22/18	1.42	2.92	NA*
03/01/18	1.42	2.81	NA*
03/08/18	1.42	2.86	NA*
03/15/18	1.43	2.82	NA*
03/22/18	1.68	2.83	NA*
03/29/18	1.68	2.74	NA*
04/05/18	1.69	2.83	NA*
04/12/18	1.69	2.83	NA*
04/19/18	1.69	2.92	NA*
04/26/18	1.70	3.00	NA*
05/03/18	1.70	2.94	NA*
05/10/18	1.70	2.97	NA*
05/17/18	1.70	3.11	NA*
05/24/18	1.70	2.98	NA*
05/31/18	1.70	2.83	NA*
06/07/18	1.70	2.93	NA*
06/14/18	1.90	2.94	NA*
06/21/18	1.92	2.90	NA*
06/28/18	1.91	2.84	NA*
07/05/18	1.91	2.84	NA*
07/12/18	1.91	2.85	NA*
07/19/18	1.91	2.84	NA*
07/26/18	1.91	2.98	NA*
08/02/18	1.91	2.98	NA*
08/09/18	1.91	2.93	NA*
08/16/18	1.92	2.87	NA*
08/23/18	1.92	2.82	NA*
08/30/18	1.92	2.86	NA*
09/06/18	1.92	2.88	NA*
09/13/18	1.92	2.97	NA*
09/20/18	1.92	3.07	NA*
09/27/18	2.18	3.06	NA*
10/04/18	2.18	3.19	NA*
10/11/18	2.18	3.14	NA*
10/18/18	2.19	3.17	NA*
10/25/18	2.20	3.14	NA*
11/01/18	2.20	3.14	NA*
11/08/18	2.20	3.24	NA*
11/15/18	2.20	3.11	NA*
11/21/18	2.20	3.06	NA*
11/29/18	2.20	3.03	NA*
12/06/18	2.20	2.87	NA*
12/13/18	2.19	2.91	NA*
12/20/18	2.40	2.79	NA*
12/27/18	2.40	2.77	NA*
01/03/19	2.40	2.56	NA*
01/10/19	2.40	2.74	NA*
01/17/19	2.40	2.75	NA*
01/24/19	2.40	2.72	NA*
01/31/19	2.40	2.63	NA*
02/07/19	2.40	2.63	NA*
02/14/19	2.40	2.66	NA*
02/21/19	2.40	2.69	NA*
02/28/19	2.40	2.73	NA*
03/07/19	2.40	2.64	NA*
03/14/19	2.40	2.63	NA*
03/21/19	2.41	2.54	NA*
03/28/19	2.41	2.39	NA*
04/04/19	2.41	2.51	NA*
04/11/19	2.41	2.51	NA*
04/18/19	2.43	2.57	NA*
04/25/19	2.44	2.54	NA*
05/02/19	2.41	2.55	NA*
05/09/19	2.38	2.45	NA*
05/16/19	2.39	2.40	NA*
05/23/19	2.38	2.31	NA*
05/30/19	2.39	2.22	NA*
06/06/19	2.37	2.12	NA*
06/13/19	2.37	2.10	NA*
06/20/19	2.37	2.01	NA*
06/27/19	2.38	2.01	NA*
07/03/19	2.41	1.96	NA
07/11/19	2.40	1.85	NA*
07/18/19	2.41	2.04	NA*
07/25/19	2.40	2.08	NA*
08/01/19	2.14	1.90	NA*
08/08/19	2.12	1.72	NA*
08/15/19	2.13	1.52	NA*
08/22/19	2.12	1.62	NA*
08/29/19	2.12	1.50	NA*
09/05/19	2.13	1.57	NA*
09/12/19	2.13	1.79	NA*
09/19/19	1.90	1.79	NA*
09/26/19	1.85	1.70	NA*
10/03/19	1.83	1.54	NA*
10/10/19	1.83	1.67	NA*
10/17/19	1.85	1.76	NA*
10/24/19	1.85	1.77	NA*
10/31/19	1.58	1.69	NA*
11/07/19	1.55	1.92	NA*
11/14/19	1.55	1.82	NA*
11/21/19	1.55	1.77	NA*
11/27/19	1.55	1.77	NA*
12/05/19	1.55	1.80	NA*
12/12/19	1.55	1.90	NA*
12/19/19	1.55	1.92	NA*
12/26/19	1.55	1.90	NA*
01/02/20	1.55	1.88	NA*
01/09/20	1.55	1.85	NA*
01/16/20	1.54	1.81	NA*
01/23/20	1.55	1.74	NA*
01/30/20	1.60	1.57	NA*
02/06/20	1.59	1.65	NA*
02/13/20	1.59	1.61	NA*
02/20/20	1.59	1.59	NA*
02/27/20	1.58	1.30	NA*
03/05/20	1.09	0.92	NA*
03/12/20	1.10	0.88	NA*
03/19/20	0.20	1.12	NA*
03/26/20	0.10	0.83	NA*
04/02/20	0.05	0.63	NA*
04/09/20	0.05	0.73	NA*
04/16/20	0.05	0.61	NA*
04/23/20	0.04	0.61	NA*
04/30/20	0.05	0.64	NA*
05/07/20	0.05	0.63	NA*
05/14/20	0.05	0.63	NA*
05/21/20	0.05	0.68	NA*
05/28/20	0.05	0.70	NA*
06/04/20	0.09	0.82	NA*
06/11/20	0.12	0.66	NA*
06/18/20	0.09	0.71	NA*
06/25/20	0.08	0.68	NA*
07/01/20	0.08	0.69	NA
07/09/20	0.09	0.62	NA*
07/16/20	0.10	0.62	NA*
07/23/20	0.09	0.59	NA*
07/31/20	0.10	0.55	NA*
08/06/20	0.10	0.55	NA*
08/13/20	0.10	0.71	NA*
08/20/20	0.09	0.65	NA*
08/27/20	0.08	0.74	NA*
09/03/20	0.09	0.63	NA*
09/10/20	0.09	0.68	NA*
09/17/20	0.09	0.69	NA*
09/24/20	0.09	0.67	NA*
10/01/20	0.09	0.68	NA*
10/08/20	0.09	0.78	NA*
10/15/20	0.09	0.74	NA*
10/22/20	0.09	0.87	NA*
10/29/20	0.09	0.85	NA*
11/05/20	0.10	0.79	NA*
11/12/20	0.09	0.88	NA*
11/19/20	0.08	0.86	NA*
11/25/20	0.08	0.88	NA*
12/03/20	0.08	0.92	NA*
12/10/20	0.09	0.92	NA*
12/17/20	0.09	0.94	NA*
12/22/20	0.09	0.93	NA*
12/30/20	0.09	0.93	NA*
01/07/21	0.09	1.08	NA*
01/14/21	0.09	1.15	NA*
01/21/21	0.08	1.12	NA*
01/28/21	0.07	1.07	NA*
02/04/21	0.08	1.15	NA*
02/11/21	0.08	1.16	NA*
02/18/21	0.07	1.29	NA*
02/25/21	0.07	1.54	NA*

*Note: The Board of Governors of the Federal Reserve System discontinued the publication of the BAA bond yield.

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/h15/

Chart VIII-2 of the Board of Governors of the Federal Reserve System provides the rate of US dollars (USD) per euro (EUR), USD/EUR. The rate depreciated from USD 1.1096/EUR on Feb 21, 2020 to USD 1.2136/EUR on Feb 19, 2021 or 9.4 percent. The euro has devalued 31.7 percent relative to the dollar from the high on Jul 15, 2008 to Feb 26, 2021. US corporations with foreign transactions and net worth experience losses in their balance sheets in converting revenues from depreciated currencies to the dollar. Corporate profits with IVA and CCA increased at $64.8 billion in IVQ2019. Profits from domestic industries increased at $62.7 billion and profits from nonfinancial business increased at $46.0 billion. Profits from the rest of the world increased at $2.1 billion. Corporate profits with IVA and CCA decreased at $276.2 billion in IQ2020. Profits from domestic industries decreased at $232.7 billion and profits from nonfinancial business decreased at $190.5 billion. Profits from the rest of the world decreased at $43.5 billion. Corporate profits with IVA and CCA decreased at $208.9 billion in IIQ2020. Profits from domestic industries decreased at $119.4 billion and profits from nonfinancial business decreased at $145.9 billion. Profits from the rest of the world decreased at $89.5 billion. Corporate profits with IVA and CCA increased at $499.6 billion in IIIQ2020. Profits from domestic industries increased at $448.3 billion and profits from nonfinancial business increased at $436.2 billion. Profits from the rest of the world increased at $51.3 billion. Total corporate profits with IVA and CCA were $2325.7 billion in IIIQ2020 of which $1890.8 billion from domestic industries, or 81.3 percent of the total, and $434.9 billion, or 18.7 percent, from the rest of the world. Nonfinancial corporate profits of $1421.0 billion account for 61.1 percent of the total. There is increase in corporate profits from devaluing the dollar with unconventional monetary policy of zero interest rates and decrease of corporate profits in revaluing the dollar with attempts at “normalization” or increases in interest rates. Conflicts arise while other central banks differ in their adjustment process. The current account deficit at 2.4 percent in IIQ2019 decreases to 2.3 percent in IIIQ2019. The current account deficit decreases to 1.9 percent in IVQ2019. The current account deficit increases to 2.1 percent in IQ2020. The current account deficit increases to 3.5 percent in IIQ2020. The absolute value of the net international investment position increases to $10.9 trillion in IIIQ2019. The absolute value of the net international investment position increases to $11.1 trillion in IVQ2019. The absolute value of the net international investment position increases to $12.2 trillion in IQ2020. The absolute value of the net international investment position increases at $13.0 trillion in IIQ2020. The BEA explains as follows (https://www.bea.gov/sites/default/files/2020-09/intinv220_0.pdf):

“The U.S. net international investment position, the difference between U.S. residents’ foreign financial assets and liabilities, was –$13.05 trillion at the end of the second quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis (BEA). Assets totaled $28.87 trillion and liabilities were $41.92 trillion.

At the end of the first quarter, the net investment position was –$12.16 trillion (Table 1).”

The BEA explains further (https://www.bea.gov/sites/default/files/2020-09/intinv220_0.pdf):

“The –$882.6 billion change in the net investment position from the first quarter to the second quarter came from net financial transactions of –$77.5 billion and net other changes in position, such as price and exchange rate changes, of –$805.1 billion (Table A).

Coronavirus (COVID-19) Impact on Second Quarter 2020 International Investment Position

In the second quarter of 2020, U.S. assets and liabilities increased following the first quarter decreases that reflected the impact of the COVID-19 pandemic. A recovery in global stock prices, responding to monetary accommodation and fiscal stimulus measures in the United States and abroad, drove the increases in portfolio investment and direct investment assets and liabilities. Both U.S. deposit assets and liabilities decreased, as some currency swap transactions between the U.S. Federal Reserve System and several foreign central banks in Europe and Japan were allowed to expire amid improved liquidity conditions in the global dollar funding markets. These currency swaps were initiated in the first quarter to alleviate the dollar shortage overseas. The full economic effects of the COVID-19 pandemic cannot be quantified in the IIP statistics because the impacts are generally embedded in source data and cannot be separately identified. For more information on the currency swaps, see the technical note that accompanied the September 18 international transactions accounts news release.”

Chart VIII-2, Exchange Rate of US Dollars (USD) per Euro (EUR), Feb 21, 2020 to Feb 19, 2021

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/H10/default.htm

Chart VIII-3 of the Board of Governors of the Federal Reserve System provides the yield of the 10-year Treasury constant maturity note from 0.84 percent on Nov 27, 2020 to 1.54 percent on Feb 25, 2021. There is turbulence in financial markets originating in a combination of intentions of decreasing the US policy fed funds rate, quantitative easing in the United States, Europe and Japan and increasing perception of financial/economic risks.

Chart VIII-3, Yield of Ten-year Constant Maturity Treasury, Nov 27, 2020 to Feb 25, 2021

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/h15

Chart VIII-3A provides the yields of the Thirty and Ten-Year Constant Maturity Treasury from Jan 3, 2019 to Feb 11, 2021. The yield of the Thirty-Year Treasury was 2.92 percent on Jan 3, 2019 and yield of the Ten-Year Treasury was 2.56 percent. Yields show declining trend with oscillations. The final segment shows the 10-Year Yield climbing to 1.54 percent on Feb 25, 2021 and the 30-Year Yield climbing to 2.33 percent. The increase in yields has been accompanied by depreciation of the US Dollar relative to the Euro as shown in Chart VIII-2 above.

Chart VIII-3A, Yield of  Thirty-Year and Ten-year Constant Maturity Treasury, Jan 3, 2019 to Feb 25, 2021

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/h15

IX Conclusion. The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls, “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):

“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”

Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER and find evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:

“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”

The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.

Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy grows much faster during the expansion, compensating for the contraction and maintaining trend growth over the entire cycle. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. Lucas sharpens this analysis by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. The key indicator of growth of real income per capita, which is what a person earns after inflation, measures long-term economic growth and prosperity. A refined concept would include real disposable income per capita, which is what a person earns after inflation and taxes.

Table IB-1 provides the data required for broader comparison of long-term and cyclical performance of the United States economy. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (https://bea.gov/iTable/index_nipa.cfm) provide valuable information on long-term growth and cyclical behavior. First, Long-term performance. Using annual data, US GDP grew at the average rate of 3.2 percent per year from 1929 to 2019 and at 3.2 percent per year from 1947 to 2019. Real disposable income grew at the average yearly rate of 3.2 percent from 1929 to 2019 and at 3.7 percent from 1947 to 1999. Real disposable income per capita grew at the average yearly rate of 2.0 percent from 1929 to 2019 and at 2.3 percent from 1947 to 1999. US economic growth was much faster during expansions, compensating contractions in maintaining trend growth for whole cycles. Using annual data, US real disposable income grew at the average yearly rate of 3.5 percent from 1980 to 1989 and real disposable income per capita at 2.6 percent. The US economy has lost its dynamism in the current cycle: real disposable income grew at the yearly average rate of 2.2 percent from 2006 to 2019 and real disposable income per capita at 1.4 percent. Real disposable income grew at the average rate of 2.2 percent from 2007 to 2019 and real disposable income per capita at 1.4 percent. Table IB-1 illustrates the contradiction of long-term growth with the proposition of secular stagnation (Hansen 1938, 1938, 1941 with early critique by Simons (1942). Secular stagnation would occur over long periods. Table IB-1 also provides the corresponding rates of population growth that is only marginally lower at 0.8 to 0.9 percent recently from 1.1 percent over the long-term. GDP growth fell abruptly from 2.6 percent on average from 2000 to 2006 to 1.7 percent from 2006 to 2019 and 1.7 percent from 2007 to 2019 and real disposable income growth fell from 2.9 percent on average from 2000 to 2006 to 2.2 percent from 2006 to 2019 and 2.2 percent from 2007 to 2019. The decline of growth of real per capita disposable income is even sharper from average 1.9 percent from 2000 to 2006 to 1.4 percent from 2006 to 2019 and 1.4 percent from 2007 to 2019 while population growth was 0.8 percent on average. Lazear and Spletzer (2012JHJul122) provide theory and measurements showing that cyclic factors explain currently depressed labor markets. This is also the case of the overall economy. Second, first four quarters of expansion. Growth in the first four quarters of expansion is critical in recovering loss of output and employment occurring during the contraction. In the first four quarters of expansion from IQ1983 to IVQ1983: GDP increased 7.9 percent, real disposable personal income 5.5 percent and real disposable income per capita 4.5 percent. In the first four quarters of expansion from IIIQ2009 to IIQ2010: GDP increased 2.8 percent, real disposable personal income 1.0 percent and real disposable income per capita 0.2 percent. Third, first 45 quarters of expansion. In the expansion from IQ1983 to IQ1994: GDP grew 49.8 percent at the annual equivalent rate of 3.7 percent; real disposable income grew 42.6 percent at the annual equivalent rate of 3.2 percent; and real disposable income per capita grew 26.7 percent at the annual equivalent rate of 2.1 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

In the expansion from IIIQ2009 to IIIQ2020: GDP grew 22.9 percent at the annual equivalent rate of 1.8 percent; real disposable income grew 36.1 percent at the annual equivalent rate of 2.8 percent; and real disposable personal income per capita grew 26.4 percent at the annual equivalent rate of 2.1 percent. Disposable income growth increased by government transfers 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. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IQ1994: GDP grew 49.5 percent at the annual equivalent rate of 2.8 percent; real disposable personal income grew 51.1 percent at the annual equivalent rate of 2.9 percent; and real disposable personal income per capita 30.3 percent at the annual equivalent rate of 1.8 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm). In the entire cycle combining contraction and expansion from IVQ2007 to IIIQ2020: GDP grew 18.0 percent at the annual equivalent rate of 1.3 percent; real disposable personal income increased 38.1 percent at the annual equivalent rate of 2.6 percent; and real disposable personal income per capita grew 26.6 percent at the annual equivalent rate of 1.9 percent. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide convincing evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction of 4.0 percent from IVQ2007 to IIQ2009 and the financial crisis. There was sharp contraction of US GDP at the SAAR of 5.0 percent in IQ2020 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 (https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/11/dollar-devaluation-increasing.html). GDP contracted at the SAAR of 31.4 percent in IIQ2020 and expanded at 33.4 percent in IIIQ2020. The proposition of secular stagnation should explain a long-term process of decay and not the actual abrupt collapse of the economy and labor markets currently. The bottom part of Table I-IB shows that GDP contracted 3.4 percent cumulatively from IVQ2019 to IIIQ2020, RDPI grew 6.3 percent and RDPI per capita 5.9 percent. Table IIB-1 and Table IIB-1A and the text below analyze individual segments.

Table IB-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population Long-term and in 1983-94 and 2007-2020, %

Long-term Average ∆% per Year	GDP	Population
1929-2019	3.2	1.1
1947-2019	3.2	1.2
1947-1999	3.6	1.3
1980-1989	3.5	0.9
2000-2019	2.0	0.8
2000-2006	2.6	0.9
2006-2019	1.7	0.7
2007-2019	1.7	0.7
Long-term Average ∆% per Year	Real Disposable Income	Real Disposable Income per Capita	Population
1929-2019	3.2	2.0	1.1
1947-1999	3.7	2.3	1.3
2000-2019	2.4	1.6	0.8
2000-2006	2.9	1.9	0.9
2006-2019	2.2	1.4	0.7
2007-2019	2.2	1.4	0.7
Whole Cycles Average ∆% per Year
1980-1989	3.5	2.6	0.9
2006-2019	2.2	1.4	0.7
2007-2019	2.2	1.4	0.7
Comparison of Cycles	# Quarters	∆%	∆% Annual Equivalent
GDP
I83 to IV83 I83 to IQ87 I83 to II87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 I83 to II91 I83 to III91 I83 to IV91 I83 to I92 I83 to II92 I83 to III92 I83 to IV92 I83 to I93 I83 to II93 I83 to III93 I83 to IV93 I83 to I94	4 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45	7.9 23.0 24.4 25.4 27.6 28.3 29.9 30.7 32.5 33.8 34.8 35.8 36.1 37.6 38.1 38.2 36.9 36.3 37.3 38.0 38.5 40.2 41.7 43.1 44.6 44.8 45.7 46.4 48.3 49.8	7.9 5.0 5.0 4.9 5.0 4.9 4.9 4.8 4.8 4.8 4.7 4.6 4.5 4.5 4.4 4.3 4.0 3.8 3.8 3.8 3.7 3.7 3.7 3.7 3.8 3.7 3.6 3.6 3.7 3.7
RDPI
I83 to IV83 I83 to I87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 I83 to II91 I83 to III91 I83 to IV91 I83 to I92 I83 to II92 I83 to III92 I83 to IV92 I83 to I93 I83 to II93 I83 to III93 I83 to IV93 I83 to I94	4 17 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45	5.5 19.4 20.4 22.1 23.9 25.1 26.3 27.5 29.0 28.6 29.5 30.5 31.5 32.5 32.4 31.2 31.6 32.6 33.1 34.2 36.9 38.3 38.9 39.6 40.1 40.5 40.6 41.6 42.6	5.5 4.3 4.0 4.1 4.2 4.2 4.1 4.1 4.2 3.9 3.9 3.9 3.9 3.8 3.7 3.5 3.4 3.4 3.3 3.3 3.5 3.5 3.4 3.4 3.3 3.3 3.2 3.2 3.2
RDPI Per Capita
I83 to IV83 I83 to I87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 I83 to II91 I83 to III91 I83 to IV91 I83 to I92 I83 to II92 I83 to III92 I83 to IV92 I83 to I93 I83 to II93 I83 to III93 I83 to IV93 I83 to I94	4 17 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45	4.5 15.0 15.5 16.7 18.2 19.2 20.0 20.8 22.0 21.3 21.8 22.5 23.2 23.6 23.2 21.7 21.6 22.1 22.2 22.8 24.9 25.7 25.8 25.9 26.0 26.0 25.7 26.2 26.7	4.5 3.3 3.1 3.1 3.2 3.2 3.2 3.2 3.2 3.0 3.0 2.9 2.9 2.9 2.7 2.5 2.4 2.4 2.3 2.3 2.4 2.4 2.4 2.3 2.3 2.2 2.2 2.1 2.1
Whole Cycle IQ1980 to IQ1994
GDP	58	49.5	2.8
RDPI	58	51.1	2.9
RDPI per Capita	58	30.3	1.8
Population	58	16.0	1.0
GDP
III09 to II10 III09 to III20	4 45	2.8 22.9	2.8 1.8
RDPI
III09 to II10 III09 to IIIQ20	4 45	1.0 36.1	1.0 2.8
RDPI per Capita
III09 to II10 III09 to IIIQ20	4 45	0.2 26.4	0.2 2.1
Population
III09 to II10 III09 to IIIQ20	4 45	0.8 7.7	0.8 0.7
IVQ2007 to IIIQ2020	51
GDP	51	18.0	1.3
RDPI	51	38.1	2.6
RDPI per Capita	51	26.6	1.9
Population	51	9.1	0.7
IVQ2019 to IIIQ2020		Percent Change
GDP		-3.4
RDPI		6.3
RDPI per Capita		5.9
Population		0.4

RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

Table IB-1A, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population IVQ2019 to IIIQ2020

GDP	SAAR	∆%	∆% Annual Equivalent
IVQ 2019 to IQ2020	-5.0	-1.3	-5.1
IVQ2019 to IIQ2020	-31.4	-10.1	-19.2
IVQ2019 to IIIQ2020	33.4	-3.4	-4.5
RDPI
IVQ 2019 to IQ2020		0.6	2.4
IVQ2020 to IIQ2020		11.1	23.4
IVQ2019 to IIIQ2020		6.3	8.5
RDPI Per Capita
IVQ 2019 to IQ2020		0.5	2.0
IVQ2020 to IIQ2020		10.9	23.0
IVQ2019 to IIIQ2020		5.9	7.9
Population
IVQ 2019 to IQ2020		0.1	0.4
IVQ 2019 to IIQ2020		0.2	0.4
IVQ2019 to IIIQ2020		0.4	0.5

RDPI: Real Disposable Personal Income SAAR: Seasonally Adjusted Annual rate

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

There are seven basic facts illustrating the current economic disaster of the United States:

• GDP maintained trend growth in the entire business cycle from IQ1980 to IQ1993, including contractions and expansions. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm). GDP is well below trend in the entire business cycle from IVQ2007 to IQ2020, including contractions and expansions. GDP contracted the SAAR of 5.0 percent in IQ2020 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 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 (https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html).
• Per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IVQ2019 and in IIIQ2020.
• Level of employed persons increased in the 1980s but declined/stagnated cyclically into IVQ2019 with recent recovery and sharp contraction 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.
• Level of full-time employed persons increased in the 1980s but declined/stagnated cyclically into IIIQ2020 with recent recovery and sharp contraction 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.
• Level unemployed, unemployment rate and employed part-time for economic reasons fell in the recovery from the recessions in the 1980s but not substantially in relative cyclical terms in the recovery since IIQ209 with recent recovery frustrated by the probable global recession in the lockdown of economic activity 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.
• Wealth of households and nonprofit organizations soared in the 1980s but stagnated in historically relative real terms into IVQ2019 with recovery into IIIQ2020.
• Gross private domestic investment increased sharply from IQ1980 to IQ1994, but gross private domestic investment stagnated, and private fixed investment stagnated in relative cyclical terms from IVQ2007 into IIIQ2020 with recent recovery frustrated by 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.

There are references to adverse periods as “lost decades.” There is a more prolonged and adverse period in Table V-3A: the lost economic cycle of the Global Recession with economic growth underperforming below trend worldwide. Economic contractions were relatively high but not comparable to the decline of GDP during the Great Depression. In fact, during the Great Depression in the four years of 1930 to 1933, US GDP in constant dollars fell 26.3 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. The contraction of GDP in the current cycle of the Global Recession was much lower, 4.0 percent (https://cmpassocregulationblog.blogspot.com/2021/01/us-gdp-growing-at-saar-40-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html). Contractions are sharper in the global recession resulting from the COVID-19 event (https://www.bls.gov/covid19/employment-situation-covid19-faq-january-2021.htm). US economic growth has been at only 1.9 percent on average in the cyclical expansion in the 46 quarters from IIIQ2009 to IVQ2020 and 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. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IVQ2020 (https://www.bea.gov/sites/default/files/2021-01/gdp4q20_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2021/01/us-gdp-growing-at-saar-40-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ1992, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993, 3.6 percent from IQ1983 to IIQ1993, 3.6 percent from IQ1983 to IIIQ1993, 3.7 percent from IQ1983 to IVQ1993, 3.7 percent from IQ1983 to IQ1994, 3.7 percent from IQ1983 to IIQ1994 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2021/01/us-gdp-growing-at-saar-40-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IVQ2020 and 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 would have accumulated to 46.9 percent. GDP in IVQ2020 would be $23,147.0 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $4366.7 billion than actual $18,780.3 billion. There are more than four trillion dollars of GDP less than at trend, explaining the 32.8 million unemployed or underemployed equivalent to actual unemployment/underemployment of 19.0 percent of the effective labor force with the largest part originating 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 (https://cmpassocregulationblog.blogspot.com/2021/02/increasing-valuations-of-risks.html and earlier https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/covid19/employment-situation-covid19-faq-january-2021.htm). US GDP in IIIQ2020 is 18.9 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,780.3 billion in IVQ2020 or 19.1 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. 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 3.0 percent per year from Jan 1919 to Jan 2021. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.4324 in Jan 2021. The actual index NSA in Jan 2021 is 101.5095 which is 36.3 percent below trend. The underperformance of manufacturing in Mar-Aug 2020 originates partly in the earlier global recession augmented by the current 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. 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 (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 165.6159 in Jan 2021. The actual index NSA in Jan 2021 is 101.5095, which is 38.7 percent below trend. Manufacturing output grew at average 1.8 percent between Dec 1986 and Jan 2021. Using trend growth of 1.8 percent per year, the index would increase to 136.7697 in Jan 2021. The output of manufacturing at 101.5095 in Jan 2021 is 25.8 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 103.0185 in Jan 2021 or 19.3 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 167.3180 in Jan 2021. The NAICS index at 103.0185 in Jan 2021 is 38.4 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 133.0013 in Jan 2021. The NAICS index at 103.0185 in Jan 2021 is 22.5 percent below trend under this alternative calculation.

Table V-3A, Cycle 2007-2020, Percentage Contraction, Average Growth Rate in Expansion, Average Growth Rate in Whole Cycle and GDP Percent Below Trend

	Contraction ∆%	Expansion Average ∆%	Whole Cycle Average ∆%	Below Trend Percent
USA	4.0	1.9	1.4	18.9
Japan	8.9	0.8	-0.03	NA
Euro Area 19	5.7	0.9	0.3	21.7
France	3.9	0.9	0.5	14.8
Germany	7.0	1.4	0.7	NA
UK	5.9	0.021	0.0071	24.8

Note: AV: Average. Expansion and Whole Cycle AV ∆% calculated with quarterly growth, seasonally adjusted and quarterly adjusted when applicable, rates and converted into annual equivalent except for average quarterly rate for the UK. Combines the Global Recession after 2007 and the COVID-19 Global Recession after IQ2020.

Data reported periodically in this blog.

Source: Country Statistical Agencies https://www.bls.gov/bls/other.htm https://www.census.gov/programs-surveys/international-programs/about/related-sites.html

There is a critical issue of the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Tables IB-2 and IB2A provides data for analysis of these seven basic facts. The seven blocks of Table IB-2 and Table IB-2A are separated initially after individual discussion of each one followed by the full Table IB-2 and Table IB-2A.

1. Trend Growth.

i. As shown in Table IB-2, actual GDP grew cumulatively 49.0 percent from IQ1980 to IQ1994, which is relatively close to what trend growth would have been at 53.5 percent. Real GDP grew 49.5 percent from IVQ1979 to IQ1994. Rapid growth at the average annual rate of 3.7 percent per quarter during the expansion from IQ1983 to IQ1994 erased the loss of GDP of 4.7 percent during the contractions and maintained relatively close trend growth at 2.8 percent for GDP and 2.9 percent for real disposable personal income over the entire cycle. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://www.bea.gov/iTable/index_nipa.cfm).

ii. In contrast, cumulative growth from IVQ2007 to IIIQ2020 was 18.0 percent while trend growth would have been 45.8 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2020 and 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 would have accumulated to 45.8 percent. GDP in IIIQ2020 would be $22,981.0 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $4384.5 billion than actual $18,596.5 billion. There are more than four trillion dollars of GDP less than at trend, explaining the 31.8 million unemployed or underemployed equivalent to actual unemployment/underemployment of 18.4 percent of the effective labor force with the largest part originating 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 (https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/covid19/employment-situation-covid19-faq-december-2020.htm). US GDP in IIIQ2020 is 19.1 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,596.5 billion in IIIQ2020 or 18.0 percent at the average annual equivalent rate of 1.3 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. 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 3.0 percent per year from Dec 1919 to Dec 2020. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.0403 in Dec 2020. The actual index NSA in Dec 2020 is 100.2576 which is 37.0 percent below trend. The underperformance of manufacturing in Mar-Aug 2020 originates partly in the earlier global recession augmented by the current 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. 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 (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 165.1686 in Dec 2020. The actual index NSA in Dec 2020 is 100.2576, which is 39.3 percent below trend. Manufacturing output grew at average 1.7 percent between Dec 1986 and Dec 2020. Using trend growth of 1.7 percent per year, the index would increase to 134.8328 in Dec 2020. The output of manufacturing at 100.2576 in Dec 2020 is 25.6 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 101.5553 in Dec 2020 or 17.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 166.8392 in Dec 2020. The NAICS index at 101.5553 in Dec 2020 is 39.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 132.8147 in Dec 2020. The NAICS index at 101.5553 in Dec 2020 is 23.5 percent below trend under this alternative calculation.

Period IQ1980 to IQ1994
GDP SAAR USD Billions
IQ1980	6,837.6
IQ1994	10,189.0
∆% IQ1980 to IQ1994 (49.5 percent from IVQ1979 $6816.2 billion)	49.0
∆% Trend Growth IQ1980 to IQ1994	53.5
Period IVQ2007 to IIIQ2020
GDP SAAR USD Billions
IVQ2007	15,762.0
IIIQ2020	18,596.5
∆% IVQ2007 to IIIQ2020	18.0
∆% IVQ2007 to IIIQ2020 Trend Growth	45.8
Period IVQ2019 to IIIQ2020
GDP SAAR USD Billions
IVQ2019	19,254.0
IIIQ2020	18,596.5
∆% IVQ2019 to IIIQ2020	-3.4
∆% IVQ2019 to IIIQ2020 Trend Growth	9.3

2. Real Disposable Income

i. In the entire business cycle from IQ1980 to IQ1994, as shown in Table IB-2, per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 30.2 percent, which is close to what would have been trend growth of 33.3 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2020, per capita real disposable income increased 26.6 percent while trend growth would have been 28.7 percent. Income available after inflation and taxes is cyclically lower relative to the level before the contraction after 45 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions. Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2014, personal income grew at 5.3 percent in nominal terms while nominal disposable income grew at 4.9 percent in nominal terms and at 5.4 percent in real terms (Table 14 at https://www.bea.gov/system/files/2019-07/pi0619.pdf). In IQ2015, nominal personal income grew at 5.6 percent while nominal disposable income grew at 4.3 percent and at 6.1 percent in real terms (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIQ2015, nominal personal income grew at 3.8 percent while nominal disposable income grew at 3.2 percent and real disposable income grew at 1.1 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIIQ2015, nominal personal income grew at 3.5 percent while nominal disposable income grew at 3.9 percent and real disposable income grew at 2.8 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IVQ2015, nominal personal income grew at 2.2 percent while nominal disposable income grew at 2.0 percent and real disposable income at 2.3 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IQ2016, personal income grew at 2.0 percent while nominal disposable income grew at 3.4 percent and real disposable income grew at 3.1 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIQ2016, personal income grew at 2.4 percent while nominal disposable income grew at 2.1 percent and real disposable income fell at 0.3 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIIQ2016, personal income grew at 3.8 percent while nominal disposable income grew at 3.6 percent and real disposable income grew at 1.9 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IVQ2016, nominal personal income grew at 4.4 percent while disposable income grew at 4.4 percent and real disposable income increased at 2.5 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IQ2017, nominal personal income grew at 6.1 percent while nominal disposable income grew at 6.6 percent and real disposable income at 4.3 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIQ2017, nominal personal income grew at 4.8 percent while nominal disposable income grew at 5.3 percent and real disposable income at 2.4 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIIQ2017, nominal personal income grew at 5.0 percent while nominal disposable income grew at 4.4 percent and real disposable personal income grew at 2.7 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IVQ2017, nominal personal income grew at 6.2 percent while nominal disposable income grew at 5.0 percent and real disposable personal income grew at 2.3 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IQ2018, nominal personal income grew at 6.0 percent while nominal disposable income grew at 8.0 percent and real disposable income grew at 5.2 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIQ2018, nominal personal income grew at 4.7 percent while nominal disposable income grew at 4.9 percent and real disposable income grew at 3.6 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IIIQ2018, nominal personal income grew at 5.2 percent while nominal disposable income grew at 4.9 percent and real disposable income grew at 3.3 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IVQ2018, nominal personal income grew at 3.5 percent while nominal disposable income grew at 4.2 percent and real disposable income grew at 2.8 percent (Table 14 at https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf). In IQ2019, nominal personal income grew at 5.3 percent and at 3.3 real percent excluding transfer receipts while nominal disposable income grew at 3.9 percent and real disposable income grew at 3.3 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-10/pi0820.pdf). In IIQ2019, nominal personal income grew at 2.5 percent and at minus 0.4 real percent excluding transfer receipts while nominal disposable income grew at 1.5 percent and real disposable income grew at minus 1.0 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In IIIQ2019, nominal personal income grew at 2.6 percent and at 1.0 real percent excluding transfer receipts while nominal disposable income grew at 3.5 percent and real disposable income grew at 2.1 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In IVQ2019, nominal personal income grew at 3.6 percent and at 2.4 percent real excluding current transfers while nominal disposable income grew at 3.4 percent and real disposable income grew at 1.9 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In IQ2020, nominal personal income grew at 4.1 percent and increased at 1.5 percent real excluding current transfers while nominal disposable income grew at 3.9 percent and real disposable income grew at 2.6 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In IIQ2020, nominal personal income grew at 35.8 percent and decreased at 20.5 percent real excluding current transfers while nominal disposable income grew at 46.2 percent and real disposable income grew at 48.6 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In IIIQ2020, nominal personal income decreased at 10.2 percent and increased at 18.1 percent real excluding current transfers while nominal disposable income decreased at 13.2 percent and real disposable income decreased at 16.3 percent (Table 6 at https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf).

iii. Real disposable income per capita grew 5.9 percent from IVQ2019 to IIIQ2020 while trend growth would have been 6.1 percent. Government transfers sustained disposable income at the expense of future magnified government debt.

Period IQ1980 to IQ1994
Real Disposable Personal Income per Capita IQ1980 Chained 2012 USD	21,579
Real Disposable Personal Income per Capita IQ1994 Chained 2012 USD	28,089
∆% IQ1980 to IQ1994 (30.3 percent from IVQ1979 $21,565 billion)	30.2
∆% Trend Growth	33.3
Period IVQ2007 to IIIQ2020
Real Disposable Personal Income per Capita IVQ2007 Chained 2012 USD	38,036
Real Disposable Personal Income per Capita IIIQ2020 Chained 2012 USD	48,142
∆% IVQ2007 to IIIQ2020	26.6
∆% Trend Growth	28.7
Period IVQ2019 to IIIQ2020
Real Disposable Personal Income per Capita IVQ2019 Chained 2012 USD	45,459
Real Disposable Personal Income per Capita IIIQ2020 Chained 2012 USD	48,142
∆% IVQ2019 to IIIQ2020	5.9
∆% Trend Growth	6.1

3. Number of Employed Persons

i. As shown in Table IB-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 120.844 million NSA in IQ1994 or by 22.7 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

ii. In contrast, during the entire business cycle the number employed nearly stagnated from 146.334 million in IVQ2007 to 147.796 million in IIIQ2020 or by 1.0 percent higher. There are 31.8 million unemployed or underemployed equivalent to actual unemployment/underemployment of 18.4 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html) 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. The number employed in Dec 2020 was 149.613 million (NSA) or 2.298 million more people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 261.230 million in Dec 2020 or by 29,272 million. The number employed increased 1.6 percent from Jul 2007 to Dec 2020 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 12.6 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employed as percent of population of 231.958 million). The same ratio in Dec 2020 would result in 165.881 million jobs (0.635 multiplied by noninstitutional civilian population of 261.230 million). There are effectively 16.268 million fewer jobs in Dec 2020 than in Jul 2007, or 165.881 million minus 149.613 million. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

iii. The number employed decreased by 6.8 percent from 158.504 million in IVQ2019 to 147.796 million in the current 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.

Period IQ1980 to IQ1994
Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IQ1994 NSA End of Quarter	120.844
∆% Employed IQ1980 to IQ1994	22.7
Period IVQ2007 to IIIQ2020
Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIIQ2020 NSA End of Quarter	147.796
∆% Employed IVQ2007 to IIIQ2020	1.0
Period IVQ2019 to IIIQ2020
Employed Millions IVQ2019 NSA End of Quarter	158.504
Employed Millions IIIQ2020 NSA End of Quarter	147.796
∆% Employed IVQ2019 to IIIQ2020	-6.8

4. Number of Full-Time Employed Persons

i. As shown in Table IB-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 96.794 million NSA in IQ1994 or 19.1 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time increased from 121.042 million in IVQ2007 to 122.998 million in IIIQ2020 or 1.6 percent. The magnitude of the stress in US labor markets is magnified by the increase in the civilian noninstitutional population of the United States from 231.958 million in Jul 2007 to 261.230 million in Dec 2020 or by 29.272 million (https://www.bls.gov/data/). The number with full-time jobs in Dec 2020 is 124.415 million, 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, which is higher by 1.196 million relative to the peak of 123.219 million in Jul 2007. The ratio of full-time jobs of 123.219 million in Jul 2007 to civilian noninstitutional population of 231.958 million was 53.1 percent. If that ratio had remained the same, there would be 138.713 million full-time jobs with population of 261.230 million in Dec 2020 (0.531 x 261.230) or 14.298 million fewer full-time jobs relative to actual 124.415 million. There appear to be around 14 million fewer full-time jobs in the US than before the global recession while population increased around 29 million. Mediocre GDP growth is the main culprit of the fractured US labor market augmented 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.

iii. The number employed full-time decreased 6.2 percent from 131.142 million in IVQ2019 to 122.998 million in IIIQ2020 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.

Period IQ1980 to IQ1994
Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IQ1994 NSA End of Quarter	96.794
∆% Full-time Employed IQ1980 to IQ1994	19.1
Period IVQ2007 to IIIQ2020
Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIIQ2020 NSA End of Quarter	122.998
∆% Full-time Employed IVQ2007 to IIIQ2020	1.6
Period IVQ2019 to IIIQ2020
Employed Full-time Millions IVQ2019 NSA End of Quarter	131,142
Employed Full-time Millions IIIQ2020 NSA End of Quarter	122.998
∆% Full-time Employed IVQ2019 to IIIQ2020	-6.2

5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.

i. As shown in Table IB-2 and in the following block, in the cycle from IQ1980 to IQ1994: (a) The rate of unemployment was higher at 6.8 percent in IQ1994 relative to 6.6 percent in IQ1980. (b) The number unemployed increased from 6.983 million in IQ1980 to 8.874 million in IQ1994 or 27.1 percent. (c) The number employed part-time for economic reasons increased 37.6 percent from 3.624 million in IQ1980 to 4.987 million in IQ1994. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2020: (a) The rate of unemployment increased from 4.8 percent in IVQ2007 to 7.7 percent in IIIQ2020. (b) The number unemployed increased 66.6 percent from 7.371 million in IVQ2007 to 12.277 million in IIIQ2020. (c) The number employed part-time for economic reasons because they could not find any other job increased 25.4 percent from 4.750 million in IVQ2007 to 5.955 million in IIIQ2020. (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 12.4 percent in IIIQ2020. 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, is deteriorating sharply labor markets.

iii. The rate of unemployment increased from 3.4 percent in IVQ2019 to 7.7 percent in IIIQ2020. The number unemployed increased 123.1 from 5.503 million in IVQ2019 to 12.277 million in IIIQ2020. The number employed part-time for economic reasons increased 40.2 percent from 4.247 million in IVQ2019 to 5.955 million in IIIQ2020. U6 increased from 6.7 in IVQ2019 to 12.4 in IIIQ2020.

Period IQ1980 to IQ1994
Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IQ1994 NSA End of Quarter	6.8
Unemployed IQ1980 Millions NSA End of Quarter	6.983
Unemployed IQ994 Millions NSA End of Quarter	8.874
∆%	27.1
Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter	3.624
Employed Part-time Economic Reasons Millions IQ1994 NSA End of Quarter	4.987
∆%	37.6
Period IVQ2007 to IIIQ2020
Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIIQ2020 NSA End of Quarter	7.7
Unemployed IVQ2007 Millions NSA End of Quarter	7.371
Unemployed IIIQ2020 Millions NSA End of Quarter	12.277
∆%	66.6
Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIIQ2020 NSA End of Quarter	5.955
∆%	25.4
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIIQ2020	12.4
Period IVQ2019 to IIIQ2020
Unemployment Rate IVQ2019 NSA End of Quarter	3.4
Unemployment Rate IIIQ2020 NSA End of Quarter	7.7
Unemployed IVQ2019 Millions NSA End of Quarter	5.503
Unemployed IIIQ2020 Millions NSA End of Quarter	12.277
∆%	123.1
Employed Part-time Economic Reasons IVQ2019 Millions NSA End of Quarter	4.247
Employed Part-time Economic Reasons Millions IIIQ2020 NSA End of Quarter	5.955
∆%	40.2
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2019	6.7
IIIQ2020	12.4

6. Wealth of Households and Nonprofit Organizations.

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IQ1994 and from IVQ2007 to IVQ2019 is in Table IIA-5. There is also the comparison of net worth from IV2019 to IIIQ2020 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. The data reveal the following facts for the cycles in the 1980s:

• IVQ1979 to IQ1994. Net worth increased 194.3 percent from IVQ1979 to IQ1994, the all items CPI index increased 91.9 percent from 76.7 in Dec 1979 to 147.2 in Mar 1994 and real net worth increased 53.4 percent.
• IQ1980 to IVQ1985. Net worth increased 66.5 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 22.0 percent.
• IVQ1979 to IVQ1985. Net worth increased 70.0 percent, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 19.3 percent.
• IQ1980 to IQ1989. Net worth increased 121.5 percent, the all items CPI index increased 52.7 percent from 80.1 in Mar 1980 to 122.3 in Mar 1989 and real net worth increased 45.0 percent.
• IQ1980 to IIQ1989. Net worth increased 126.0 percent, the all items CPI index increased 54.9 percent from 80.1 in Mar 1980 to 124.1 in Jun 1989 and real net worth increased 45.9 percent.
• IQ1980 to IIIQ1989. Net worth increased 131.8 percent, the all items CPI index increased 56.1 percent from 80.1 in Mar 1980 to 125.0 in Sep 1989 and real net worth increased 48.6 percent.
• IQ1980 to IVQ1989. Net worth increased 136.2 percent, the all items CPI index increased 57.4 from 80.1 in Mar 1980 to 126.1 in Dec 1989 and real net worth increased 50.0 percent.
• IQ1980 to IQ1990. Net worth increased 137.6 percent, the all items CPI index increased 60.7 percent from 80.1 in Mar 1980 to 128.7 in Mar 1990 and real net worth increased 47.9 percent.
• IQ1980 to IIQ1990. Net worth increased 140.1 percent, the all items CPI index increased 62.2 percent from 80.1 in Mar 1980 to 129.9 in Jun 1990 and real net worth increased 48.1 percent
• IQ1980 to IIIQ1990. Net worth increased 138.3 percent, the all items CPI index increased 65.7 percent from 80.1 in Mar 1980 to 132.7 in Jun 1990 and real net worth increased 43.9 percent.
• IQ1980 to IVQ1990. Net worth increased 143.0 percent, the all items CPI index increased 67.0 percent from 80.1 in Mar 1980 to 133.8 in Dec 1990 and real net worth increased 45.5 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). This new cyclical contraction explains the contraction of net worth in IIIQ1990
• IQ1980 to IQ1991. Net worth increased 149.3 percent, the all items CPI index increased 68.5 percent from 80.1 in Mar 1980 to 135.0 in Mar 1991 and real net worth increased 47.9 percent.
• IQ1980 to IIQ1991. Net worth increased 149.8 percent, the all items CPI index increased 69.8 percent from 80.1 in Mar 1980 to 136.0 in Jun 1991 and real net worth increased 47.1 percent.
• IQ1980 to IIIQ1991. Net worth increased 152.8 percent, the all items CPI index increased 71.3 percent from 80.1 in Mar 1980 to 137.2 in Sep 1991 and real net worth increased 47.6 percent.
• IQ1980 to IVQ1991. Net worth increased 159.1 percent, the all items CPI index increased 72.2 percent from 80.1 in Mar 1980 to 137.9 in Dec 1991 and real net worth increased 50.5 percent.
• IQ1980 to IQ1992. Net worth increased 160.1 percent, the all items CPI index increased 73.9 percent from 80.1 in Mar 1980 to 139.3 in Mar 1992 and real net worth increased 49.6 percent.
• IQ1980 to IIQ1992. Net worth increased 161.0 percent, the all items CPI index increased 75.0 percent from 80.1 in Mar 1980 to 140.2 in Jun 1992 and real net worth increased 49.1 percent.
• IQ1980 to IIIQ1992. Net worth increased 164.8 percent, the all items CPI index increased 76.4 percent from 80.1 in Mar 1980 to 141.3 in Sep 1992 and real net worth increased 50.1 percent.
• IQ1980 to IVQ1992. Net worth increased 171.2, the all items CPI index increased 77.2 percent from 80.1 in Mar 1980 to 141.9 in Dec 1992 and real net worth increased 53.1 percent.
• IQ1980 to IQ1993. Net worth increased 174.8 percent, the all items CPI increased 79.3 percent from 80.1 in Mar 1980 to 143.6 in Mar 1993 and real net worth increased 53.3 percent.
• IQ1980 to IIQ1993. Net worth increased 177.6 percent, the all items CPI increased 80.3 percent from 80.1 in Jun 1980 to 144.4 in Jun 1993 and real net worth increased 54.0 percent.
• IQ1980 to IIIQ1993. Net worth increased 181.9 percent, the all items CPI increased 81.1 percent from 80.1 in Jun 1980 to 145.1 in Sep 1993 and real net worth increased 55.6 percent.
• IQ1980 to IVQ1993. Net worth increased 186.5 percent, the all items CPI increased 82.0 percent from 80.1 in Jun 1980 to 145.8 in Dec 1993 and real net worth increased 57.4 percent.
• IQ1980 to IQ1994. Net worth increased 188.2 percent, the all items CPI increased 83.8 percent from 80.1 in Jun 1980 to 147.2 in Mar 1994 and real net worth increased 56.8 percent.

There is comparatively weaker performance in the economic cycle of the global recession of 2007:

• IVQ2007 to IVQ2019. Net worth increased 67.4 percent, the all items CPI increased 22.3 percent from 210.036 in Dec 2007 to 256.974 in Dec 2019 and real net worth increased 36.8 percent.

There is sharp contraction followed by recovery 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:

• IVQ2019 to IIIQ2020. Net worth increased 4.4 percent, the all items CPI increased 1.3 percent from 256.974 in IVQ2019 to 250.280 in IIIQ2020 and real net worth increased 3.1 percent. Net worth decreased by $6,885.9 billion from IVQ2019 to IQ2020 or by 5.8 percent 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. Net worth increased $8,293.9 billion from IQ2020 to IIQ2020 or 7.4 percent. Net worth increased 1.2 percent from IVQ2019 to IIQ2020. Net worth increased $5,2253.3 billion from IVQ2019 to IIIQ2020 or 4.4 percent. Real estate increased $1,340.7 billion from IVQ2019 to IIIQ2020 or 4.0 percent. Financial assets increased $3,932.8 billion from IVQ2019 to IIIQ2020 or 4.1 percent. Stock markets recovered in Apr to Dec 2020. Corporate equities increased $1,089.7 billion from IVQ2019 to IIIQ2020 or 5.1 percent.

The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 1.8 percent on average in the cyclical expansion in the 45 quarters from IIIQ2009 to IIIQ2020 and 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. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the third estimate of GDP for IIIQ2020 (https://www.bea.gov/sites/default/files/2020-12/gdp3q20_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/11/dollar-devaluation-increasing.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ1992, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993, 3.6 percent from IQ1983 to IIQ1993, 3.6 percent from IQ1983 to IIIQ1993, 3.7 percent from IQ1983 to IVQ1993, 3.7 percent from IQ1983 to IQ1994 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/11/dollar-devaluation-increasing.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIIQ2020 and 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 would have accumulated to 45.8 percent. GDP in IIIQ2020 would be $22,981.0 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $4384.5 billion than actual $18,596.5 billion. There are more than four trillion dollars of GDP less than at trend, explaining the 31.8 million unemployed or underemployed equivalent to actual unemployment/underemployment of 18.4 percent of the effective labor force with the largest part originating 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 (https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/covid19/employment-situation-covid19-faq-december-2020.htm). US GDP in IIIQ2020 is 19.1 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,596.5 billion in IIIQ2020 or 18.0 percent at the average annual equivalent rate of 1.3 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. 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 3.0 percent per year from Dec 1919 to Dec 2020. Growth at 3.0 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 159.0403 in Dec 2020. The actual index NSA in Dec 2020 is 100.2576 which is 37.0 percent below trend. The underperformance of manufacturing in Mar-Aug 2020 originates partly in the earlier global recession augmented by the current 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. 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 (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 165.1686 in Dec 2020. The actual index NSA in Dec 2020 is 100.2576, which is 39.3 percent below trend. Manufacturing output grew at average 1.7 percent between Dec 1986 and Dec 2020. Using trend growth of 1.7 percent per year, the index would increase to 134.8328 in Dec 2020. The output of manufacturing at 100.2576 in Dec 2020 is 25.6 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 101.5553 in Dec 2020 or 17.6 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 166.8392 in Dec 2020. The NAICS index at 101.5553 in Dec 2020 is 39.1 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 132.8147 in Dec 2020. The NAICS index at 101.5553 in Dec 2020 is 23.5 percent below trend under this alternative calculation.

Table IIA-5, Net Worth of Households and Nonprofit Organizations in Billions of Dollars, IVQ1979 to IQ1994 and IVQ2007 to IIIQ2020

Period IQ1980 to IQ1994
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ1979 IQ1980	9,104.3 9,297.0
IVQ1985 IIIQ1986 IVQ1986 IQ1987 IIQ1987 IIIQ1987 IVQ1987 IQ1988 IIQ1988 IIIQ1988 IVQ1988 IQ1989 IIQ1989 IIIQ1989 IVQ1989 IQ1990 IIQ1990	15,481.3 16,537.2 17,107.6 17,731.7 18,023.6 18,435.6 18,381.2 18,890.3 19,328.2 19,649.2 20,156.4 20,589.4 21,011.8 21,554.4 21,957.1 22,086.0 22,324.4
III1990	22,156.6
IV1990	22,590.8
I1991	23,175.6
IIQ1991	23,224.1
IIIQ1991	23,503.9
IVQ1991	24,090.5
IQ1992	24,181.0
IIQ1992	24,266.7
IIIQ1992	24,617.2
IVQ1992	25,216.3
IQ1993	25,546.1
IIQ1993	25,808.7
IIIQ1993	26,205.4
IVQ1993	26,639.4
IQ1994	26,797.7
∆ USD IVQ1979 to IVQ1985 IVQ1979 to IQ1994 IQ1980-IVQ1985 IQ1980-IIIQ1986 IQ1980-IVQ1986 IQ1980-IQ1987 IQ1980-IIQ1987 IQ1980-IIIQ1987 IQ1980-IVQ1987 IQ1980-IQ1988 IQ1980-IIQ1988 IQ1980-IIIQ1988 IQ1980-IVQ1988 IQ1980-IQ1989 IQ1980-IIQ1989 IQ1980-IIIQ1989 IQ1980-IVQ1989 IQ1980-IQ1990 IQ1980-IIQ1990	+6,377.0 ∆%70.0 R∆19.3 +17,657.4 ∆%194.3 R∆%53.4 +6,184.3∆%66.5 R∆%22.0 +7,240.2 ∆%77.9 R∆%29.3 +7,810.6 ∆%84.0 R∆%33.4 +8,434.7 ∆%90.7 R∆%36.3 +8,726.6 ∆%93.9 R∆%36.8 +9,138.6 ∆%98.3 R∆%38.1 +9084.2 ∆%97.7 R∆%37.2 +9593.3 ∆%103.2 R∆%39.7 10,031.2 ∆%107.9 R∆%41.1 +10,352.2 ∆%111.3 R∆%41.3 +10,859.4 ∆%116.8 R∆%44.1 +11292.4 ∆%121.5 R∆%45.0 +11,714.8 ∆%126.0 R∆% 45.9 +12,257.4 ∆%131.8 R∆% 48.6 +12,660.1 ∆%136.2 R∆%50.0 +12,789.0 ∆%137.6 R∆%47.9 +13,027.4 ∆%140.1 R∆%48.1
IQ1980-IIIQ1990	+12,859.6∆%138.3 R∆%43.9
IQ1980-IVQ1990	+13,293.8 ∆%143.0 R∆%45.5
IQ1980-IQ1991	+13,878.6 ∆%149.3 R∆%47.9
IQ1980-IIQ1991	+13,927.1 ∆%149.8 R∆%47.1
IQ1980-IIIQ1991	+14,206.9 ∆%152.8 R∆%47.6
IQ1980-IVQ1991	+14,793.5 ∆%159.1 R∆%50.5
IQ1980-IQ1992	+14,884.0 ∆%160.1 R∆%49.6
IQ1980-IIQ1992	+14,969.6 ∆%161.0 R∆%49.1
IQ1980-IIIQ1992	+15,320.6 ∆%164.8 R∆%50.1
IQ1980-IVQ1992	+15,919.9 ∆%171.2 R∆%53.1
IQ1980-IQ1993	+16,249.1 ∆%174.8 R∆%53.3
IQ1980-IIQ1993	+16,511.7 ∆%177.6 R∆% 54.0
IQ1980-IIIQ1993	+16,908.4 ∆%181.9 R∆% 55.6
IQ1980-IVQ1993	+17342.4 ∆%186.5 R∆% 57.4
IQ1980-IQ1994	+17500.7 ∆%188.2 R∆% 56.8
Period IVQ2007 to IVQ2019
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ2007	70,659.4
IVQ2019	118,294.4
∆ USD Billions	+47635.0 ∆%67.4 R∆% 36.8
Period IVQ2019 to IIIQ2020
IVQ2019	118,294.4
IIIQ2020	123,519.7
IVQ2019 to IIIQ2020
∆ USD Billions	+5,225.3 ∆%4.4 R∆%3.1

Net Worth = Assets – Liabilities. R∆% real percentage change or adjusted for CPI percentage change.

Notes: Deposits: Total Time and Savings Deposits FL15303005; Net Worth = Assets – Liabilities

Source: Board of Governors of the Federal Reserve System. 2020. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2020. Washington, DC, Federal Reserve System, Dec 10. https://www.federalreserve.gov/releases/z1/current/default.htm

7. Gross Private Domestic Investment.

i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IQ1994, from IVQ2007 to IIIQ2020 and from IVQ2019 to IIIQ2020 is in the following block and in Table IB-2 and Table IB-2A. Gross private domestic investment increased from $933.1 billion in IQ1980 to $1,424.4 billion in IQ1994 or by 52.7 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://bea.gov/iTable/index_nipa.cfm).

ii In the current cycle, gross private domestic investment increased from $2,653.1 billion in IVQ2007 to $3,329.7 billion in IIIQ2020, or 25.5 percent. Private fixed investment edged from $2,630.0 billion in IVQ2007 to $3,314.7 billion in IIIQ2020 or increase by 26.0 percent. Private fixed investment contracted at the SAAR of minus 1.4 percent in IQ2020 and minus 29.2 percent in IIQ2020, expanding at 31.3 percent in IIIQ2020 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.

iii. Gross private domestic investment decreased 2.4 percent from $3413.3 billion in IVQ2019 to $3329.7 billion in IIIQ2020. Private fixed investment contracted 2.1 percent from $3387.2 percent in IVQ2019 to $3314.7 in IIIQ2020.

Period IQ1980-IQ1994
Gross Private Domestic Investment USD 2009 Billions
IQ1980	933.1
IQ1994	1424.4
∆%	52.7

Period IVQ2007 to IIIQ2020
Gross Private Domestic Investment USD 2012 Billions
IVQ2007	2,653.1
IIIQ2020	3,329.7
∆%	25.5
Private Fixed Investment USD 2012 Billions
IVQ2007	2,630.0
IIIQ2020	3,314.7
∆%	26.0
Period IVQ2019 to IIIQ2020
Gross Private Domestic Investment USD Billions
IVQ2019	3,413.3
IIIQ2020	3,329.7
∆%	-2.4
Private Fixed Investment USD 2009 Billions
IVQ2019	3,387.2
IIIQ2020	3,314.7
∆%	-2.1

Table IB-2, US, GDP and Real Disposable Personal Income Per capita Actual and Trend Growth and Employment, 1980-1994 and 2007-2020, SAAR USD Billions, Millions of Persons and ∆%

Period IQ1980 to IQ1994
GDP SAAR USD Billions
IQ1980	6,837.6
IQ1994	10,189.0
∆% IQ1980 to IQ1994 (49.5 percent from IVQ1979 $6816.2 billion)	49.0
∆% Trend Growth IQ1980 to IQ1994	53.5
Real Disposable Personal Income per Capita IQ1980 Chained 2012 USD	21,579
Real Disposable Personal Income per Capita IQ1994 Chained 2012 USD	28,089
∆% IQ1980 to IQ1994 (30.3 percent from IVQ1979 $21,565 billion)	30.2
∆% Trend Growth	33.3
Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IQ1994 NSA End of Quarter	120.844
∆% Employed IQ1980 to IQ1994	22.7
Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IQ1994 NSA End of Quarter	96.794
∆% Full-time Employed IQ1980 to IQ1994	19.1
Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IQ1994 NSA End of Quarter	6.8
Unemployed IQ1980 Millions NSA End of Quarter	6.983
Unemployed IQ994 Millions NSA End of Quarter	8.874
∆%	27.1
Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter	3.624
Employed Part-time Economic Reasons Millions IQ1994 NSA End of Quarter	4.987
∆%	37.6
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ1979	9,104.3
IQ1994	26,797.7
∆ USD Billions	+17,657.4
∆% CPI Adjusted	53.4
Gross Private Domestic Investment USD 2012 Billions
IQ1980	933.1
IQ1994	1424.4
∆%	52.7
Period IVQ2007 to IIIQ2020
GDP SAAR USD Billions
IVQ2007	15,762.0
IIIQ2020	18,596.5
∆% IVQ2007 to IIIQ2020	18.0
∆% IVQ2007 to IIIQ2020 Trend Growth	45.8
Real Disposable Personal Income per Capita IVQ2007 Chained 2012 USD	38,036
Real Disposable Personal Income per Capita IIIQ2020 Chained 2012 USD	48,142
∆% IVQ2007 to IIIQ2020	26.6
∆% Trend Growth	28.7
Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIIQ2020 NSA End of Quarter	147.796
∆% Employed IVQ2007 to IIIQ2020	1.0
Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIIQ2020 NSA End of Quarter	122.998
∆% Full-time Employed IVQ2007 to IIIQ2020	1.6
Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIIQ2020 NSA End of Quarter	7.7
Unemployed IVQ2007 Millions NSA End of Quarter	7.371
Unemployed IIIQ2020 Millions NSA End of Quarter	12.277
∆%	66.6
Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIIQ2020 NSA End of Quarter	5.955
∆%	25.4
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIIQ2020	12.4
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ2007	70,659.4
IIIQ2020	123,519.7
∆ USD Billions	+52,860.3 ∆%74.8 R∆%41.1
Gross Private Domestic Investment USD Billions
IVQ2007	2,653.1
IIIQ2020	3,329.7
∆%	25.5
Private Fixed Investment USD 2009 Billions
IQ2007	2,630.0
IIIQ2020	3,314.7
∆%	26.0

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm Source:

Board of Governors of the Federal Reserve System. 2020. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2020. Washington, DC, Federal Reserve System, Dec 10, 2020. https://www.federalreserve.gov/releases/z1/current/default.htm

Table IIB-A, Economic Cycle IVQ2019 to IIIQ2020

Period IVQ2019 to IIIQ2020
GDP SAAR USD Billions
IVQ2019	19,254.0
IIIQ2020	18,596.5
∆% IVQ2019 to IIIQ2020	-3.4
∆% IVQ2019 to IIIQ2020 Trend Growth	9.3
Real Disposable Personal Income per Capita IVQ2019 Chained 2012 USD	45,459
Real Disposable Personal Income per Capita IIIQ2020 Chained 2012 USD	48,142
∆% IVQ2019 to IIIQ2020	5.9
∆% Trend Growth	6.1
Employed Millions IVQ2019 NSA End of Quarter	158.504
Employed Millions IIIQ2020 NSA End of Quarter	147.796
∆% Employed IVQ2019 to IIIQ2020	-6.8
Employed Full-time Millions IVQ2019 NSA End of Quarter	131,142
Employed Full-time Millions IIIQ2020 NSA End of Quarter	122.998
∆% Full-time Employed IVQ2019 to IIIQ2020	-6.2
Unemployment Rate IVQ2019 NSA End of Quarter	3.4
Unemployment Rate IIIQ2020 NSA End of Quarter	7.7
Unemployed IVQ2019 Millions NSA End of Quarter	5.503
Unemployed IIIQ2020 Millions NSA End of Quarter	12.277
∆%	123.1
Employed Part-time Economic Reasons IVQ2019 Millions NSA End of Quarter	4.247
Employed Part-time Economic Reasons Millions IIIQ2020 NSA End of Quarter	5.955
∆%	40.2
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2019	6.7
IIIQ2020	12.4
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ2019	118,294.4
IIIQ2020	123,519.7
∆ USD Billions	+5,225.3 ∆%4.4 R∆%3.1
Gross Private Domestic Investment USD Billions
IVQ2019	3,413.3
IIIQ2020	3,329.7
∆%	-2.4
Private Fixed Investment USD 2009 Billions
IVQ2019	3,387.2
IIIQ2020	3,314.7
∆%	-2.1

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm Source:

Board of Governors of the Federal Reserve System. 2020. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2020. Washington, DC, Federal Reserve System, Dec 10, 2020. https://www.federalreserve.gov/releases/z1/current/default.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 IIIQ2020 at 1.8 percent on average is in contrast with 3.7 percent on average in the expansion from IQ1983 to IQ1994 (https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/11/dollar-devaluation-increasing.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 31.8 million or 18.4 percent of the effective labor force in Dec 2020 (https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html) with much lower hiring than in the period before the current cycle (https://cmpassocregulationblog.blogspot.com/2021/01/total-nonfarm-hires-jump-from-5864.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/total-nonfarm-hires-jump-from-5864.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 IIIQ2020 at 1.8 percent on average is in contrast with 3.7 percent on average in the expansion from IQ1983 to IQ1994 (https://cmpassocregulationblog.blogspot.com/2020/12/us-gdp-growing-at-saar-334-percent-in.html and earlier https://cmpassocregulationblog.blogspot.com/2020/11/dollar-devaluation-increasing.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 31.8 million or 18.4 percent of the effective labor force in Dec 2020 (https://cmpassocregulationblog.blogspot.com/2021/01/decrease-in-dec-2020-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/dollar-devaluation-increasing.html) with much lower hiring than in the period before the current cycle (https://cmpassocregulationblog.blogspot.com/2021/01/total-nonfarm-hires-jump-from-5864.html and earlier https://cmpassocregulationblog.blogspot.com/2020/12/total-nonfarm-hires-jump-from-5864.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.

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