CMP Associates Regulation Blog

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

Chart IIA-1A of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. The low average rate of growth of GDP of 2.0 percent during the expansion beginning since IIIQ2009 does not deteriorate further the trade balance. Higher rates of growth may cause sharper deterioration.

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

Source: US Census Bureau

Table IIA-2B provides the US international trade balance, exports and imports of goods and services on an annual basis from 1960 to 2020. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit as percent of GDP at 2.3 percent in IIIQ2019 decreases to 1.9 percent in IVQ2019. The current account deficit increases to 2.1 percent in IQ2020. The current account deficit increases to 3.3 percent in IIQ2020. The current account deficit increases to 3.4 percent in IIIQ2020. The current account deficit increases to 3.5 percent of GDP in IVQ2020. 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 $13.1 trillion in IIQ2020. The absolute value of the net international investment position increases to $13.95 trillion in IIIQ2020. The absolute value of the net international position increases to $14.1 trillion in IVQ2020. The ratio of the current account deficit to GDP has stabilized close 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets. The final rows of Table IIA-2B show marginal improvement of the trade deficit from $554,522 million in 2011 to lower $525,906 million in 2012 with exports growing 4.8 percent and imports 2.8 percent. The trade balance improved further to deficit of $446,829 million in 2013 with growth of exports of 2.9 percent while imports virtually stagnated, decreasing 0.5 percent. The trade deficit deteriorated in 2014 to $484,144 million with growth of exports of 3.4 percent and of imports of 4.2 percent. The trade deficit deteriorated in 2015 to $491,261 million with decrease of exports of 4.7 percent and decrease of imports of 3.7 percent. The trade deficit improved in 2016 to $481,475 million with decrease of exports of 1.8 percent and decrease of imports of 1.8 percent. The trade deficit deteriorated in 2017 to $512,739 million with growth of exports of 6.8 percent and of imports of 6.8 percent. The trade deficit deteriorated in 2018 to $580,950 million with growth of exports of 6.2 percent and of imports of 7.4 percent. The trade deficit improved in 2019 to $576,341 million with decrease of exports of 0.4 percent and decrease of imports of 0.5 percent. The trade deficit deteriorated to $676,684 million in 2020 with decrease of exports of 15.6 percent and decrease of imports of 9.5 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. Growth and commodity shocks under alternating inflation waves (https://cmpassocregulationblog.blogspot.com/2021/05/us-gdp-growing-at-saar-64-percent-in_29.html and earlier https://cmpassocregulationblog.blogspot.com/2021/04/rising-inflation-world-inflation-waves.html) have deteriorated the trade deficit from the low of $394,771 million in 2009.

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

	Balance	Exports	∆%	Imports	∆%
1960	3,508	25,939		22,433
1961	4,194	26,403	1.8	22,208	-1.0
1962	3,371	27,722	5.0	24,352	9.7
1963	4,210	29,620	6.8	25,411	4.3
1964	6,022	33,340	12.6	27,319	7.5
1965	4,664	35,285	5.8	30,621	12.1
1966	2,939	38,926	10.3	35,987	17.5
1967	2,604	41,333	6.2	38,729	7.6
1968	250	45,544	10.2	45,292	16.9
1969	90	49,220	8.1	49,130	8.5
1970	2,255	56,640	15.1	54,385	10.7
1971	-1,301	59,677	5.4	60,980	12.1
1972	-5,443	67,223	12.6	72,664	19.2
1973	1,900	91,242	35.7	89,342	23.0
1974	-4,293	120,897	32.5	125,189	40.1
1975	12,403	132,585	9.7	120,181	-4.0
1976	-6,082	142,716	7.6	148,798	23.8
1977	-27,247	152,302	6.7	179,547	20.7
1978	-29,763	178,428	17.2	208,191	16.0
1979	-24,566	224,132	25.6	248,696	19.5
1980	-19,407	271,835	21.3	291,242	17.1
1981	-16,172	294,399	8.3	310,570	6.6
1982	-24,156	275,235	-6.5	299,392	-3.6
1983	-57,767	266,106	-3.3	323,874	8.2
1984	-109,074	291,094	9.4	400,166	23.6
1985	-121,879	289,071	-0.7	410,951	2.7
1986	-138,539	310,034	7.3	448,572	9.2
1987	-151,683	348,869	12.5	500,553	11.6
1988	-114,566	431,150	23.6	545,714	9.0
1989	-93,142	487,003	13.0	580,145	6.3
1990	-80,865	535,234	9.9	616,098	6.2
1991	-31,136	578,343	8.1	609,479	-1.1
1992	-39,212	616,882	6.7	656,094	7.6
1993	-70,311	642,863	4.2	713,174	8.7
1994	-98,493	703,254	9.4	801,747	12.4
1995	-96,384	794,387	13.0	890,771	11.1
1996	-104,065	851,602	7.2	955,667	7.3
1997	-108,273	934,453	9.7	1,042,726	9.1
1998	-166,140	933,174	-0.1	1,099,314	5.4
1999	-255,809	976,525	4.6	1,232,335	12.1
2000	-369,686	1,082,963	10.9	1,452,650	17.9
2001	-360,373	1,015,366	-6.2	1,375,739	-5.3
2002	-420,666	986,095	-2.9	1,406,762	2.3
2003	-496,243	1,028,186	4.3	1,524,429	8.4
2004	-610,838	1,168,120	13.6	1,778,958	16.7
2005	-716,542	1,291,503	10.6	2,008,045	12.9
2006	-763,533	1,463,991	13.4	2,227,523	10.9
2007	-710,997	1,660,815	13.4	2,371,811	6.5
2008	-712,350	1,849,586	11.4	2,561,936	8.0
2009	-394,771	1,592,792	-13.9	1,987,563	-22.4
2010	-503,087	1,872,320	17.5	2,375,407	19.5
2011	-554,522	2,143,552	14.5	2,698,074	13.6
2012	-525,906	2,247,453	4.8	2,773,359	2.8
2013	-446,829	2,313,237	2.9	2,760,066	-0.5
2014	-484,144	2,392,268	3.4	2,876,412	4.2
2015	-491,261	2,279,743	-4.7	2,771,004	-3.7
2016	-481,475	2,238,337	-1.8	2,719,812	-1.8
2017	-512,739	2,390,778	6.8	2,903,517	6.8
2018	-580,950	2,538,638	6.2	3,119,588	7.4
2019	-576,341	2,528,367	-0.4	3,104,708	-0.5
2020	-676,684	2,134,441	-15.6	2,811,125	-9.5

Source: US Census Bureau

https://www.census.gov/foreign-trade/index

IMPORTANT NOTE: Charts IIA-2 through IIA2-4A cannot be updated because of the discontinuance of support of the Adobe Flash Player (https://www.adobe.com/products/flashplayer/end-of-life.html).

Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Nov 2020. There is long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The global recession from IVQ2007 to IIQ2009 reversed the trend of deterioration. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks. There are additional effects for devaluation of the dollar with the Fed orienting interest increases now followed by decreases and inaction at near zero interest rates while the European Central Bank and the Bank of Japan determine negative nominal interest rates.

Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Nov 2020

Source: US Census Bureau

Char IIA-2A provides the US trade balance showing sharp deterioration 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.

Chart IIA-2A, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 2019-Nov 2020

Source: US Census Bureau

There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation. Exports contracted sharply in Mar-May 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event with partial recovery in Jun-Nov 2020.

Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Nov 2020

Source: US Census Bureau

Chart IIA-3A shows she sharp contraction of US exports in Mar-May 2020 followed by milder recovery in Jun-Nov 2020.

Chart IIA-3A, US, Exports SA, Monthly, Millions of Dollars Jan 2019-Nov 2020

Source: US Census Bureau

Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment in Chart IIA-4 resulting from weaker world economic growth and diminishing inflation because of risk aversion and portfolio reallocations from commodity exposures to equities. Imports contracted sharply 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 with partial recovery in Jun-Nov 2020.

Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Nov 2020

Source: US Census Bureau

Chart IIA-4A shows the sharp contraction of imports in Jan-May 2020 with recovery in Jun-Nov 2020.

Chart IIA-4A, US, Imports SA, Monthly, Millions of Dollars Jan 2019-Nov 2020

Source: US Census Bureau

There is deterioration of the US trade balance in goods in Table IIA-3 from deficit of $74,616 million in Apr 2020 to deficit of $86,680 million in Apr 2021. The nonpetroleum deficit increased from $75,884 million in Apr 2020 to $86,372 million in Apr 2021 while the petroleum surplus decreased from $2258 million in Apr 2020 to $645 million in Apr 2021. Total exports of goods increased 52.9 percent in Apr 2021 relative to a year earlier while total imports increased 36.7 percent. Nonpetroleum exports increased 48.9 percent from Apr 2020 to Apr 2021 while nonpetroleum imports increased 32.5 percent. Petroleum imports increased 151.3 percent with recovery of oil prices. Oil use contracted 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.

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

	Apr 2021	Apr 2020	∆%
Total Balance	-86,680	-74,616
Petroleum	645	2,258
Non-Petroleum	-86,372	-75,884
Total Exports	145,288	95,025	52.9
Petroleum	15,812	8,295	90.6
Non-Petroleum	128,961	86,633	48.9
Total Imports	231,968	169,641	36.7
Petroleum	15,168	6,037	151.3
Non-Petroleum	215,334	162,516	32.5

Details may not add because of rounding and seasonal adjustment

Source: US Census Bureau

US exports and imports of goods not seasonally adjusted in Jan-Apr 2021 and Jan-Apr 2020 are in Table IIA-4. The rate of growth of exports was 12.6 percent and 17.4 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 26.4 percent and of mineral fuels that increased 11.4 percent both because prices of raw materials and commodities increase and fall recurrently because of shocks of risk aversion and portfolio reallocations. There is now the impact 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 US exports a growing amount of crude oil, decreasing 6.4 percent in cumulative Jan-Apr 2021 relative to a year earlier. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports increased 6.8 percent while manufactured imports increased 18.5 percent. Significant part of the US trade imbalance originates in imports of mineral fuels increasing 18.7 percent and petroleum increasing 15.0 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation.

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

	Jan-Apr 2021 $ Millions	Jan-Apr 2020 $ Millions	∆%
Exports	547,969	486,712	12.6
Manufactured	354,558	332,074	6.8
Agricultural Commodities	59,216	46,859	26.4
Mineral Fuels	64,975	58,343	11.4
Petroleum	42,007	44,872	-6.4
Imports	862,832	734,915	17.4
Manufactured	755,901	638,152	18.5
Agricultural Commodities	53,682	49,240	9.0
Mineral Fuels	56,457	47,571	18.7
Petroleum	51,344	44,630	15.0

Source: US Census Bureau

Table IIA-4A provides the United States balance of trade in goods, exports of goods and imports of goods NSA in millions of US dollars and percent share in Jan-Apr 2021. North America, consisting of Mexico and Canada, have joint share of 33.5 percent of exports and 26.5 percent of imports. The combined share of North America and Europe is 55.5 percent of exports and 50.6 percent of imports. The share of the Pacific Rim in exports is 26.7 percent and 33.7 percent of imports.

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

Jan-Apr 2021	Millions USD	Million USD	Percent	Million USD	Percent
Region/Country	Balance	Exports		Imports
Total Census Basis	-314,863	547,969		862,832
North America*	-45,679	183,392	33.5	229,072	26.5
Europe	-87,406	120,466	22.0	207,872	24.1
Euro Area	-58,879	76,642	14.0	135,521	15.7
Pacific Rim	-144,925	146,110	26.7	291,035	33.7
China	-104,384	46,574	8.5	150,957	17.5
Japan	-20,350	23,879	4.4	44,229	5.1
Brazil	4,765	12,742	2.3	7,977	0.9

*Canada and Mexico

Source: US Census Bureau

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

United States International Terms of Trade. Delfim Netto (1959) partly reprinted in Pelaez (1973) conducted two classical nonparametric tests (Mann 1945, Wallis and Moore 1941; see Kendall and Stuart 1968) with coffee-price data in the period of free markets from 1857 to 1906 with the following conclusions (Pelaez, 1976a, 280):

“First, the null hypothesis of no trend was accepted with high confidence; secondly, the null hypothesis of no oscillation was rejected also with high confidence. Consequently, in the nineteenth century international prices of coffee fluctuated but without long-run trend. This statistical fact refutes the extreme argument of structural weakness of the coffee trade.”

In his classic work on the theory of international trade, Jacob Viner (1937, 563) analyzed the “index of total gains from trade,” or “amount of gain per unit of trade,” denoted as T:

T= (∆P^e/∆Pⁱ)∆Q

Where ∆P^e is the change in export prices, ∆Pⁱ is the change in import prices and ∆Q is the change in export volume. Dorrance (1948, 52) restates “Viner’s index of total gain from trade” as:

“What should be done is to calculate an index of the value (quantity multiplied by price) of exports and the price of imports for any country whose foreign accounts are to be analysed. Then the export value index should be divided by the import price index. The result would be an index which would reflect, for the country concerned, changes in the volume of imports obtainable from its export income (i.e. changes in its "real" export income, measured in import terms). The present writer would suggest that this index be referred to as the ‘income terms of trade’ index to differentiate it from the other indexes at present used by economists.”

What really matters for an export activity especially during modernization is the purchasing value of goods that it exports in terms of prices of imports. For a primary producing country, the purchasing power of exports in acquiring new technology from the country providing imports is the critical measurement. The barter terms of trade of Brazil improved from 1857 to 1906 because international coffee prices oscillated without trend (Delfim Netto 1959) while import prices from the United Kingdom declined at the rate of 0.5 percent per year (Imlah 1958). The accurate measurement of the opportunity afforded by the coffee exporting economy was incomparably greater when considering the purchasing power in British prices of the value of coffee exports, or Dorrance’s (1948) income terms of trade.

The conventional theory that the terms of trade of Brazil deteriorated over the long term is without reality (Pelaez 1976a, 280-281):

“Moreover, physical exports of coffee by Brazil increased at the high average rate of 3.5 per cent per year. Brazil's exchange receipts from coffee-exporting in sterling increased at the average rate of 3.5 per cent per year and receipts in domestic currency at 4.5 per cent per year. Great Britain supplied nearly all the imports of the coffee economy. In the period of the free coffee market, British export prices declined at the rate of 0.5 per cent per year. Thus, the income terms of trade of the coffee economy improved at the relatively satisfactory average rate of 4.0 per cent per year. This is only a lower bound of the rate of improvement of the terms of trade. While the quality of coffee remained relatively constant, the quality of manufactured products improved significantly during the fifty-year period considered. The trade data and the non-parametric tests refute conclusively the long-run hypothesis. The valid historical fact is that the tropical export economy of Brazil experienced an opportunity of absorbing rapidly increasing quantities of manufactures from the "workshop" countries. Therefore, the coffee trade constituted a golden opportunity for modernization in nineteenth-century Brazil.”

Imlah (1958) provides decline of British export prices at 0.5 percent in the nineteenth century and there were no lost decades, depressions or unconventional monetary policies in the highly dynamic economy of England that drove the world’s growth impulse. Inflation in the United Kingdom between 1857 and 1906 is measured by the composite price index of O’Donoghue and Goulding (2004) at minus 7.0 percent or average rate of decline of 0.2 percent per year.

Simon Kuznets (1971) analyzes modern economic growth in his Lecture in Memory of Alfred Nobel:

“The major breakthroughs in the advance of human knowledge, those that constituted dominant sources of sustained growth over long periods and spread to a substantial part of the world, may be termed epochal innovations. And the changing course of economic history can perhaps be subdivided into economic epochs, each identified by the epochal innovation with the distinctive characteristics of growth that it generated.Without considering the feasibility of identifying and dating such economic epochs, we may proceed on the working assumption that modern economic growth represents such a distinct epoch - growth dating back to the late eighteenth century and limited (except in significant partial effects) to economically developed countries. These countries, so classified because they have managed to take adequate advantage of the potential of modern technology, include most of Europe, the overseas offshoots of Western Europe, and Japan—barely one quarter of world population.”

Cameron (1961) analyzes the mechanism by which the Industrial Revolution in Great Britain spread throughout Europe and Cameron (1967) analyzes the financing by banks of the Industrial Revolution in Great Britain. O’Donoghue and Goulding (2004) provide consumer price inflation in England since 1750 and MacFarlane and Mortimer-Lee (1994) analyze inflation in England over 300 years. Lucas (2004) estimates world population and production since the year 1000 with sustained growth of per capita incomes beginning to accelerate for the first time in English-speaking countries and in particular in the Industrial Revolution in Great Britain. The conventional theory is unequal distribution of the gains from trade and technical progress between the industrialized countries and developing economies (Singer 1950, 478):

“Dismissing, then, changes in productivity as a governing factor in changing terms of trade, the following explanation presents itself: the fruits of technical progress may be distributed either to producers (in the form of rising incomes) or to consumers (in the form of lower prices). In the case of manufactured commodities produced in more developed countries, the former method, i.e., distribution to producers through higher incomes, was much more important relatively to the second method, while the second method prevailed more in the case of food and raw material production in the underdeveloped countries. Generalizing, we may say -that technical progress in manufacturing industries showed in a rise in incomes while technical progress in the production of food and raw materials in underdeveloped countries showed in a fall in prices”

Temin (1997, 79) uses a Ricardian trade model to discriminate between two views on the Industrial Revolution with an older view arguing broad-based increases in productivity and a new view concentration of productivity gains in cotton manufactures and iron:

“Productivity advances in British manufacturing should have lowered their prices relative to imports. They did. Albert Imlah [1958] correctly recognized this ‘severe deterioration’ in the net barter terms of trade as a signal of British success, not distress. It is no surprise that the price of cotton manufactures fell rapidly in response to productivity growth. But even the price of woolen manufactures, which were declining as a share of British exports, fell almost as rapidly as the price of exports as a whole. It follows, therefore, that the traditional ‘old-hat’ view of the Industrial Revolution is more accurate than the new, restricted image. Other British manufactures were not inefficient and stagnant, or at least, they were not all so backward. The spirit that motivated cotton manufactures extended also to activities as varied as hardware and haberdashery, arms, and apparel.”

Phyllis Deane (1968, 96) estimates growth of United Kingdom gross national product (GNP) at around 2 percent per year for several decades in the nineteenth century. The facts that the terms of trade of Great Britain deteriorated during the period of epochal innovation and high rates of economic growth while the income terms of trade of the coffee economy of nineteenth-century Brazil improved at the average yearly rate of 4.0 percent from 1857 to 1906 disprove the hypothesis of weakness of trade as an explanation of relatively lower income and wealth. As Temin (1997) concludes, Britain did pass on lower prices and higher quality the benefits of technical innovation. Explanation of late modernization must focus on laborious historical research on institutions and economic regimes together with economic theory, data gathering and measurement instead of grand generalizations of weakness of trade and alleged neocolonial dependence (Stein and Stein 1970, 134-5):

“Great Britain, technologically and industrially advanced, became as important to the Latin American economy as to the cotton-exporting southern United States. [After Independence in the nineteenth century] Latin America fell back upon traditional export activities, utilizing the cheapest available factor of production, the land, and the dependent labor force.”

Summerhill (2015) contributes momentous solid facts and analysis with an ideal method combining economic theory, econometrics, international comparisons, data reconstruction and exhaustive archival research. Summerhill (2015) finds that Brazil committed to service of sovereign foreign and internal debt. Contrary to conventional wisdom, Brazil generated primary fiscal surpluses during most of the Empire until 1889 (Summerhill 2015, 37-8, Figure 2.1). Econometric tests by Summerhill (2015, 19-44) show that Brazil’s sovereign debt was sustainable. Sovereign credibility in the North-Weingast (1989) sense spread to financial development that provided the capital for modernization in England and parts of Europe (see Cameron 1961, 1967). Summerhill (2015, 3, 194-6, Figure 7.1) finds that “Brazil’s annual cost of capital in London fell from a peak of 13.9 percent in 1829 to only 5.12 percent in 1889. Average rates on secured loans in the private sector in Rio, however, remained well above 12 percent through 1850.” Financial development would have financed diversification of economic activities, increasing productivity and wages and ensuring economic growth. Brazil restricted creation of limited liability enterprises (Summerhill 2015, 151-82) that prevented raising capital with issue of stocks and corporate bonds. Cameron (1961) analyzed how the industrial revolution in England spread to France and then to the rest of Europe. The Société Générale de Crédit Mobilier of Émile and Isaac Péreire provided the “mobilization of credit” for the new economic activities (Cameron 1961). Summerhill (2015, 151-9) provides facts and analysis demonstrating that regulation prevented the creation of a similar vehicle for financing modernization by Irineu Evangelista de Souza, the legendary Visconde de Mauá. Regulation also prevented the use of negotiable bearing notes of the Caisse Générale of Jacques Lafitte (Cameron 1961, 118-9). The government also restricted establishment and independent operation of banks (Summerhill 2015, 183-214). Summerhill (2015, 198-9) measures concentration in banking that provided economic rents or a social loss. The facts and analysis of Summerhill (2015) provide convincing evidence in support of the economic theory of regulation, which postulates that regulated entities capture the process of regulation to promote their self-interest. There appears to be a case that excessively centralized government can result in regulation favoring private instead of public interests with adverse effects on economic activity. The contribution of Summerhill (2015) explains why Brazil did not benefit from trade as an engine of growth—as did regions of recent settlement in the vision of nineteenth-century trade and development of Ragnar Nurkse (1959)—partly because of restrictions on financing and incorporation. Professor Rondo E. Cameron, in his memorable A Concise Economic History of the World (Cameron 1989, 307-8), finds that “from a broad spectrum of possible forms of interaction between the financial sector and other sectors of the economy that requires its services, one can isolate three type-cases: (1) that in which the financial sector plays a positive, growth-inducing role; (2) that in which the financial sector is essentially neutral or merely permissive; and (3) that in which inadequate finance restricts or hinders industrial and commercial development.” Summerhill (2015) proves exhaustively that Brazil failed to modernize earlier because of the restrictions of an inadequate institutional financial arrangement plagued by regulatory capture for self-interest.

There is analysis of the origins of current tensions in the world economy (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), Regulation of Banks and Finance (2009b), International Financial Architecture (2005), The Global Recession Risk (2007), Globalization and the State Vol. I (2008a), Globalization and the State Vol. II (2008b), Government Intervention in Globalization (2008c)).

The US Bureau of Economic Analysis (BEA) measures the terms of trade index of the United States quarterly since 1947 and annually since 1929. Chart IID-1 provides the terms of trade of the US quarterly since 1947 with significant long-term deterioration from 150.474 in IQ1947 to 109.713 in IVQ2020, decreasing from 109.980 in IVQ2019 and increasing from 107.721 in IIQ2020 and 108.756 in IIIQ2020. The index increased to 111.363 in IQ2021. Significant part of the deterioration occurred from the 1960s to the 1980s followed by some recovery and then stability.

Chart IID-1, United States Terms of Trade Quarterly Index 1947-2021

Source: Bureau of Economic Analysis

Chart IID-1A provides the annual US terms of trade from 1929 to 2020. The index fell from 142.590 in 1929 to 108.977 in 2020. There is decline from 1971 to a much lower plateau.

Chart IID-1A, United States Terms of Trade Annual Index 1929-2020, Annual

Source: Bureau of Economic Analysis

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

Chart IID-1B provides the US terms of trade index, index of terms of trade of nonpetroleum goods and index of terms of trade of goods. The terms of trade of nonpetroleum goods dropped sharply from the mid-1980s to 1995, recovering significantly until 2014, dropping and then recovering again into 2020. There is relative stability in the terms of trade of nonpetroleum goods from 1967 to 2021 but sharp deterioration in the overall index and the index of goods.

Chart IID-1B, United States Terms of Trade Indexes 1967-2021, Quarterly

Source: Bureau of Economic Analysis

https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&1921=survey&1903=46#reqid=19&step=3&isuri=1&1921=survey&1903=46

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

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

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

Chart IID-3 provides the BLS terms of trade of the US with Canada. The index increases from 100.0 in Dec 2017 to 117.8 in Dec 2018 and decreases to 104.0 in Feb 2020. The index increases to 121.5 in Apr 2020. The index decreases to 92.5 in Apr 2021.

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

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

Chart IID-4 provides the BLS terms of trade of the US with the European Union. There is improvement from 100.0 in Dec 2017 to 102.8 in Jan 2020 followed by decrease to 102.2 in Apr 2021.

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

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

Chart IID-4 provides the BLS terms of trade of the US with Mexico. There is improvement from 100.0 in Dec 2017 to 109.6 in Apr 2021.

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

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

Chart IID-4 provides the BLS terms of trade of the US with China. There is deterioration from 100.0 in Dec 2017 to 98.0 in Sep 2018, improvement to 102.1 in Dec 2020 and 106.4 in Apr 2021.

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

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

Chart IID-4 provides the BLS terms of trade of the US with Japan. There is deterioration from 100.0 in Dec 2017 to 99.2 in Dec 2019 and improvement to 104.3 in Apr 2021.

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

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

Manufacturing is underperforming in the lost cycle of the global recession. Manufacturing (NAICS) in Apr 2021 is lower by 5.0 percent relative to the peak in Jun 2007, as shown in Chart V-3A. Manufacturing (SIC) in Apr 2021 at 103.3965 is lower by 7.9 percent relative to the peak at 112.3113 in Jun 2007. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Apr 1919 to Apr 2021. Growth at 3.1 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 162.7065 in Apr 2021. The actual index NSA in Apr 2021 is 103.3965 which is 36.5 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 166.9656 in Apr 2021. The actual index NSA in Apr 2021 is 103.3965, which is 38.1 percent below trend. Manufacturing output grew at average 1.8 percent between Dec 1986 and Apr 2021. Using trend growth of 1.8 percent per year, the index would increase to 137.3810 in Apr 2021. The output of manufacturing at 103.3965 in Apr 2021 is 24.7 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 104.9873 in Apr 2021 or 21.5 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 168.7632 in Apr 2021. The NAICS index at 104.9873 in Apr 2021 is 37.8 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 133.5630 in Apr 2021. The NAICS index at 104.9873 in Apr 2021 is 21.4 percent below trend under this alternative calculation.

Chart V-3A, United States Manufacturing (NAICS) NSA, Dec 2007 to Apr 2021

Board of Governors of the Federal Reserve System

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

Chart V-3A, United States Manufacturing (NAICS) NSA, Jun 2007 to Apr 2021

Board of Governors of the Federal Reserve System

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

Chart V-3B provides the civilian noninstitutional population of the United States, or those available for work. The civilian noninstitutional population increased from 231.713 million in Jun 2007 to 261.103 million in Mar 2021 or 29.390 million.

Chart V-3B, United States, Civilian Noninstitutional Population, Million, NSA, Jan 2007 to Apr 2021

Source: US Bureau of Labor Statistics

Chart V-3C provides nonfarm payroll manufacturing jobs in the United States from Jan 2007 to Apr 2021. Nonfarm payroll manufacturing jobs fell from 13.987 million in Jun 2007 to 12.246 million in Apr 2021, or 1.741 million.

Chart V-3C, United States, Payroll Manufacturing Jobs, NSA, Jan 2007 to Apr 2021, Thousands

Source: US Bureau of Labor Statistics

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

Chart V-3D provides the index of US manufacturing (NAICS) from Jan 1972 to Apr 2021. The index continued increasing during the decline of manufacturing jobs after the early 1980s. There are likely effects of changes in the composition of manufacturing with also changes in productivity and trade. There is sharp 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. There is initial recovery in May 2020-Apr 2021.

Chart V-3D, United States Manufacturing (NAICS) NSA, Jan 1972 to Apr 2021

Source: Board of Governors of the Federal Reserve System

Chart V-3E provides the US noninstitutional civilian population, or those in condition of working, from Jan 1948, when first available, to Apr 2021. The noninstitutional civilian population increased from 170.042 million in Jun 1981 to 261.103 million in Apr 2021 or 91.061 million.

Chart V-3E, United States, Civilian Noninstitutional Population, Million, NSA, Jan 1948 to Apr 2021

Source: US Bureau of Labor Statistics

Chart V-3F provides manufacturing jobs in the United States from Jan 1939 to Apr 2021. Nonfarm payroll manufacturing jobs decreased from a peak of 18.890 million in Jun 1981 to 12.246 million in Apr 2021.

Chart V-3F, United States, Payroll Manufacturing Jobs, NSA, Jan 1939 to Apr 2021, Thousands

Source: US Bureau of Labor Statistics

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

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

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

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

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

Source: US Bureau of Economic Analysis

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

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

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

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

Source: US Bureau of Economic Analysis

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

United States Current Account of Balance of Payments and International Investment Position. The current account of the US balance of payments is in Table VI-3A for IVQ2020 and IVQ2019. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/sites/default/files/2021-03/trans420.pdf):

“The U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, widened by $7.6 billion, or 4.2 percent, to $188.5 billion in the fourth quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis. The revised third quarter deficit was $180.9 billion. The fourth quarter deficit was 3.5 percent of current dollar gross domestic product (GDP), up from 3.4 percent in the third quarter. The $7.6 billion widening of the current account deficit in the fourth quarter primarily reflected an expanded deficit on goods and a reduced surplus on services that were partly offset by a reduced deficit on secondary income.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted increased from $101.8 billion in IVQ2019 to $189.8 billion in IVQ2020. The current account deficit seasonally adjusted at annual rate increased from 1.9 percent of GDP in IVQ2019 to 3.4 percent of GDP in IIIQ2020, increasing at 3.5 percent of GDP in IVQ2020 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 ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets.

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

	IVQ2019	IVQ2020	Difference
Goods Balance	-208,907	-258,389	-49,482
X Goods	416,713	393,017	-5.7 ∆%
M Goods	-625,620	-651,406	-0.2 ∆%
Services Balance	82,290	58,232	-76,458
X Services	227,342	176,160	-22.5 ∆%
M Services	-145,052	-117,928	-18.7 ∆%
Balance Goods and Services	-126,617	-200,157	-73,540
Exports of Goods and Services and Income Receipts	962,008	853,697	-108,311
Imports of Goods and Services and Income Payments	-1,063,789	-1,043,467	-20,322
Current Account Balance	-101,782	-189,770	-87,988
% GDP	IVQ2019	IVQ2020	IIIQ2020
	1.9	3.5	3.4

X: exports; M: imports

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

Source: Bureau of Economic Analysis

https://www.bea.gov/data/economic-accounts/international#bop

The following chart of the BEA (Bureau of Economic Analysis) provides the US current account and component balances through IVQ2020. There is deterioration in IVQ2020 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.

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

Source: https://www.bea.gov/sites/default/files/2021-03/trans420.pdf

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

Source: https://www.bea.gov/sites/default/files/2021-03/trans420.pdf

The following chart of the BEA (Bureau of Economic Analysis) provides the US current account and component balances through IIIQ2020. There is deterioration 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.

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

Source: https://www.bea.gov/sites/default/files/2020-12/trans320_0.pdf

The BEA analyzes the impact on data of 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:

“Coronavirus (COVID-19) Impact on Second Quarter 2020 International Transactions

All major categories of current account transactions declined in the second quarter of 2020 resulting in part from the impact of COVID-19, as many businesses were operating at limited capacity or ceased operations completely, and the movement of travelers across borders was restricted. In the financial account, the ending of some currency swaps between the U.S. Federal Reserve System and some central banks in Europe and Japan contributed to U.S. withdrawal of deposit assets and U.S. repayment of deposit liabilities. The full economic effects of the COVID-19 pandemic cannot be quantified in the statistics because the impacts are generally embedded in source data and cannot be separately identified. For more information on the impact of COVID-19 on the statistics, see the technical note that accompanies this release.”

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

Source: https://www.bea.gov/news/2020/us-international-transactions-second-quarter-2020

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

Source: https://www.bea.gov/news/2020/us-international-transactions-second-quarter-2020

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

Source: https://www.bea.gov/news/2020/us-international-transactions-first-quarter-2020-and-annual-update

Chart VI-3B1*, US, Current Account Transactions, Quarterly SA

Source: https://www.bea.gov/news/2020/us-international-transactions-first-quarter-2020-and-annual-update

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

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

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

Source: https://www.bea.gov/news/2020/us-international-transactions-fourth-quarter-and-year-2019

Chart VI-3B2, US, Current Account and Components Balances, Quarterly SA

Source: https://www.bea.gov/news/2020/us-international-transactions-fourth-quarter-and-year-2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

M_tV(i_t, ·) = P_tY_t (5)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table IIA2-3 provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1077 billion or 6.7 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5094 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.084 trillion in four years, using the fiscal year deficit of $1077 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5084 billion. Federal debt in 2012 was 70.3 percent of GDP (CBO 2015Jan26) and 72.2 percent of GDP in 2013, as shown in Table VI-3B with the latest revisions (https://www.cbo.gov/about/products/budget-economic-data#2) . This situation may worsen in the future (CBO 2013Sep17):

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

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

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

The most recent CBO long-term budget on Jun 25, 2019 projects US federal debt at 144.0 percent of GDP in 2049 (Congressional Budget Office, The 2019 long-term budget outlook. Washington, DC, Jun 25 https://www.cbo.gov/publication/55331). Table VI-3B provides the balance of payments and net international investment position together with the fiscal imbalances of the US that were critical at the onset of the global recession after 2007 (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 ) and are exploding again with the fiscal stimulus of the COVID-19 event.

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

	2007	2008	2009	2010	2011
Goods & Services	-705	-709	-384	-495	-549
Exports Goods & Services & Income Receipts	2559.3	2742.3	2283.1	2624.0	2981.5
Imports Goods & Services & Income Payments	-3270.4	-3423.6	-2655.6	-3055.3	-3427.2
Current Account	-711	-681	-373	-431	-445
NGDP	14452	14713	14449	14992	15543
Current Account % GDP	-4.9	-4.6	-2.6	-2.9	-2.9
NIIP	-1279	-3995	-2628	-2512	-4455
US Owned Assets Abroad	20705	19423	19426	21767	22209
Foreign Owned Assets in US	21984	23418	22054	24279	26664
NIIP % GDP	-8.8	-27.2	-18.2	-16.8	-28.7
Exports Goods, Services and Income Receipts	2559	2742	2283	2624	2982
NIIP % Exports Goods, Services and Income Payments	-50	-146	-115	-96	-149
DIA MV	5858	3707	4945	5486	5215
DIUS MV	4134	3091	3619	4099	4199
Fiscal Balance	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	-1.1	-3.1	-9.8	-8.7	-8.4
Federal Debt	5035	5803	7545	9019	10128
Federal Debt % GDP	35.2	39.4	52.3	60.8	65.8
Federal Outlays	2729	2983	3518	3457	3603
∆%	2.8	9.3	17.9	-1.7	4.2
% GDP	19.1	20.2	24.4	23.3	23.4
Federal Revenue	2568	2524	2105	2163	2303
∆%	6.7	-1.7	-16.6	2.7	6.5
% GDP	18.0	17.1	14.6	14.6	15.0

	2012	2013	2014	2015	2016
Goods & Services	-537	-461	-490	-499	-503
Exports Goods & Services & Income Receipts	3095.0	3213.0	3341.8	3207.3	3188.5
Exports Goods & Services & Income Receipts	3521.9	3561.8	3707.0	-3615.1	3616.9
Current Account	-426	-349	-365	-408	-428
NGDP	16197	16785	17527	18225	18715
Current Account % GDP	-2.6	-2.1	-2.1	-2.2	-2.3
NIIP	-4518	-5369	-6945	-7462	-8192
US Owned Assets Abroad	22562	24145	24883	23431	24060
Foreign Owned Assets in US	27080	29513	31828	30892	32252
NIIP % GDP	-27.9	-32.0	-39.6	-40.9	-43.8
Exports Goods, Services and Income	3095	3213	3342	3207	3189
NIIP % Exports Goods, Services and Income	-146	-167	-208	-233	-257
DIA MV	5969	7121	72421	7057	7422
DIUS MV	4662	5815	6370	6729	7596
Fiscal Balance	-1077	-680	-485	-442	-585
Fiscal Balance % GDP	-6.7	-4.1	-2.8	-2.4	-3.2
Federal Debt	11281	11983	12780	13117	14168
Federal Debt % GDP	70.3	72.2	73.7	72.5	76.4
Federal Outlays	3527	3455	3506	3692	3853
∆%	-2.1	-2.0	1.5	5.3	4.4
% GDP	22.0	20.8	20.2	20.4	20.8
Federal Revenue	2450	2775	3022	3250	3268
∆%	6.4	13.3	8.9	7.6	0.6
% GDP	15.3	16.7	17.4	18.0	17.6
	2017	2018	2019
Goods & Services	-550	-628	-616
Exports Goods & Services & Income Receipts	3444.8	3735.7	3763.9
Imports Goods & Services & Income Payments	3884.5	4226.7	4262.3
Current Account	-440	-491	-498
NGDP	19519	20580	21428
Current Account % GDP	2.3	2.4	2.3
NIIP	-7743	-9555	-10991
US Owned Assets Abroad	27773	25241	29317
Foreign Owned Assets in US	35516	34796	40309
NIIP % GDP	-39.7	-46.4	-51.3
Exports Goods, Services and Income	3445	3736	3764
NIIP % Exports Goods, Services and Income	-225	-256	-292
DIA MV	8910	7504	8838
DIUS MV	8925	8483	10581
Fiscal Balance	-665	-779	-984
Fiscal Balance % GDP	-3.5	-3.8	-4.6
Federal Debt	14665	15750	16803
Federal Debt % GDP	76.0	77.4	79.2
Federal Outlays	3982	4109	4447
∆%	3.3	3.2	8.2
% GDP	20.6	20.2	21.0
Federal Revenue	3316	3330	3462
∆%	1.5	0.4	4.0
% GDP	17.2	16.4	16.3

Sources:

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

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

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

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

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

Table VI-3C provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit as percent of GDP at 2.3 percent in IIIQ2019 decreases to 1.9 percent in IVQ2019. The current account deficit increases to 2.1 percent in IQ2020. The current account deficit increases to 3.3 percent in IIQ2020. The current account deficit increases to 3.4 percent in IIIQ2020. The current account deficit increases to 3.5 percent of GDP in IVQ2020. 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 $13.1 trillion in IIQ2020. The absolute value of the net international investment position increases to $13.95 trillion in IIIQ2020. The absolute value of the net international position increases to $14.1 trillion in IVQ2020. 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 –$14.09 trillion at the end of the fourth quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis (BEA). Assets totaled $32.16 trillion and liabilities were $46.25 trillion.

At the end of the third quarter, the net investment position was –$13.86 trillion (Table 1).”

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

“The –$227.5 billion change in the net investment position from the third quarter to the fourth quarter came from net financial transactions of –$287.1 billion and net other changes in position, such as price and exchange rate changes, of $59.6 billion (Table A).

COVID-19 Impact on Fourth Quarter 2020 International Investment Position

The global pandemic and the economic recovery continued to impact the IIP in the fourth quarter of 2020. The 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.”

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

	IVQ2019	IQ2020	IIQ2020	IIIQ2020	IVQ2020
Goods & Services	-127	-114	-160	-207	-200
Primary Income	62	53	33	48	47
Secondary Income	-37	-37	-36	-38	-37
Current Account	-102	-98	-163	-197	-190
Current Account % GDP SA	1.9	2.1	3.3	3.4	3.5
NIIP	-11050	-12163	-13085	-13865	-14092
US Owned Assets Abroad	29153	26921	28779	29516	32156
Foreign Owned Assets in US	-40203	-39085	-41864	-43381	-46248
DIA MV	8799	7004	7945	8340	9296
DIUS MV	10547	8762	10091	10847	1197

Notes: NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Sep 2014

https://www.bea.gov/international/concepts_methods.htm

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

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

Source: Bureau of Economic Analysis

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

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

Source: Bureau of Economic Analysis

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

Chart VI-3C1 provides the quarterly NSA NIIP.

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

Source: Bureau of Economic Analysis

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

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

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

Source: Bureau of Economic Analysis

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

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

Chart VI-3C3, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

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

Chart VI-3C3, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2019/us-international-investment-position-third-quarter-2019

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2020/us-international-investment-position-fourth-quarter-and-year-2019

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2020/us-international-investment-position-first-quarter-2020-year-2019-and-annual-update

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2020/us-international-investment-position-second-quarter-2020

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2020/us-international-investment-position-third-quarter-2020

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2020/us-international-investment-position-third-quarter-2020

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2021/us-international-investment-position-fourth-quarter-and-year-2020

Chart VI-3C4, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2021/us-international-investment-position-fourth-quarter-and-year-2020

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 Jun 10, 2021, at 0.06 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 0.06 percent on Jun 10, 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).

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 Jun 10, 2021, Percent per Year

Source: Board of Governors of the Federal Reserve System

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

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

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

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

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

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

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

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

Source: Board of Governors of the Federal Reserve System

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

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

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

Source: Bureau of Labor Statistics

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

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

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

Source: Bureau of Labor Statistics

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

The Congressional Budget Office estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2017 at 3.2 percent per year. The projected path is significantly lower at 1.4 percent per year from 2018 to 2028. The legacy of the economic cycle expansion from IIIQ2009 to IQ2021 at 2.0 percent on average is in contrast with 3.7 percent on average in the expansion from IQ1983 to IIIQ1994 (https://cmpassocregulationblog.blogspot.com/2021/05/us-gdp-growing-at-saar-64-percent-in_29.html and earlier https://cmpassocregulationblog.blogspot.com/2021/05/us-gdp-growing-at-saar-64-percent-in.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 28.1 million or 16.2 percent of the effective labor force in May 2021 (https://cmpassocregulationblog.blogspot.com/2021/06/increase-in-may-2021-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2021/05/increase-in-apr-2021-of-nonfarm-payroll.html) with much lower hiring than in the period before the current cycle (Section I and earlier https://cmpassocregulationblog.blogspot.com/2021/05/accelerating-inflation-with-deepening.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 IQ2021 at 2.0 percent on average is in contrast with 3.7 percent on average in the expansion from IQ1983 to IIIQ1994 (https://cmpassocregulationblog.blogspot.com/2021/05/us-gdp-growing-at-saar-64-percent-in_29.html and earlier https://cmpassocregulationblog.blogspot.com/2021/05/us-gdp-growing-at-saar-64-percent-in.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 28.1 million or 16.2 percent of the effective labor force in May 2021 (https://cmpassocregulationblog.blogspot.com/2021/06/increase-in-may-2021-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2021/05/increase-in-apr-2021-of-nonfarm-payroll.html) with much lower hiring than in the period before the current cycle (https://cmpassocregulationblog.blogspot.com/2021/06/increase-in-may-2021-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2021/05/increase-in-apr-2021-of-nonfarm-payroll.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Bureau of Economic Analysis

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

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

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

Source: Bureau of Economic Analysis

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There were temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of seven trillion dollars of securities held outright. 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. Net foreign purchases of US long-term securities (row C in Table VA-4) strengthened from minus $36.8 billion in Feb 2020 to $224.7 billion in Apr 2021. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Feb 2021 of minus $7.3 billion strengthened to $208.1 billion in Mar 2021. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) strengthened from $11.7 billion in Feb 2021 to $54.1 billion in Mar 2021. Other transactions (row C2 in Table VA-4) changed from minus $41.1 billion in Feb 2021 to minus $37.5 billion in Mar 2021. In Mar 2021,

C = A + B + C2 = $208.1 billion + $54.1 billion - $37.5 billion = -$224.7 billion.

There are minor rounding errors. There is strengthening demand in Table VA-4 in Mar 2021 in A1 private purchases by residents overseas of US long-term securities of $142.1 billion of which strengthening in A11 Treasury securities of 71.1 billion, weakening in A12 of $2.9 billion in agency securities, strengthening of $30.6 billion of corporate bonds and strengthening of $28.5 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 increased $65.9 billion with increase of Treasury securities of $47.8 billion in Mar 2021. Official purchases of agency securities increased $10.9 billion in Mar 2021. Row D shows decrease in Mar 2021 of $53.7 billion in purchases of short-term dollar denominated obligations. Foreign holdings of US Treasury bills decreased $69.1 billion (row D1) with foreign official holdings decreasing $45.6 billion while the category “other” increased $15.4 billion. Foreign private holdings of US Treasury bills decreased $23.4 billion in what could be arbitrage of duration exposures and international risks. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations in risk perceptions.

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

	Mar 20 12 Months	Mar 21 12 Months	Feb 2021	Mar 2021
A Foreign Purchases less Sales of US LT Securities	19.7	552.1	-7.3	208.1
A1 Private	202.3	371.3	-15.3	142.1
A11 Treasury	-42.2	-215.1	-61.0	71.1
A12 Agency	238.3	240.2	18.5	2.9
A13 Corporate Bonds	-56.7	-48.1	13.2	39.6
A14 Equities	62.9	394.3	14.0	28.5
A2 Official	-182.7	180.8	7.9	65.9
A21 Treasury	-356.9	-40.4	-4.5	47.8
A22 Agency	144.8	189.0	11.2	10.9
A23 Corporate Bonds	6.0	20.1	1.3	3.5
A24 Equities	23.5	12.1	0.0	3.7
B Net US Purchases of LT Foreign Securities	295.3	371.7	11.7	54.1
B1 Foreign Bonds	256.4	229.7	8.6	62.7
B2 Foreign Equities	39.0	141.9	3.1	-8.6
C1 Net Transactions	315.0	923.8	4.3	262.2
C2 Other	-268.7	-478.1	-41.1	-37.5
C Net Foreign Purchases of US LT Securities	46.3	445.7	-36.8	224.7
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	28.7	256.5	13.3	-53.7
D1 US Treasury Bills	-35.9	237.0	20.5	-69.1
D11 Private	-0.7	159.6	-7.7	-23.4
D12 Official	-35.3	77.4	28.2	-45.6
D2 Other	64.7	19.6	-7.2	15.4

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

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

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

Table VA-5 provides major foreign holders of US Treasury securities. China is the second largest holder with $1100.4 billion in Mar 2021, increasing 0.3 percent from $1104.2 billion in Feb 2021 while increasing $18.8 billion from Mar 2020 or 1.7 percent. The United States Treasury estimates US government debt held by private investors at $16,279 billion in Dec 2020 (Fiscal Year 2021). China’s holding of US Treasury securities in Mar 2021 represents 6.8 percent of US government marketable interest-bearing debt held by private investors (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan decreased its holdings from $1272.6 billion in Mar 2020 to $1240.3 billion in Mar 2021 or 2.5 percent. The combined holdings of China and Japan in Mar 2020 add to $2340.7 billion, which is equivalent to 14.4 percent of US government marketable interest-bearing securities held by investors of $16,279 billion in Dec 2020 (Fiscal Year 2021) (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Total foreign holdings of Treasury securities increased from $6949.5 billion in Mar 2020 to $7028.4 billion in Mar 2021, or 1.1 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007). Professor Martin Feldstein, at Harvard University, writing on “The Debt Crisis Is Coming Soon,” published in the Wall Street Journal on Mar 20, 2019 (https://www.wsj.com/articles/the-debt-crisis-is-coming-soon-11553122139?mod=hp_opin_pos3), foresees a US debt crisis with deficits moving above $1 trillion and debt above 100 percent of GDP. A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

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

	Mar 2021	Feb 2021	Mar 2020
Total	7028.4	7098.7	6949.5
Japan	1240.3	1258.0	1272.6
China	1100.4	1104.2	1081.6
United Kingdom	443.2	459.5	469.7
Ireland	309.8	316.0	271.6
Luxembourg	282.8	282.1	246.1
Brazil	255.5	259.0	264.4
Switzerland	254.8	257.8	244.6
Belgium	235.8	236.7	206.1
Taiwan	231.5	234.5	205.0
Hong Kong	227.0	225.0	256.0
Cayman Islands	215.2	216.0	209.4
India	200.0	204.4	156.5
Singapore	170.2	161.4	151.5
Saudi Arabia	130.8	132.9	159.1
Foreign Official Holdings	4202.2	4235.4	4417.9
A. Treasury Bills	360.6	406.2	283.2
B. Treasury Bonds and Notes	3841.6	3829.2	3934.6

Source: United States Treasury

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

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

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

II Rules, Discretionary Authorities and Slow Productivity Growth. The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used by the BLS is (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table II-1 provides revised estimates for IQ2021 and revision of the estimates for IVQ2020 and IIIQ2020 together with data for nonfarm business sector productivity and unit labor costs in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increase in output at 8.6 percent and increase at 3.0 percent in hours worked, nonfarm business sector labor productivity increased at the SAAE rate of 5.4 percent in IQ2021, as shown in column 2 “IQ2021 SAEE.” The increase of labor productivity from IQ2020 to IQ2021 was 4.1 percent, reflecting increase in output of 1.1 percent and decrease of hours worked of 2.9 percent, as shown in column 3 “IQ2021 YOY.” Hours worked decreased from 38.2 percent in IIIQ2020 to 10.0 percent in IVQ2020 and increased at 3.0 percent in IQ2021 while output growth decreased from 44.1 percent in IIIQ2020 at SAAE to 5.8 percent in IVQ2020, increasing at 8.6 percent in IQ2021. The BLS defines unit labor costs as (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs increased at the SAAE rate of 1.7 percent in IQ2021 and increased 4.1 percent in IQ2021 relative to IQ2020. Hourly compensation increased at the SAAE rate of 7.2 percent in IQ2021, which deflating by the estimated inflation increase SAAE rate in IQ2021 results in increase of real hourly compensation at 3.3 percent. Real hourly compensation increased 6.3 percent in IQ2021 relative to IQ2020.

Table II-1, US, Nonfarm Business Sector Productivity and Costs %

	IQ2021 SAAE	IQ2021 YOY	IVQ2020 SAAE	IVQ2020 YOY	IIIQ2020 SAAE	IIIQ2020 YOY
Productivity	5.4	4.1	-3.8	2.6	4.2	4.0
Output	8.6	1.1	5.8	-2.6	44.1	-3.2
Hours	3.0	-2.9	10.0	-5.0	38.2	-6.9
Hourly Comp.	7.2	8.3	9.7	8.8	-5.8	7.2
Real Hourly Comp.	3.3	6.3	7.1	7.5	-10.0	5.9
Unit Labor Costs	1.7	4.1	14.0	6.1	-9.6	3.1
Unit Nonlabor Payments	8.2	-2.0	-14.4	-6.4	28.2	-2.6
Implicit Price Deflator	4.3	1.5	1.3	0.7	4.3	0.6

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier

The analysis by Kydland (https://www.nobelprize.org/prizes/economic-sciences/2004/kydland/biographical/) and Prescott (https://www.nobelprize.org/prizes/economic-sciences/2004/prescott/biographical/) (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t- Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999). Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 http://www.johnbtaylor.com/) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is not uncommon for effects of regulation differing from those intended by policy. Professors Edward C. Prescott and Lee E. Ohanian (2014Feb), writing on “US productivity growth has taken a dive,” on Feb 3, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303942404579362462611843696?KEYWORDS=Prescott), argue that impressive productivity growth over the long-term constructed US prosperity and wellbeing. Prescott and Ohanian (2014Feb) measure US productivity growth at 2.5 percent per year since 1948. Average US productivity growth has been only 1.1 percent since 2011. Prescott and Ohanian (2014Feb) argue that living standards in the US increased at 28 percent in a decade but with current slow growth of productivity will only increase 12 percent by 2024. There may be collateral effects on productivity growth from policy design similar to those in Kydland and Prescott (1977). Professor Edward P. Lazear (2017Feb27), writing in the Wall Street Journal, on Feb 27, 2017 (https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746), finds that productivity growth was 7 percent between 2009 and 2016 at annual equivalent 1 percent. Lazear measures productivity growth at 2.3 percent per year from 2001 to 2008. Herkenhoff, Ohanian and Prescott (2017) and Ohanian and Prescott (2017Dec) analyze how restriction of land use by states in the United States have been depressing economic activity. Professor Edmund S. Phelps (https://www.nobelprize.org/prizes/economic-sciences/2006/phelps/auto-biography/) argues that there is failed analysis that fiscal stimulus in the form of higher government expenditures and tax reductions caused the recovery of the economy to normal levels by 2017 (Phelps, Edmund S. 2018. The fantasy of fiscal stimulus. The Wall Street Journal Oct 29, 2018 https://www.wsj.com/articles/the-fantasy-of-fiscal-stimulus-1540852299?mod=searchresults&page=1&pos=2). The evidence analyzed by Phelps leads to the conclusion that countries with disorderly government finance grew less rapidly than those with sounder fiscal performance. Phelps concludes convincingly that “there is a strong relationship between the speed of recovery and a proxy of its dynamism—the long-term growth rate of total factor productivity from 1990 to 2007. Some countries have preexisting social institutions and cultural capital that enables them to bounce back from an economic downturn. Much credit of the U.S.’s relatively speedy recovery is owed to this country’s endemic culture of innovation and enterprise.” Professor Edward P. Lazear, writing on “Mind the productivity gap to reduce inequality,” published in the Wall Street Journal on May 6, 2019 (https://www.wsj.com/articles/mind-the-productivity-gap-to-reduce-inequality-11557181134?mod=searchresults&page=1&pos=1), analyzes the causes of the growing differential of wages between the income of the 90^th percentile and the 50^th percentile in terms of technological change. The improvement of the lower half of wage earners would consist of increasing their skills. Professors John F. Cogan and John B. Taylor, writing in the Wall Street Journal on Oct 6, 2020, measure productivity growth increasing from 0.8 percent per year in 2013-2016 to 1.5 percent per year in 2016-2019 because of deregulation and market-oriented policies. The Bureau of Labor Statistics important report on productivity and costs released on Jun 3, 2021 (https://www.bls.gov/lpc/) supports the argument of decline of productivity growth in the US analyzed by Prescott and Ohanian (2014Feb), Lazear (2017Feb27), Phelps (2018) and Cogan and Taylor (2020Oct6). Table II-2 provides the annual percentage changes of productivity, real hourly compensation and unit labor costs for the entire economic cycle from 2007 to 2020. The estimates incorporate the yearly revision of the US national accounts (https://www.bea.gov/information-updates-national-income-and-product-accounts) and the comprehensive revisions since 1929 (https://apps.bea.gov/national/pdf/2018-ComprehensiveUpdate-Results.pdf). The data confirm the argument of Prescott and Ohanian (2014Feb), Lazear (2017Feb27) and Cogan and Taylor (2020Oct6): productivity increased cumulatively 8.9 percent from 2011 to 2019 at the average annual rate of 1.0 percent. Confirming measurement by Cogan and Taylor (2020Oct6), productivity increased at average 0.8 percent from 2013 to 2016 and at 1.5 percent from 2017 to 2019, using revised data. Average productivity growth for the entire economic cycle from 2007 to 2020 is only 1.5 percent. The argument by Prescott and Ohanian (2014Feb) is proper in choosing the tail of the business cycle because the increase in productivity in 2009 of 3.5 percent and 3.4 percent in 2010 consisted of reducing labor hours. Productivity increased 2.5 percent in 2020 with decrease of output at 4.2 percent and decrease of hours worked at 6.6 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.

Table II-2, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average, ∆% Annual Average

	2017 ∆%	2018 ∆%	2019 ∆%	2020 %
Productivity	1.2	1.4	1.8	2.5
Real Hourly Compensation	1.3	0.9	1.8	5.6
Unit Labor Costs	2.3	1.9	1.9	4.3
	2016 ∆%	2015 ∆%	2014 ∆%	2013 ∆%	2012 ∆%	2011 ∆%
Productivity	0.4	1.6	0.9	0.5	0.8	0.0
Real Hourly Compensation	-0.2	3.0	1.1	-0.2	0.5	-0.9
Unit Labor Costs	0.7	1.6	1.9	0.8	1.8	2.2

	2010 ∆%	2009 ∆%	2008 ∆%	2007∆%
Productivity	3.4	3.5	1.2	1.8
Real Hourly Compensation	0.2	1.3	-0.9	1.5
Unit Labor Costs	-1.5	-2.5	1.7	2.5

Source: US Bureau of Labor Statistics

Table II-3, US, Nonfarm Business Output per Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (https://www.nber.org/cycles.html) Table II-3 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 1999 to 2020. The annual average jumped from 2.7 percent in 2001 to 4.4 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 8.9 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIIQ2009 (https://www.nber.org/cycles.html) and increased during the first phase of expansion from IIQ2009 to IQ2010, trended lower and collapsed in 2011 and 2012 with sporadic jumps and declines. Productivity increased at 3.2 percent in IVQ2013 and contracted at 3.7 percent in IQ2014. Productivity increased at 4.1 percent in IIQ2014 and at 3.7 percent in IIIQ2014. Productivity contracted at 1.8 percent in IVQ2014 and increased at 4.1 percent in IQ2015. Productivity grew at 1.6 percent in IIQ2015 and changed at 0.0 percent in IIIQ2015. Productivity contracted at 1.6 percent in IVQ2015 and increased at 1.2 percent in IQ2016. Productivity decreased at 0.4 percent in IIQ2016 and expanded at 1.3 percent in IIIQ2016. Productivity grew at 3.0 percent in IVQ2016 and increased at 0.8 percent in IQ2017. Productivity decreased at 1.0 percent in IIQ2017 and increased at 3.2 percent in IIIQ2017. Productivity increased at 1.8 percent in IVQ2017 and increased at 1.9 percent in IQ2018. Productivity increased at 0.7 percent in IIQ2018 and increased at 1.2 percent in IIIQ2018. Productivity increased at 0.4 percent in IVQ2018. Productivity increased at 3.9 percent in IQ2019. Productivity increased at 1.9 percent in IIQ2019 and increased at 0.5 percent in IIIQ2019. Productivity increased at 1.6 percent in IVQ2019. Productivity decreased at 0.8 percent in IQ2020, increasing at 11.2 percent in IIQ2020 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. Productivity increased at 4.2 percent in IIIQ2020. Productivity decreased at 3.8 percent in IVQ2020. Productivity increased at 2.5 percent in 2020 with decrease of output at 4.2 percent and decrease of hours worked at 6.6 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. Productivity increased at 5.4 percent in IQ2021.

Table II-3, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2021

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	5.4	1.1	3.8	6.3	3.8
2000	-0.4	8.0	0.1	4.2	3.3
2001	-1.7	6.9	2.3	5.0	2.7
2002	8.9	0.6	3.2	-0.3	4.4
2003	4.2	5.3	9.3	3.8	3.8
2004	-1.3	3.9	1.7	2.0	2.9
2005	4.6	-0.8	2.8	0.6	2.2
2006	2.8	-0.6	-1.1	3.6	1.1
2007	1.1	1.5	3.8	3.6	1.8
2008	-3.3	4.3	1.0	-2.4	1.2
2009	3.7	8.7	5.4	6.7	3.5
2010	1.9	0.7	2.1	1.7	3.4
2011	-2.7	0.4	-1.5	2.7	0.0
2012	1.6	1.5	-0.7	-1.4	0.8
2013	2.5	-1.5	1.7	3.2	0.5
2014	-3.7	4.1	3.7	-1.8	0.9
2015	4.1	1.6	0.0	-1.6	1.6
2016	1.2	-0.4	1.3	3.0	0.4
2017	0.8	-1.0	3.2	1.8	1.2
2018	1.9	0.7	1.2	0.4	1.4
2019	3.9	1.9	0.5	1.6	1.8
2020	-0.8	11.2	4.2	-3.8	2.5
2021	5.4

Source: US Bureau of Labor Statistics

Chart II-1 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 1999 to 2021. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of revenue. Productivity rose briefly in the expansion after 2009 but then collapsed and moved to negative change with some positive changes recently at lower rates. Contractions in the cycle from 2007 to 2019 have been more frequent and sharper. Productivity increased in 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event as hours worked collapsed and increased into 2021.

Chart II-1, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2021

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table II-4. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table II-4 shows continuing subdued increases in unit labor costs in 2011 but with increase at 8.3 percent in IQ2012 followed by increase at 0.4 percent in IIQ2012, increase at 1.1 percent in IIIQ2012 and increase at 12.6 percent in IVQ2012. Unit labor costs decreased at 8.0 percent in IQ2013 and increased at 4.6 percent in IIQ2013. Unit labor costs decreased at 2.7 percent in IIIQ2013 and decreased at 0.4 percent in IVQ2013. Unit labor costs increased at 12.3 percent in IQ2014 and at minus 5.6 percent in IIQ2014. Unit labor costs decreased at 1.0 percent in IIIQ2014 and increased at 6.2 percent in IVQ2014. Unit labor costs increased at 1.3 percent in IQ2015 and increased at 1.8 percent in IIQ2015. Unit labor costs increased at 1.2 percent in IIIQ2015 and increased at 1.5 percent in IVQ2015. Unit labor costs decreased at 1.0 percent in IQ2016 and increased at 1.5 percent in IIQ2016. Unit labor costs increased at 0.4 percent in IIIQ2016 and increased at 1.3 percent in IVQ2016. Unit labor costs increased at 3.2 percent in IQ2017 and increased at 3.2 percent in IIQ2017. United labor costs increased at 1.8 percent in IIIQ2017 and increased at 3.9 percent in IVQ2017. Unit labor costs increased at 0.4 percent in IQ2018 and increased at 0.4 percent in IIQ2018. Unit labor costs increased at 3.9 percent in IIIQ2018 and increased at 1.0 percent in IVQ2018. Unit labor costs increased at 5.2 percent in IQ2019 and decreased at 0.7 percent in IIQ2019. Unit labor costs decreased at 0.6 percent in IIIQ2019 and increased at 1.9 percent in IVQ2019. Unit labor costs increased at 9.8 percent in IQ2020 and increased at 11.9 percent in IIQ2020. Unit labor costs decreased at 9.6 percent in IIIQ2020 and increased at 14.0 percent in IVQ2020. Unit labor costs increased at 1.7 percent in IQ2021.

Table II-4, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2021

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	1.8	0.6	-0.2	1.9	0.8
2000	15.4	-6.5	7.9	-2.0	3.6
2001	11.3	-4.9	-1.7	-1.3	1.6
2002	-6.5	2.9	-1.1	1.3	-2.0
2003	-1.6	1.7	-2.9	1.8	-0.1
2004	0.6	3.9	5.6	-0.3	1.6
2005	-1.7	3.3	2.2	2.0	1.4
2006	5.2	1.0	1.7	3.5	2.7
2007	9.0	-1.8	-2.2	1.1	2.5
2008	7.4	-3.5	2.8	6.6	1.7
2009	-13.2	1.6	-3.1	-3.7	-2.5
2010	-4.3	3.3	-0.4	0.5	-1.5
2011	10.7	-3.2	4.5	-7.8	2.2
2012	8.3	0.4	1.1	12.6	1.8
2013	-8.0	4.6	-2.7	-0.4	0.8
2014	12.3	-5.6	-1.0	6.2	1.9
2015	1.3	1.8	1.2	1.5	1.6
2016	-1.0	1.5	0.4	1.3	0.7
2017	3.2	3.2	1.8	3.9	2.3
2018	0.4	0.4	3.9	1.0	1.9
2019	5.2	-0.7	-0.6	1.9	1.9
2020	9.8	11.9	-9.6	14.0	4.3
2021	1.7

Source: US Bureau of Labor Statistics

Chart II-2 provides change of unit labor costs at SAAE from 1999 to 2021. There are multiple oscillations recently with negative changes alternating with positive changes. There is sharp contraction in 2020 followed by rebound 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.

Chart II-2, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2021

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

Table II-5, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate, 1999-2021

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	5.9	-1.4	0.5	5.0	2.5
2000	10.4	-2.1	4.1	-0.6	3.5
2001	5.2	-1.3	-0.5	4.1	1.5
2002	0.5	0.3	-0.1	-1.3	0.7
2003	-1.6	7.8	3.0	4.0	1.4
2004	-4.0	4.7	4.7	-2.6	1.8
2005	0.8	-0.4	-1.0	-1.3	0.3
2006	6.0	-3.3	-3.0	9.0	0.6
2007	6.0	-4.7	-1.0	-0.2	1.5
2008	-0.6	-4.4	-2.3	14.2	-0.9
2009	-7.5	8.1	-1.2	-0.4	1.3
2010	-3.1	4.2	0.5	-1.0	0.2
2011	3.2	-7.1	0.3	-7.0	-0.9
2012	7.4	1.2	-1.5	8.1	0.5
2013	-7.2	3.4	-3.2	1.3	-0.2
2014	5.3	-3.8	1.5	5.3	1.1
2015	8.1	0.5	-0.2	-0.1	3.0
2016	0.4	-2.1	0.0	1.8	-0.2
2017	1.3	1.6	3.1	2.5	1.3
2018	-0.8	-1.4	3.5	-0.1	0.9
2019	8.4	-2.2	-1.4	0.9	1.8
2020	7.9	28.4	-10.0	7.1	5.6
2021	3.3

Source: US Bureau of Labor Statistics