United States Consumer Prices Increase 7.0 Percent in 12 Months Ending in Dec 2021 for Highest Since Jun 1982, US Consumer Prices Increase at Annual Equivalent 9.2 Percent in Oct-Dec 2021, Recovery Without Hiring, Ten Million Fewer Full-Time Jobs in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Theory and Reality of Cyclical Slow Growth, Youth and Middle Age Unemployment, United States Inflation, United States International Trade, Stagflation Risks, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization: Part II

 

United States Consumer Prices Increase 7.0 Percent in 12 Months Ending in Dec 2021 for Highest Since Jun 1982, US Consumer Prices Increase at Annual Equivalent 9.2 Percent in Oct-Dec 2021, Recovery Without Hiring, Ten Million Fewer Full-Time Jobs in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Theory and Reality of Cyclical Slow Growth, Youth and Middle Age Unemployment, United States Inflation, United States International Trade, Stagflation Risks, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Fifteen Million Fewer Full-time Jobs

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

IIA United States International Trade

IC United States Inflation

IC Long-term US Inflation

ID Current US Inflation

III World Financial Turbulence

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

Preamble. The current federal debt limit of the United States is $29.04 trillion (https://home.treasury.gov/system/files/136/FINAL-Daily-Debt-Subject-Limit-Activity-2021_12_15.pdf). The Net International Investment Position of the United States, or foreign debt, is $16.1 trillion (https://www.bea.gov/sites/default/files/2021-12/intinv321.pdf https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html). The United States current account deficit is 3.7 percent of GDP in IIIQ2021 (https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html). The Treasury deficit of the United States reached $2.8 trillion in fiscal year 2021 (https://fiscal.treasury.gov/reports-statements/mts/). Total assets of Federal Reserve Banks reached $8.8 trillion on Jan 12, 2022 and securities held outright reached $8.3 trillion (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). US GDP nominal NSA reached $23.2 trillion in IIIQ2021 (https://www.bea.gov/sites/default/files/2021-12/gdp3q21_3rd.pdf). Total Treasury interest-bearing, marketable debt held by private investors increased from $3635 billion in 2007 to $16,439 billion in Sep 2021 (Fiscal Year 2021) or increase by 352.2 percent (https://fiscal.treasury.gov/reports-statements/treasury-bulletin/).

Chart VII-4 of the Energy Information Administration provides the price of the Natural Gas Futures Contract increasing from $2.581 on Jan 4, 2021 to $4.249 per million Btu on Jan 11, 2022 or 64.6 percent.

Chart VII-4, US, Natural Gas Futures Contract 1

Source: US Energy Information Administration

https://www.eia.gov/dnav/ng/hist/rngc1d.htm

Chart CPI-H provides 12 months percentage changes of the US Consumer Price Index from 1981 to 2021. The increase of 7.0 percent of the US CPI in the 12 months ending in Dec 2021 is the highest since 7.1 percent in Jun 1982 in the beginning adjustment from the Great Inflation.

Chart CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-2021

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

II United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (https://www.census.gov/economic-indicators/). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (https://cmpassocregulationblog.blogspot.com/2022/01/real-disposable-income-decreasing-02.html and earlier https://cmpassocregulationblog.blogspot.com/2021/11/us-gdp-growing-at-21-saar-in-iiiq2021.html). The Census Bureau revised data for 2021, 2020, 2019, 2018, 2017, 2016, 2015, 2014 and 2013. Exports increased 0.2 percent in Nov 2021 while imports increased 4.6 percent in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The trade deficit increased from $67,158 million in Oct 2021 to $80,172 million in Nov 2021. The trade deficit deteriorated to $43,454 million in Feb 2016, improving to $36,916 million in Mar 2016. The trade deficit deteriorated to $38,127 million in Apr 2016, deteriorating to $39,149 million in May 2016 and $41,873 million in Jun 2016. The trade deficit improved to $40,148 million in Jul 2016, moving to $40,421 million in Aug 2016. The trade deficit improved to $37,237 million in Sep 2016, deteriorating to $38,766 million in Oct 2016. The trade deficit deteriorated to $44,082 million in Nov 2016, improving to $41,144 million in Dec 2016. The trade deficit deteriorated to $42,946 million in Jan 2017, improving to $39,811 million in Feb 2017. The trade deficit deteriorated to $41,476 million in Mar 2017 and $44,357 million in Apr 2017, improving to $44,127 million in May 2017. The trade deficit improved to $43,002 million in Jun 2017, deteriorating to $42,007 million in Jul 2017. The trade deficit improved to $41,163 million in Aug 2017, improving to $41,464 million in Sep 2017. The trade deficit deteriorated to $41,615 million in Oct 2017, deteriorating to $44,623 million in Nov 2017. The trade deficit deteriorated to 46,149 million in Dec 2017, deteriorating to $47,056 million in Jan 2018. The trade deficit deteriorated to $49,149 million in Feb 2018, improving to $43,981 million in Mar 2018. The trade deficit worsened to $45,105 million in Apr 2018, improving to $41,185 million in May 2018. The trade deficit deteriorated to $44,871 million in Jun 2018, deteriorating to $49,512 million in Jul 2018. The trade deficit improved to $49,738 million in Aug 2018 and deteriorated to $51,773 million in Sep 2018. The trade deficit deteriorated to $52,345 million in Oct 2018 and improved to $50,547 million in Nov 2018. The trade deficit deteriorated to $55,687 million in Dec 2018, improving to $48,818 million in Jan 2019. The trade deficit improved to $48,032 million in Feb 2019, deteriorating to $49,777 million in Mar 2019. The trade deficit deteriorated to $50,074 million in Apr 2019, deteriorating to $51,904 million in May 2019. The trade deficit improved to $50,390 million in Jun 2019, improving to $49,959 million in Jul 2019. The trade deficit deteriorated to $50,388 million in Aug 2019, improving to $48,262 million in Sep 2019. The trade deficit improved to $42,720 million in Oct 2019, improving to $40,596 million in Nov 2019. The trade deficit deteriorated to $45,421 million in Dec 2019, deteriorating to $45,452 million in Jan 2020. The trade deficit improved to $41,639 million in Feb 2020, deteriorating to $47,157 million in Mar 2020. The trade deficit deteriorated to $52,959 million in Apr 2020. The trade deficit deteriorated to $54,915 million in May 2020, improving to $50,675 million in Jun 2020. The trade deficit deteriorated to $60,743 million in Jul 2020, deteriorating to $63,733 million in Aug 2020. The trade deficit improved to $62,625 million in Sep 2020. The trade deficit deteriorated to $63,678 million in Oct 2020, deteriorating to $67,307 million in Nov 2020. The trade deficit improved to $65,802 million in Dec 2020. The trade deficit improved to 65,696 million in Jan 2021. The trade deficit deteriorated to $68,180 million in Feb 2021. The trade deficit deteriorated to $75,222 million in Mar 2021. The trade deficit improved to 66,151 million in Apr 2021. The trade deficit deteriorated to $67,975 million in May 2021. The trade deficit deteriorated to $72,935 million in Jun 2021. The trade deficit improved to $70,333 million in Jul 2021. The trade deficit deteriorated to $73,195 million in Aug 2021. The trade deficit deteriorated to $81,435 million in Sep 2021. The trade deficit improved to $67,158 million in Oct 2021. The trade deficit deteriorated to $80,172 million in Nov 2021. Exports increased 0.2 percent in Nov 2021 while imports increased 4.6 percent.

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

	Balance		Exports	∆%	Imports	∆%
Jan-2016	-40,157		180,840	-1.9	220,997	-2.0
Feb-2016	-43,454		182,895	1.1	226,349	2.4
Mar-2016	-36,916		181,919	-0.5	218,835	-3.3
Apr-2016	-38,127		184,034	1.2	222,161	1.5
May-2016	-39,149		184,948	0.5	224,097	0.9
Jun-2016	-41,873		186,622	0.9	228,495	2.0
Jul-2016	-40,148		187,910	0.7	228,058	-0.2
Aug-2016	-40,421		189,850	1.0	230,271	1.0
Sep-2016	-37,237		190,415	0.3	227,652	-1.1
Oct-2016	-38,766		189,089	-0.7	227,854	0.1
Nov-2016	-44,082		187,434	-0.9	231,516	1.6
Dec-2016	-41,144		192,381	2.6	233,525	0.9
Jan-2017	-42,946		195,303	1.5	238,248	2.0
Feb-2017	-39,811		195,839	0.3	235,650	-1.1
Mar-2017	-41,476		195,880	0.0	237,356	0.7
Apr-2017	-44,357		195,851	0.0	240,208	1.2
May-2017	-44,127		195,404	-0.2	239,531	-0.3
Jun-2017	-43,002		197,631	1.1	240,633	0.5
Jul-2017	-42,007		197,812	0.1	239,820	-0.3
Aug-2017	-41,163		198,638	0.4	239,800	0.0
Sep-2017	-41,464		200,747	1.1	242,211	1.0
Oct-2017	-41,615		202,584	0.9	244,199	0.8
Nov-2017	-44,623		205,999	1.7	250,623	2.6
Dec-2017	-46,149		209,091	1.5	255,241	1.8
Jan-2018	-47,056		206,058	-1.5	253,114	-0.8
Feb-2018	-49,149		208,776	1.3	257,925	1.9
Mar-2018	-43,981		213,123	2.1	257,104	-0.3
Apr-2018	-45,105		213,183	0.0	258,289	0.5
May-2018	-41,185		216,094	1.4	257,279	-0.4
Jun-2018	-44,871		213,698	-1.1	258,569	0.5
Jul-2018	-49,512		211,824	-0.9	261,336	1.1
Aug-2018	-49,738		211,054	-0.4	260,791	-0.2
Sep-2018	-51,773		212,793	0.8	264,566	1.4
Oct-2018	-52,345		213,861	0.5	266,206	0.6
Nov-2018	-50,547		210,383	-1.6	260,930	-2.0
Dec-2018	-55,687		207,793	-1.2	263,480	1.0
Jan-2019	-48,818		209,087	0.6	257,905	-2.1
Feb-2019	-48,032		210,133	0.5	258,165	0.1
Mar-2019	-49,777		213,813	1.8	263,590	2.1
Apr-2019	-50,074		210,289	-1.6	260,363	-1.2
May-2019	-51,904		213,973	1.8	265,877	2.1
Jun-2019	-50,390		210,575	-1.6	260,965	-1.8
Jul-2019	-49,959		211,469	0.4	261,428	0.2
Aug-2019	-50,388		210,474	-0.5	260,862	-0.2
Sep-2019	-48,262		208,776	-0.8	257,037	-1.5
Oct-2019	-42,720		210,157	0.7	252,877	-1.6
Nov-2019	-40,596		209,739	-0.2	250,335	-1.0
Dec-2019	-45,421		209,883	0.1	255,304	2.0
Jan-2020	-45,452		205,091	-2.3	250,543	-1.9
Feb-2020	-41,639		204,819	-0.1	246,458	-1.6
Mar-2020	-47,157		187,490	-8.5	234,647	-4.8
Apr-2020	-52,959		150,074	-20.0	203,033	-13.5
May-2020	-54,915		146,108	-2.6	201,023	-1.0
Jun-2020	-50,675		158,805	8.7	209,480	4.2
Jul-2020	-60,743		170,908	7.6	231,651	10.6
Aug-2020	-63,733		174,287	2.0	238,020	2.7
Sep-2020	-62,625		178,063	2.2	240,689	1.1
Oct-2020	-63,678		182,732	2.6	246,410	2.4
Nov-2020	-67,307		185,186	1.3	252,494	2.5
Dec-2020	-65,802		190,877	3.1	256,678	1.7
Jan-2021	-65,696		194,405	1.8	260,101	1.3
Feb-2021	-68,180		190,439	-2.0	258,619	-0.6
Mar-2021	-72,222		204,960	7.6	277,182	7.2
Apr-2021	-66,151		207,573	1.3	273,724	-1.2
May-2021	-67,975		209,549	1.0	277,524	1.4
Jun-2021	-72,935		210,524	0.5	283,460	2.1
Jul-2021	-70,333		212,422	0.9	282,756	-0.2
Aug-2021	-73,195		213,204	0.4	286,399	1.3
Sep-2021	-81,435		206,796	-3.0	288,232	0.6
Oct-2021	-67,158		223,856	8.2	291,014	1.0
Nov-2021	-80,172		224,215	0.2	304,388	4.6

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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

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

	Balance	∆%	Exports	∆%	Imports	∆%
1960	4,608		19,626		15,018
1961	5,476	18.8	20,190	2.9	14,714	-2.0
1962	4,583	-16.3	20,973	3.9	16,390	11.4
1963	5,289	15.4	22,427	6.9	17,138	4.6
1964	7,006	32.5	25,690	14.5	18,684	9.0
1965	5,333	-23.9	26,699	3.9	21,366	14.4
1966	3,837	-28.1	29,379	10.0	25,542	19.5
1967	4,122	7.4	30,934	5.3	26,812	5.0
1968	837	-79.7	34,063	10.1	33,226	23.9
1969	1,289	54.0	37,332	9.6	36,043	8.5
1970	3,224	150.1	43,176	15.7	39,952	10.8
1971	-1,476	-145.8	44,087	2.1	45,563	14.0
1972	-5,729	288.1	49,854	13.1	55,583	22.0
1973	2,389	-141.7	71,865	44.2	69,476	25.0
1974	-3,884	-262.6	99,437	38.4	103,321	48.7
1975	9,551	-345.9	108,856	9.5	99,305	-3.9
1976	-7,820	-181.9	116,794	7.3	124,614	25.5
1977	-28,352	262.6	123,182	5.5	151,534	21.6
1978	-30,205	6.5	145,847	18.4	176,052	16.2
1979	-23,922	-20.8	186,363	27.8	210,285	19.4
1980	-19,696	-17.7	225,566	21.0	245,262	16.6
1981	-22,267	13.1	238,715	5.8	260,982	6.4
1982	-27,510	23.5	216,442	-9.3	243,952	-6.5
1983	-52,409	90.5	205,639	-5.0	258,048	5.8
1984	-106,702	103.6	223,976	8.9	330,678	28.1
1985	-117,711	10.3	218,815	-2.3	336,526	1.8
1986	-138,279	17.5	227,159	3.8	365,438	8.6
1987	-152,119	10.0	254,122	11.9	406,241	11.2
1988	-118,526	-22.1	322,426	26.9	440,952	8.5
1989	-109,399	-7.7	363,812	12.8	473,211	7.3
1990	-101,719	-7.0	393,592	8.2	495,311	4.7
1991	-66,723	-34.4	421,730	7.1	488,453	-1.4
1992	-84,501	26.6	448,164	6.3	532,665	9.1
1993	-115,568	36.8	465,091	3.8	580,659	9.0
1994	-150,630	30.3	512,626	10.2	663,256	14.2
1995	-158,801	5.4	584,742	14.1	743,543	12.1
1996	-170,214	7.2	625,075	6.9	795,289	7.0
1997	-180,522	6.1	689,182	10.3	869,704	9.4
1998	-229,758	27.3	682,138	-1.0	911,896	4.9
1999	-328,821	43.1	695,797	2.0	1,024,618	12.4
2000	-436,104	32.6	781,918	12.4	1,218,022	18.9
2001	-411,899	-5.6	729,100	-6.8	1,140,999	-6.3
2002	-468,262	13.7	693,104	-4.9	1,161,366	1.8
2003	-532,350	13.7	724,771	4.6	1,257,121	8.2
2004	-654,829	23.0	814,875	12.4	1,469,703	16.9
2005	-772,374	18.0	901,082	10.6	1,673,456	13.9
2006	-827,970	7.2	1,025,969	13.9	1,853,939	10.8
2007	-808,765	-2.3	1,148,197	11.9	1,956,962	5.6
2008	-816,200	0.9	1,287,441	12.1	2,103,641	7.5
2009	-503,583	-38.3	1,056,042	-18.0	1,559,625	-25.9
2010	-635,365	26.2	1,278,493	21.1	1,913,858	22.7
2011	-725,447	14.2	1,482,507	16.0	2,207,954	15.4
2012	-730,446	0.7	1,545,821	4.3	2,276,267	3.1
2013	-689,470	-5.6	1,578,517	2.1	2,267,987	-0.4
2014	-734,482	6.5	1,621,874	2.7	2,356,356	3.9
2015	-745,483	1.5	1,503,328	-7.3	2,248,811	-4.6
2016	-735,326	-1.4	1,451,460	-3.5	2,186,786	-2.8
2017	-792,396	7.8	1,547,195	6.6	2,339,591	7.0
2018	-870,358	9.8	1,665,787	7.7	2,536,145	8.4
2019	-850,917	-2.2	1,642,820	-1.4	2,493,738	-1.7
2020	-911,056	7.1	1,424,935	-13.3	2,335,991	-6.3

Source: US Census Bureau

https://www.census.gov/economic-indicators/

There is recent sharp deterioration of the US trade balance and the three-month moving average in Chart IIA-1 of the US Census Bureau with further improvement in Jan-Feb 2019. There is marginal improvement in Jun-Nov 2019 with deterioration in Dec 2019. There is improvement in Jan-Feb 2020 with deterioration in Mar-May 2020 followed by improvement in Jun 2020. There is deterioration in Jul-Aug 2020 and improvement in Sep 2020 followed by deterioration in Oct-Nov 2020. There is improvement in Dec 2020 followed by deterioration in Jan-Mar 2021 with improvement in Apr 2021. There is deterioration in May-Jun 2021, improvement in Jul 2021 and deterioration in Aug-Sep 2021. There is improvement in Oct 2021 followed by deterioration in Nov 2021.

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

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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

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

Table IIA-2B provides the US international trade balance, exports and imports of goods and services on an annual basis from 1960 to 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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). Growth and commodity shocks under alternating inflation waves (https://cmpassocregulationblog.blogspot.com/2022/01/real-disposable-income-decreasing-02.html and earlier https://cmpassocregulationblog.blogspot.com/2021/11/us-gdp-growing-at-21-saar-in-iiiq2021.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/economic-indicators/

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). Updated Versions of fusion charts are shown below each chart.

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

https://www.census.gov/economic-indicators/

Chart IIA-2F, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).

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

Source: US Census Bureau

https://www.census.gov/economic-indicators/

Chart IIA-2AF, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 2019-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) 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

https://www.census.gov/economic-indicators/

Chart IIA-3F, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

Chart IIA-3A shows sharp contraction of exports in Feb-Apr 2020 followed by recovery.

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

Source: US Census Bureau

https://www.census.gov/economic-indicators/

Chart IIA-3AF, US, Exports SA, Monthly, Millions of Dollars Jan 2019-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) 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

https://www.census.gov/economic-indicators/

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

Chart IIA-4F, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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

https://www.census.gov/economic-indicators/

Chart IIA-4AF, US, Imports SA, Monthly, Millions of Dollars Jan 2019-Nov 2021

Source: US Census Bureau

https://www.census.gov/economic-indicators/

There is deterioration of the US trade balance in goods in Table IIA-3 from deficit of $86.227 million in Nov 2020 to deficit of $98,991 million in Nov 2021. The nonpetroleum deficit increased from $85,730 million in Nov 2020 to $96,972 million in Nov 2021 while the petroleum surplus decreased from $328 million in Nov 2020 to deficit of minus $1068 million in Nov 2021. Total exports of goods increased 23.0 percent in Nov 2021 relative to a year earlier while total imports increased 19.7 percent. Nonpetroleum exports increased 16.0 percent from Nov 2020 to Nov 2021 while nonpetroleum imports increased 14.8 percent. Petroleum imports increased 118.9 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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).

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

	Nov 2021	Nov 2020	∆%
Total Balance	-98,991	-86,227
Petroleum	-1,068	328
Non-Petroleum	-96,972	-85,730
Total Exports	155,942	126,789	23.0
Petroleum	19,788	9,856	100.8
Non-Petroleum	116,681	135,327	16.0
Total Imports	254,933	213,017	19.7
Petroleum	20,856	9,527	118.9
Non-Petroleum	202,412	232,300	14.8

Details may not add because of rounding and seasonal adjustment

Source: US Census Bureau

https://www.census.gov/economic-indicators/

US exports and imports of goods not seasonally adjusted in Jan-Nov 2021 and Jan-Nov 2020 are in Table IIA-4. The rate of growth of exports was 23.4 percent and 21.4 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 20.2 percent and of mineral fuels that increased 56.4 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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The US exports a growing amount of crude oil, increasing 40.8 percent in cumulative Jan-Nov 2021 relative to a year earlier. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports increased 18.9 percent while manufactured imports increased 19.3 percent. Significant part of the US trade imbalance originates in imports of mineral fuels increasing 74.8 percent and petroleum increasing 74.6 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-Nov 2021 $ Millions	Jan-Nov 2020 $ Millions	∆%
Exports	1,595,321	1,292,741	23.4
Manufactured	1,033,109	868,542	18.9
Agricultural Commodities	160,551	133,557	20.2
Mineral Fuels	210,588	134,689	56.4
Petroleum	140,610	99,856	40.8
Imports	2,575,024	2,120,618	21.4
Manufactured	2,240,233	1,877,308	19.3
Agricultural Commodities	156,346	134,176	16.5
Mineral Fuels	194,550	111,313	74.8
Petroleum	180,085	103,133	74.6

Source: US Census Bureau

https://www.census.gov/economic-indicators/

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-Nov 2021. North America, consisting of Mexico and Canada, have joint share of 33.4 percent of exports and 26.2 percent of imports. The combined share of North America and Europe is 55.4 percent of exports and 50.0 percent of imports. The share of the Pacific Rim in exports is 26.2 percent and 33.9 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-Nov 2021	Millions USD	Million USD	Percent	Million USD	Percent
Region/Country	Balance	Exports		Imports
Total Census Basis	-979,703	1,595,321		2,575,024
North America*	-142,792	532,779	33.4	675,571	26.2
Europe	-261,466	350,633	22.0	612,100	23.8
Euro Area	-173,021	225,277	14.1	398,298	15.5
Pacific Rim	-453,471	418,165	26.2	871,636	33.9
China	-319,152	137,681	8.6	456,832	17.7
Japan	-55,162	68,416	4.3	123,578	4.8
Brazil	14,527	42,783	2.7	28,256	1.1

*Canada and Mexico

Source: US Census Bureau

https://www.census.gov/economic-indicators/

IID. 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 150.983 in IQ1947 to 110.202 in IVQ2020, increasing from 109.891 in IVQ2019 and increasing from 107.819 in IIQ2020 and 109.156 in IIIQ2020. The index increased to 112.034 in IQ2021, increasing to 113.485 in IIQ2021. The index increased to 114.437 in IIIQ2021. 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

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-1A provides the annual US terms of trade from 1929 to 2020. The index fell from 143.072 in 1929 to 109.211 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 89.4 in Nov 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 move to 104.6 in Nov 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 117.8 in Nov 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 109.1 in Nov 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 111.2 in Nov 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 Nov 2021 is lower by 6.4 percent relative to the peak in Jun 2007, as shown in Chart V-3A. Manufacturing (SIC) in Nov 2021 at 100.8699 is lower by 9.0 percent relative to the peak at 110.8954 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 2.9 percent per year from Nov 1919 to Nov 2021. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 106.8161 in Dec 2007 to 159.0076 in Nov 2021. The actual index NSA in Nov 2021 is 100.8699 which is 36.6 percent below trend. The underperformance of manufacturing in Mar-Nov 2020 originates partly in the earlier global recession augmented by the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). 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 106.8161 in Dec 2007 to 167.8289 in Nov 2021. The actual index NSA in Nov 2021 is 100.8699, which is 39.9 percent below trend. Manufacturing output grew at average 1.8 percent between Dec 1986 and Nov 2021. Using trend growth of 1.8 percent per year, the index would increase to 136.9179 in Nov 2021. The output of manufacturing at 100.8699 in Nov 2021 is 26.3 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 108.5167 in Jul 2007 to the low of 84.7321 in May 2009 or 21.9 percent. The NAICS manufacturing index increased from 84.7321 in Apr 2009 to 101.5378 in Nov 2021 or 19.8 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 104.6868 in Dec 2007 to 168.9711 in Nov 2021. The NAICS index at 101.5378 in Nov 2021 is 39.9 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 104.6868 in Dec 2007 to 132.3657 in Nov 2021. The NAICS index at 101.5378 in Nov 2021 is 23.3 percent below trend under this alternative calculation.

Chart V-3A, United States Manufacturing (NAICS) NSA, Dec 2007 to Nov 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 Nov 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 262.029 million in Nov 2021 or 30.316 million.

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

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3C provides nonfarm payroll manufacturing jobs in the United States from Jan 2007 to Nov 2021. Nonfarm payroll manufacturing jobs fell from 13.987 million in Jun 2007 to 12.558 million in Nov 2021, or 1.429 million.

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

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3D provides the index of US manufacturing (NAICS) from Jan 1972 to Nov 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/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).

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

Source: Board of Governors of the Federal Reserve System

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

Chart V-3E provides the US noninstitutional civilian population, or those in condition of working, from Jan 1948, when first available, to Nov 2021. The noninstitutional civilian population increased from 170.042 million in Jun 1981 to 262.029 million in Nov 2021 or 91.987 million.

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

Source: US Bureau of Labor Statistics

https://www.bls.gov/

Chart V-3F provides manufacturing jobs in the United States from Jan 1939 to Nov 2021. Nonfarm payroll manufacturing jobs decreased from a peak of 18.890 million in Jun 1981 to 12.558 million in Nov 2021.

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

Source: US Bureau of Labor Statistics

https://www.bls.gov/

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

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

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

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

Source: US Bureau of Economic Analysis

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

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

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

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

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

Source: US Bureau of Economic Analysis

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

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 IIIQ2020 and IIIQ2021. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/sites/default/files/2021-12/trans321.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 $16.5 billion, or 8.3 percent, to $214.8 billion in the third quarter of 2021, according to statistics released today by the U.S. Bureau of Economic Analysis (BEA). The revised second-quarter deficit was $198.3 billion. The third-quarter deficit was 3.7 percent of current-dollar gross domestic product, up from 3.5 percent in the second quarter.

The $16.5 billion widening of the current-account deficit in the third quarter reflected a reduced surplus on services and expanded deficits on secondary income and on goods that were partly offset by an expanded surplus on primary 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 $188.8 billion in IIIQ2020 to $237.7 billion in IIIQ2021. The current account deficit seasonally adjusted at annual rate increased from 3.3 percent of GDP in IIIQ2020 to 3.5 percent of GDP in IIQ2021, increasing at 3.7 percent of GDP in IIQ2021 (using the third update of GDP for IIIQ2021 (https://www.bea.gov/sites/default/files/2021-12/gdp3q21_3rd.pdf https://apps.bea.gov/iTable/index_nipa.cfm) in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The ratio of the current account deficit to GDP has stabilized around 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

	IIIQ2020	IIIQ2021	Difference
Goods Balance	-261,517	-296,723	-35,206
X Goods	352,449	436,343	23.8 ∆%
M Goods	-613,965	-733,066	19.4 ∆%
Services Balance	57,490	48,385	-9,105
X Services	165,120	189,854	15.0 ∆%
M Services	-107,629	-141,469	31.4 ∆%
Balance Goods and Services	-204,027	-248,338	-44,311
Exports of Goods and Services and Income Receipts	802,510	952,106	149,596
Imports of Goods and Services and Income Payments	-991,306	-1,189,791	-198,485
Current Account Balance	-188,796	-237,685	-48,889
% GDP SA	IIIQ2020	IIIQ2021	IIQ2021
	3.3	3.7	3.5

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 IIIQ2021. There is deterioration in IIIQ2021 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) .

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

Source: https://www.bea.gov/sites/default/files/2021-12/trans321.pdf

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

Source: https://www.bea.gov/sites/default/files/2021-12/trans321.pdf

The following chart of the BEA (Bureau of Economic Analysis) provides the US current account and component balances through IIQ2021. There is deterioration in IIQ2021 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) .

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

Source: https://www.bea.gov/sites/default/files/2021-09/trans221.pdf

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

Source: https://www.bea.gov/sites/default/files/2021-09/trans221.pdf

The following chart of the BEA (Bureau of Economic Analysis) provides the US current account and component balances through IQ2021. There is deterioration in IQ2021 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 ac 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/2021-06/trans121.pdf

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

Source: https://www.bea.gov/sites/default/files/2021-06/trans121.pdf

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 2.4 percent in IQ2019 decreases to 1.9 percent in IVQ2019. The current account deficit at 2.1 percent in IQ2020 increases to 3.2 percent in IIQ2020. The current account deficit increases to 3.3 percent in IIIQ2020. The current account deficit stabilizes to 3.3 percent of GDP in IVQ2020. The current account deficit increases to 3.4 percent in IQ2021. The current account deficit increases to 3.5 percent of GDP in IIQ2021. The current account deficit increases to 3.7 percent in IIIQ2021. The absolute value of the net international investment position increases at $13.0 trillion in IIQ2020. The absolute value of the net international investment position increases to $13.8 trillion in IIIQ2020. The absolute value of the net international position increases to $14.0 trillion in IVQ2020. The absolute value of the net international investment position increased to $14.3 trillion in IQ2021. The absolute value of the net international investment position increases to $15.9 trillion in IIQ2021. The absolute value of the net international investment position increases to $16.1 trillion in IIIQ2021. The BEA explains as follows (https://www.bea.gov/sites/default/files/2021-12/intinv321.pdf): “

• The U.S. net international investment position (IIP), the difference between U.S. residents' foreign financial assets and liabilities, was –$16.07 trillion at the end of the third quarter of 2021, according to statistics released today by the U.S. Bureau of Economic Analysis (BEA). Assets totaled $34.45 trillion, and liabilities were $50.53 trillion. At the end of the second quarter, the net investment position was –$15.91 trillion. The net investment positions and components of assets and liabilities are presented in table 1.
• U.S. assets increased by $181.2 billion to a total of $34.45 trillion at the end of the third quarter, reflecting increases in portfolio investment and reserve assets. Portfolio investment assets increased by $194.3 billion to $16.16 trillion, driven by net U.S. purchases of foreign securities. Reserve assets increased by $105.0 billion to $695.1 billion, reflecting the allocation of $112.8 billion in new special drawing rights (SDRs) in August 2021 to the United States as its share of the $650 billion SDR allocation approved by the International Monetary Fund (IMF). The SDR is an international reserve asset created by the IMF to supplement its member countries' official reserves and can be exchanged between members for currencies such as the U.S. dollar, the euro, or the yen. The allocation in the third quarter was the largest in the history of the IMF.
• U.S. liabilities increased by $346.3 billion to a total of $50.53 trillion at the end of the third quarter, mostly reflecting increases in other investment liabilities. Other investment liabilities increased by $294.8 billion to $7.77 trillion, reflecting increases in deposit liabilities and in SDR allocation liabilities that represent the U.S. long-term obligation to other IMF member countries holding SDRs. In an SDR allocation, the increase in U.S. liabilities offsets the increase in U.S. assets, so the allocation has no impact on the net international investment position.

In the third quarter of 2021, a new allocation of special drawing rights, approved by the International Monetary Fund to mitigate the impact of the COVID-19 pandemic on the finances of developing countries, contributed to the increases in U.S. assets and liabilities. The full economic effects of the COVID-19 pandemic cannot be quantified in the IIP statistics because the impacts are generally embedded in source data and cannot be separately identified.”

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

	IIQ2020	IIIQ2020	IVQ2020	IQ2021	IIQ2021	IIIQ2021
Goods & Services	-159	-204	-196	-176	-208	-248
Primary Income	35	49	54	50	39	49
Secondary Income	-29	-34	-33	-33	-30	-38
Current Account	-154	-189	-176	-160	-199	-238
Current Account % GDP SA	3.2	3.3	3.3	3.4	3.5	3.7
NIIP	-12996	-13767	-14011	-14301	-15906	-16071
US Owned Assets Abroad	28788	29518	32256	32838	34273	34455
Foreign Owned Assets in US	-41783	-43285	-46268	-47139	-50179	-50526
DIA MV	7925	8346	9405	9892	10563	10543
DIUS MV	10035	10843	11978	12563	13473	13572

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-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-first-quarter-2021-year-2020-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/2021/us-international-investment-position-first-quarter-2021-year-2020-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/2021/us-international-investment-position-second-quarter-2021

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-second-quarter-2021

Chart VI-3C5, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2021/us-international-investment-position-third-quarter-2021

Chart VI-3C5A, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

https://www.bea.gov/news/2021/us-international-investment-position-third-quarter-2021

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 Jan 13, 2021, at 0.08 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 0.08 percent on Jan 13, 2022. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

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

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

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

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

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Jan 13, 2022, 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 IIIQ2021 at 2.1 percent on average is in contrast with 3.6 percent on average in the expansion from IQ1983 to IQ1995 (https://cmpassocregulationblog.blogspot.com/2021/12/us-gdp-growing-at-23-saar-in-iiiq2021.html and earlier https://cmpassocregulationblog.blogspot.com/2021/11/us-gdp-growing-at-21-saar-in-iiiq2021.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 23.5 million or 13.6 percent of the effective labor force in Dec 2021 (https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2021/12/increase-in-nov-2021-of-nonfarm-payroll.html) with much lower hiring than in the period before the current cycle (Section II and earlier https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.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 IIIQ2021 at 2.1 percent on average is in contrast with 3.6 percent on average in the expansion from IQ1983 to IQ1995 (https://cmpassocregulationblog.blogspot.com/2021/12/us-gdp-growing-at-23-saar-in-iiiq2021.html and earlier https://cmpassocregulationblog.blogspot.com/2021/11/us-gdp-growing-at-21-saar-in-iiiq2021.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 23.5 million or 13.6 percent of the effective labor force in Dec 2021 (https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2021/12/increase-in-nov-2021-of-nonfarm-payroll.html) with much lower hiring than in the period before the current cycle (Section II and earlier https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-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

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

Risk aversion channels funds toward US long-term and short-term securities that finance the

US balance of payments and fiscal deficits benefitting from risk flight to US dollar

denominated assets. There 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) weakened from minus $2.3 billion in Sep 2021 to minus $22.2 billion in Oct 2021. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Sep 2021 of $14.2 billion weakened to minus $22.1 billion in Oct 2021. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) strengthened from $12.4 billion in Sep 2021 to $29.2 billion in Oct 2021. Other transactions (row C2 in Table VA-4) changed from minus $29.0 billion in Sep 2021 to minus $29.3 billion in Oct 2021. In Oct 2021,

C = A + B + C2 = -$22.1 billion + $29.2 billion - $29.3 billion = -$22.2 billion.

There are minor rounding errors. There is weakening demand in Table VA-4 in Oct 2021 in A1 private purchases by residents overseas of US long-term securities of minus $46.5 billion of which weakening in A11 Treasury securities of minus $50.9 billion, weakening in A12 of $15.3 billion in agency securities, strengthening of $11.5 billion of corporate bonds and weakening of minus $22.4 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 increase $24.4 billion with increase of Treasury securities of $7.3 billion in Oct 2021. Official purchases of agency securities increased $16.0 billion in Oct 2021. Corporate bonds increased $0.5 billion. Row D shows increase in Oct 2021 of $55.3 billion in purchases of short-term dollar denominated obligations. Foreign holdings of US Treasury bills increased $33.8 billion (row D1) with foreign official holdings decreasing $8.2 billion while the category “other” increased $21.5 billion. Foreign private holdings of US Treasury bills increased $42.0 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

	Oct 20 12- Months	Oct 21 12- Months	Sep 2021	Oct 2021
A Foreign Purchases less Sales of US LT Securities	-6.3	632.8	14.2	-22.1
A1 Private	-36.9	449.7	14.4	-46.5
A11 Treasury	-352.3	-11.6	8.9	-50.9
A12 Agency	226.3	194.9	16.9	15.3
A13 Corporate Bonds	-165.3	114.8	1.3	11.5
A14 Equities	254.4	151.6	-12.7	-22.4
A2 Official	30.7	183.2	-0.2	24.4
A21 Treasury	-174.1	-29.2	-7.6	7.3
A22 Agency	180.1	205.1	5.9	16.0
A23 Corporate Bonds	17.1	9.3	-0.3	0.5
A24 Equities	7.6	-2.0	1.8	0.6
B Net US Purchases of LT Foreign Securities	358.1	291.4	12.4	29.2
B1 Foreign Bonds	260.0	336.6	22.1	33.3
B2 Foreign Equities	98.1	-45.2	-9.6	-4.1
C1 Net Transactions	351.8	924.2	26.7	7.1
C2 Other	-368.4	-457.4	-29.0	-29.3
C Net Foreign Purchases of US LT Securities	-16.5	466.8	-2.3	-22.2
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	329.3	14.7	-43.1	55.3
D1 US Treasury Bills	267.1	-49.9	4.7	33.8
D11 Private	179.8	67.9	7.1	42.0
D12 Official	87.3	-117.8	-2.4	-8.2
D2 Other	62.2	64.6	-47.8	21.5

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

https://home.treasury.gov/news/press-releases

Table VA-5 provides major foreign holders of US Treasury securities. China is the second largest holder with $1065.4 billion in Oct 2021, increasing 1.7 percent from $1047.6 billion in Sep 2021 while increasing $11.4 billion from Oct 2020 or 1.1 percent. The United States Treasury estimates US government debt held by private investors at $16,439 billion in Sep 2021 (Fiscal Year 2021). China’s holding of US Treasury securities in Aug 2021 represents 6.5 percent of US government marketable interest-bearing debt held by private investors (https://fiscal.treasury.gov/reports-statements/treasury-bulletin/). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan increased its holdings from $1273.1 billion in Oct 2020 to $1320.4 billion in Oct 2021 or 3.7 percent. The combined holdings of China and Japan in Oct 2021 add to $2385.8 billion, which is equivalent to 14.5 percent of US government marketable interest-bearing securities held by investors of $16,439 billion in Sep 2021 (Fiscal Year 2021) (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Total foreign holdings of Treasury securities increased from $7070.4 billion in Oct 2020 to $7648.7 billion in Oct 2021, or 8.2 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007). Professor Martin Feldstein, at Harvard University, writing on “The Debt Crisis Is Coming Soon,” published in the Wall Street Journal on Mar 20, 2019 (https://www.wsj.com/articles/the-debt-crisis-is-coming-soon-11553122139?mod=hp_opin_pos3), foresees a US debt crisis with deficits moving above $1 trillion and debt above 100 percent of GDP. A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“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.”

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

	Oct 2021	Sep 2021	Oct 2020
Total	7648.7	7549.1	7070.4
Japan	1320.4	1299.6	1273.1
China	1065.4	1047.6	1054.0
United Kingdom	579.8	566.5	442.8
Ireland	324.3	309.4	316.3
Luxembourg	314.3	311.8	266.2
Switzerland	291.8	296.5	255.5
Cayman Islands	257.7	252.7	221.5
Brazil	247.7	249.0	262.9
Taiwan	242.4	239.5	218.2
France	239.6	242.4	136.9
Hong Kong	233.4	229.5	226.6
Belgium	225.8	220.9	239.5
India	210.7	218.4	222.4
Canada	200.3	167.1	131.3
Foreign Official Holdings	4203.6	4232.6	4166.8
A. Treasury Bills	257.6	265.8	375.4
B. Treasury Bonds and Notes	3946.1	3966.8	3791.3

Source: United States Treasury

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

I D Current US Inflation. Unconventional monetary policy of zero interest rates and large-scale purchases of long-term securities for the balance sheet of the central bank is proposed to prevent deflation. The data of CPI inflation of all goods and CPI inflation excluding food and energy for the past six decades does not show even one negative change, as shown in Table CPIEX.

Table CPIEX, Annual Percentage Changes of the CPI All Items Excluding Food and Energy

Year	Annual ∆%
1958	2.4
1959	2.0
1960	1.3
1961	1.3
1962	1.3
1963	1.3
1964	1.6
1965	1.2
1966	2.4
1967	3.6
1968	4.6
1969	5.8
1970	6.3
1971	4.7
1972	3.0
1973	3.6
1974	8.3
1975	9.1
1976	6.5
1977	6.3
1978	7.4
1979	9.8
1980	12.4
1981	10.4
1982	7.4
1983	4.0
1984	5.0
1985	4.3
1986	4.0
1987	4.1
1988	4.4
1989	4.5
1990	5.0
1991	4.9
1992	3.7
1993	3.3
1994	2.8
1995	3.0
1996	2.7
1997	2.4
1998	2.3
1999	2.1
2000	2.4
2001	2.6
2002	2.4
2003	1.4
2004	1.8
2005	2.2
2006	2.5
2007	2.3
2008	2.3
2009	1.7
2010	1.0
2011	1.7
2012	2.1
2013	1.8
2014	1.7
2015	1.8
2016	2.2
2017	1.8
2018	2.1
2019	2.2
2020	1.7
2021	3.6

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

Chart I-12 provides the consumer price index NSA from 1913 to 2021. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart I-12, US, Consumer Price Index, NSA, 1913-2021

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

Chart I-13 provides 12-month percentage changes of the consumer price index from 1914 to 2021. The only episode of deflation after 1950 is in 2009, which is explained by the reversal of speculative commodity futures carry trades that were induced by interest rates driven to zero in a shock of monetary policy in 2008. The only persistent case of deflation is from 1930 to 1933, which has little if any relevance to the contemporary United States economy. There are actually three waves of inflation in the second half of the 1960s, in the mid-1970s and again in the late 1970s. Inflation rates then stabilized in a range with only two episodes above 5 percent.

Chart I-13, US, Consumer Price Index, All Items, 12- Month Percentage Change 1914-2021

Source: US Bureau of Labor Statistics

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

Table I-2 provides annual percentage changes of United States consumer price inflation from 1914 to 2021. There have been only cases of annual declines of the CPI after wars:

• World War I minus 10.5 percent in 1921 and minus 6.1 percent in 1922 following cumulative increases of 83.5 percent in four years from 1917 to 1920 at the average of 16.4 percent per year
• World War II: minus 1.2 percent in 1949 following cumulative 33.9 percent in three years from 1946 to 1948 at average 10.2 percent per year
• Minus 0.4 percent in 1955 two years after the end of the Korean War
• Minus 0.4 percent in 2009.
• The decline of 0.4 percent in 2009 followed increase of 3.8 percent in 2008 and is explained by the reversal of speculative carry trades into commodity futures that were created in 2008 as monetary policy rates were driven to zero. The reversal occurred after misleading statement on toxic assets in banks in the proposal for TARP (Cochrane and Zingales 2009).

There were declines of 1.7 percent in both 1927 and 1928 during the episode of revival of rules of the gold standard. The only persistent deflationary period since 1914 was during the Great Depression in the years from 1930 to 1933 and again in 1938-1939. Consumer prices increased only 0.1 percent in 2015 because of the collapse of commodity prices from artificially high levels induced by zero interest rates. Consumer prices increased 1.3 percent in 2016, increasing at 2.1 percent in 2017. Consumer prices increased 2.4 percent in 2018, increasing at 1.8 percent in 2019. Consumer prices increased 1.2 percent in 2020. Consumer prices increased 4.7 percent in 2021 during fiscal, monetary, and external imbalances. Fear of deflation based on that experience does not justify unconventional monetary policy of zero interest rates that has failed to stop deflation in Japan. Financial repression causes far more adverse effects on allocation of resources by distorting the calculus of risk/returns than alleged employment-creating effects or there would not be current recovery without jobs and hiring after zero interest rates since Dec 2008 and intended now forever in a self-imposed forecast growth and employment mandate of monetary policy. Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness. Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). If there were an infallible science of central banking, models and forecasts would provide accurate information to policymakers on the future course of the economy in advance. Such forewarning is essential to central bank science because of the long lag between the actual impulse of monetary policy and the actual full effects on income and prices many months and even years ahead (Romer and Romer 2004, Friedman 1961, 1953, Culbertson 1960, 1961, Batini and Nelson 2002). Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzed 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). Jon Hilsenrath demonstrates that Fed policymakers frequently did not understand the current state of the US economy in 2008 and much less the direction of income and prices. The conclusion of Friedman (1953) that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

Table I-2, US, Annual CPI Inflation ∆% 1914-2021

Year	Annual ∆%
1914	1.0
1915	1.0
1916	7.9
1917	17.4
1918	18.0
1919	14.6
1920	15.6
1921	-10.5
1922	-6.1
1923	1.8
1924	0.0
1925	2.3
1926	1.1
1927	-1.7
1928	-1.7
1929	0.0
1930	-2.3
1931	-9.0
1932	-9.9
1933	-5.1
1934	3.1
1935	2.2
1936	1.5
1937	3.6
1938	-2.1
1939	-1.4
1940	0.7
1941	5.0
1942	10.9
1943	6.1
1944	1.7
1945	2.3
1946	8.3
1947	14.4
1948	8.1
1949	-1.2
1950	1.3
1951	7.9
1952	1.9
1953	0.8
1954	0.7
1955	-0.4
1956	1.5
1957	3.3
1958	2.8
1959	0.7
1960	1.7
1961	1.0
1962	1.0
1963	1.3
1964	1.3
1965	1.6
1966	2.9
1967	3.1
1968	4.2
1969	5.5
1970	5.7
1971	4.4
1972	3.2
1973	6.2
1974	11.0
1975	9.1
1976	5.8
1977	6.5
1978	7.6
1979	11.3
1980	13.5
1981	10.3
1982	6.2
1983	3.2
1984	4.3
1985	3.6
1986	1.9
1987	3.6
1988	4.1
1989	4.8
1990	5.4
1991	4.2
1992	3.0
1993	3.0
1994	2.6
1995	2.8
1996	3.0
1997	2.3
1998	1.6
1999	2.2
2000	3.4
2001	2.8
2002	1.6
2003	2.3
2004	2.7
2005	3.4
2006	3.2
2007	2.8
2008	3.8
2009	-0.4
2010	1.6
2011	3.2
2012	2.1
2013	1.5
2014	1.6
2015	0.1
2016	1.3
2017	2.1
2018	2.4
2019	1.8
2020	1.2
2021	4.7

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

Chart I-14 provides the consumer price index excluding food and energy from 1957 to 2021. There is long-term inflation in the US without episodes of persistent deflation.

Chart I-14, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2021

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

Chart I-15 provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 to 2021. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.

Chart I-15, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2021

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

The consumer price index of housing is in Chart I-16. There was also acceleration during the Great Inflation of the 1970s. The index flattens after the global recession in IVQ2007 to IIQ2009. Housing prices collapsed under the weight of construction of several times more housing than needed. Surplus housing originated in subsidies and artificially low interest rates in the shock of unconventional monetary policy in 2003 to 2004 in fear of deflation.

Chart I-16, US, Consumer Price Index Housing, NSA, 1967-2021

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

Chart I-17 provides 12-month percentage changes of the housing CPI. The Great Inflation also had extremely high rates of housing inflation. Housing is considered as potential hedge of inflation.

Chart I-17, US, Consumer Price Index, Housing, 12- Month Percentage Change, NSA, 1968-2021

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

ID Current US Inflation. Consumer price inflation has fluctuated in recent months. Table I-3 provides 12-month consumer price inflation in Dec 2021 and annual equivalent percentage changes for the months from Oct 2021 to Dec 2021 of the CPI and major segments. The final column provides inflation from Nov 2021 to Dec 2021. CPI inflation increased 7.0 percent in the 12 months ending in Dec 2021. The annual equivalent rate from Oct 2021 to Dec 2021 was 9.2 percent in the new episode of reversal and renewed positions of carry trades from zero interest rates to commodities exposures with increasing fiscal imbalances; and the monthly inflation rate of 0.5 percent annualizes at 6.2 percent with oscillating carry trades at the margin. These inflation rates fluctuate in accordance with inducement of risk appetite or frustration by risk aversion of carry trades from zero interest rates to commodity futures. At the margin, the decline in commodity prices in sharp recent risk aversion in commodities markets caused lower inflation worldwide (with return in some countries in Dec 2012 and Jan-Feb 2013) that followed a jump in Aug-Sep 2012 because of the relaxed risk aversion resulting from the bond-buying program of the European Central Bank or Outright Monetary Transactions (OMT) (https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html). Carry trades moved away from commodities into stocks with resulting weaker commodity prices and stronger equity valuations. There is reversal of exposures in commodities but with preferences of equities by investors. Geopolitical events in Eastern Europe and the Middle East together with economic conditions worldwide are inducing risk concerns in commodities at the margin. With zero or very low interest rates, commodity prices would increase again in an environment of risk appetite, as shown in past oscillating inflation. Excluding food and energy, core CPI inflation was 5.5 percent in the 12 months ending in Dec 2021, 7.0 percent in annual equivalent from Oct 2021 to Dec 2021 and 0.6 percent in Nov 2021, which annualizes at 7.4 percent. There is no deflation in the US economy that could justify further unconventional monetary policy, which is now open-ended or forever with very low interest rates and cessation of bond-buying by the central bank but with reinvestment of interest and principal, or QE→∞ even if the economy grows back to potential. The FOMC is engaging in renewed increases in the Fed balance sheet. Financial repression of very low interest rates is now intended as a permanent distortion of resource allocation by clouding risk/return decisions, preventing the economy from expanding along its optimal growth path. The FOMC had engaged in recent increases of purchases of securities after reducing interest rates in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). 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. Consumer food prices in the US increased 6.3 percent in 12 months ending in Dec 2021 and changed at 8.7 percent in annual equivalent from Oct 2021 to Dec 2021. Monetary policies stimulating carry trades of commodities futures that increase prices of food constitute a highly regressive tax on lower income families for whom food is a major portion of the consumption basket especially with wage increases below inflation in a recovery without hiring (Section II and earlier https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html). Energy consumer prices increased 29.3 percent in 12 months, increased at 36.2 percent in annual equivalent from Oct 2021 to Dec 2021 and decreased 0.4 percent in Dec 2021 or at minus 4.7 percent in annual equivalent. Waves of inflation are induced by carry trades from zero interest rates to commodity futures, which are unwound and repositioned during alternating risk aversion and risk appetite originating in the European debt crisis and increasingly in growth, soaring debt and politics in China. For lower income families, food and energy are a major part of the family budget. Inflation is not persistently low or threatening deflation in annual equivalent in any of the categories in Table I-2 but simply reflecting waves of inflation originating in carry trades. Zero interest rates induce carry trades into commodity futures positions with episodes of risk aversion and portfolio reallocations causing fluctuations that determine an upward trend of prices. There are now exceptional effects on prices in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).

Table I-3, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	% RI	∆% 12 Months Dec 2021/Dec 2020 NSA	∆% Annual Equivalent Oct 2021 to Dec 2021 SA	∆% Dec 2021/Nov 2021 SA
CPI All Items	100.000	7.0	9.2	0.5
CPI ex Food and Energy	78.468	5.5	7.0	0.6
Food	13.990	6.3	8.7	0.5
Food at Home	7.722	6.5	9.2	0.4
Food Away from Home	6.269	6.0	8.3	0.6
Energy	7.542	29.3	36.2	-0.4
Gasoline	4.027	49.6	57.4	-0.5
Electricity	2.412	6.3	10.0	0.3
Gas Service	0.825	24.1	26.0	-1.2
Commodities less Food and Energy	20.768	10.7	13.1	1.2
New Vehicles	3.884	11.8	14.9	1.0
Used Cars and Trucks	3.419	37.3	39.8	3.5
Medical Care Commodities	1.487	0.4	2.8	0.0
Apparel	2.669	5.8	12.6	1.7
Services Less Energy Services	57.700	3.7	4.5	0.3
Shelter	32.393	4.1	5.7	0.4
Rent of Primary Residence	7.583	3.3	4.9	0.4
Owner’s Equivalent Rent of Residences	23.509	3.8	4.9	0.4
Transportation Services	5.046	4.2	3.2	-0.3
Medical Care Services	6.987	2.5	4.5	0.3

% RI: Percent Relative Importance

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

Table I-4 provides relative important components of the consumer price index. The relative important weights for Dec 2021 are in Table I-3.

Table I-4, US, Relative Importance, 2009-2010 Weights, of Components in the Consumer Price Index, US City Average, Dec 2012

All Items	100.000
Food and Beverages	15.261
Food	14.312
Food at home	8.898
Food away from home	5.713
Housing	41.021
Shelter	31.681
Rent of primary residence	6.545
Owners’ equivalent rent	22.622
Apparel	3.564
Transportation	16.846
Private Transportation	15.657
New vehicles	3.189
Used cars and trucks	1.844
Motor fuel	5.462
Gasoline	5.274
Medical Care	7.163
Medical care commodities	1.714
Medical care services	5.448
Recreation	5.990
Education and Communication	6.779
Other Goods and Services	3.376

Refers to all urban consumers, covering approximately 87 percent of the US population (see http://www.bls.gov/cpi/cpiovrvw.htm#item1). Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/cpiri2011.pdf http://www.bls.gov/cpi/cpiriar.htm http://www.bls.gov/cpi/cpiri2012.pdf

Chart I-18 provides the US consumer price index for housing from 2001 to 2021. Housing prices rose sharply during the decade until the bump of the global recession and increased again in 2011-2012 with some stabilization in 2013. There is renewed increase in 2014 followed by stabilization and renewed increase in 2015-2021. The CPI excluding housing would likely show much higher inflation. The commodity carry trades resulting from unconventional monetary policy have compressed income remaining after paying for indispensable shelter.

Chart I-18, US, Consumer Price Index, Housing, NSA, 2001-2021

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

Chart I-19 provides 12-month percentage changes of the housing CPI. Percentage changes collapsed during the global recession but have been rising into positive territory in 2011 and 2012-2013 but with the rate declining and then increasing into 2014. There is decrease into 2015 followed by stability and marginal increase in 2016-2021 followed by initial decline in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) with sharp recovery.

Chart I-19, US, Consumer Price Index, Housing, 12-Month Percentage Change, NSA, 2001-2021

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

There have been waves of consumer price inflation in the US in 2011 and into 2021 (https://cmpassocregulationblog.blogspot.com/2022/01/real-disposable-income-decreasing-02.html and earlier https://cmpassocregulationblog.blogspot.com/2021/11/us-gdp-growing-at-21-saar-in-iiiq2021.html) that are illustrated in Table I-5. The first wave occurred in Jan-Apr 2011 and was caused by the carry trade of commodity prices induced by unconventional monetary policy of zero interest rates. Cheap money at zero opportunity cost in environment of risk appetite was channeled into financial risk assets, causing increases in commodity prices. The annual equivalent rate of increase of the all-items CPI in Jan-Apr 2011 was 4.9 percent and the CPI excluding food and energy increased at annual equivalent rate of 1.8 percent. The second wave occurred during the collapse of the carry trade from zero interest rates to exposures in commodity futures because of risk aversion in financial markets created by the sovereign debt crisis in Europe. The annual equivalent rate of increase of the all-items CPI dropped to 1.8 percent in May-Jun 2011 while the annual equivalent rate of the CPI excluding food and energy increased at 2.4 percent. In the third wave in Jul-Sep 2011, annual equivalent CPI inflation rose to 3.2 percent while the core CPI increased at 2.4 percent. The fourth wave occurred in the form of increase of the CPI all-items annual equivalent rate to 1.8 percent in Oct-Nov 2011 with the annual equivalent rate of the CPI excluding food and energy remaining at 2.4 percent. The fifth wave occurred in Dec 2011 to Jan 2012 with annual equivalent headline inflation of 1.8 percent and core inflation of 2.4 percent. In the sixth wave, headline CPI inflation increased at annual equivalent 2.4 percent in Feb-Apr 2012 and 2.0 percent for the core CPI. The seventh wave in May-Jul occurred with annual equivalent inflation of minus 1.2 percent for the headline CPI in May-Jul 2012 and 2.0 percent for the core CPI. The eighth wave is with annual equivalent inflation of 6.8 percent in Aug-Sep 2012 but 5.7 percent including Oct. In the ninth wave, annual equivalent inflation in Nov 2012 was minus 2.4 percent under the new shock of risk aversion and 0.0 percent in Dec 2012 with annual equivalent of 0.0 percent in Nov 2012-Jan 2013 and 2.0 percent for the core CPI. In the tenth wave, annual equivalent of the headline CPI was 6.2 percent in Feb 2013 and 1.2 percent for the core CPI. In the eleventh wave, annual equivalent was minus 3.0 percent in Mar-Apr 2013 and 0.6 percent for the core index. In the twelfth wave, annual equivalent inflation was 1.4 percent in May-Sep 2013 and 2.2 percent for the core CPI. In the thirteenth wave, annual equivalent CPI inflation in Oct-Nov 2013 was 1.8 percent and 1.8 percent for the core CPI. Inflation returned in the fourteenth wave at 2.4 percent for the headline CPI index and 1.8 percent for the core CPI in annual equivalent for Dec 2013 to Mar 2014. In the fifteenth wave, inflation moved to annual equivalent 1.8 percent for the headline index in Apr-Jul 2014 and 2.1 percent for the core index. In the sixteenth wave, annual equivalent inflation was 0.0 percent in Aug 2014 and 1.2 percent for the core index. In the seventeenth wave, annual equivalent inflation was 0.0 percent for the headline CPI and 2.4 percent for the core in Sep-Oct 2014. In the eighteenth wave, annual equivalent inflation was minus 4.3 percent for the headline index in Nov 2014-Jan 2015 and 1.2 percent for the core. In the nineteenth wave, annual equivalent inflation was 3.2 percent for the headline index and 2.2 percent for the core index in Feb-Jun 2015. In the twentieth wave, annual equivalent inflation was at 2.4 percent in Jul 2015 for the headline and core indexes. In the twenty-first wave, headline consumer prices decreased at 1.2 percent in annual equivalent in Aug-Sep 2015 while core prices increased at annual equivalent 1.8 percent. In the twenty-second wave, consumer prices increased at annual equivalent 1.2 percent for the central index and 2.4 percent for the core in Oct-Nov 2015. In the twenty-third wave, annual equivalent inflation was minus 0.6 percent for the headline CPI in Dec 2015 to Jan 2016 and 1.8 percent for the core. In the twenty-fourth wave, annual equivalent was minus 1.2 percent and 2.4 percent for the core in Feb 2016. In the twenty-fifth wave, annual equivalent inflation was at 4.3 percent for the central index in Mar-Apr 2016 and at 3.0 percent for the core index. In the twenty-sixth wave, annual equivalent inflation was 3.0 percent for the central CPI in May-Jun 2016 and 2.4 percent for the core CPI. In the twenty-seventh wave, annual equivalent inflation was minus 1.2 percent for the central CPI and 1.2 percent for the core in Jul 2016. In the twenty-eighth wave, annual equivalent inflation was 2.4 percent for the headline CPI in Aug 2016 and 2.4 percent for the core. In the twenty-ninth wave, CPI prices increased at annual equivalent 3.0 percent in Sep-Oct 2016 while the core CPI increased at 1.8 percent. In the thirtieth wave, annual equivalent CPI prices increased at 2.4 percent in Nov-Dec 2016 while the core CPI increased at 1.8 percent. In the thirty-first wave, CPI prices increased at annual equivalent 4.9 percent in Jan 2017 while the core index increased at 2.4 percent. In the thirty-second wave, CPI prices changed at annual equivalent 1.2 percent in Feb 2017 while the core increased at 2.4 percent. In the thirty-third wave, CPI prices changed at annual equivalent 0.0 percent in Mar 2017 while the core index changed at 0.0 percent. In the thirty-fourth wave, CPI prices increased at 2.4 percent annual equivalent in Apr 2017 while the core index increased at 2.4 percent. In the thirty-fifth wave, CPI prices changed at 0.0 annual equivalent in May-Jun 2017 while core prices increased at 1.2 percent. In the thirty-sixth wave, CPI prices changed at annual equivalent 0.0 percent in Jul 2017 while core prices increased at 1.2 percent. In the thirty-seventh wave, CPI prices increased at annual equivalent 5.5 percent in Aug-Sep 2017 while core prices increased at 2.4 percent. In the thirty-eighth wave, CPI prices increased at 1.8 percent annual equivalent in Oct-Nov 2017 while core prices increased at 1.8 percent. In the thirty-ninth wave, CPI prices increased at 2.8 percent annual equivalent in Dec 2017-Feb 2018 while core prices increased at 2.8 percent. In the fortieth wave, CPI prices increased at 1.2 percent annual equivalent in Mar 2018 while core prices increased at 3.7 percent. In the forty-first wave, CPI prices increased at 3.0 percent annual equivalent in Apr-May 2018 while core prices increased at 2.4 percent. In the forty-second wave, CPI prices increased at 1.8 percent in Jun-Sep 2018 while core prices increased at 1.8 percent. In the forty-third wave, CPI prices increased at annual equivalent 3.7 percent in Oct 2018 while core prices increased at 2.4 percent. In the forty-fourth wave, CPI prices changed at minus 0.4 percent annual equivalent in Nov 2018-Jan 2019 while core prices increased at 2.4 percent. In the forty-fifth wave, CPI prices increased at 4.9 percent annual equivalent in Feb-Apr 2019 while core prices increased at 2.4 percent. In the forty-sixth wave, CPI prices changed at 0.0 percent annual equivalent in May-Jun 2019 while core prices increased at 2.4 percent. In the forty-seventh wave, CPI prices increased at 2.4 percent annual equivalent in Jul 2019 while core prices increased at 2.4 percent. In the forty-eighth wave, CPI prices increased at 1.8 percent annual equivalent in Aug-Sep 2019 while core prices increased at 2.4 percent. In the forty-ninth wave, CPI prices increased at 2.4 percent annual equivalent in Oct-Dec 2019 while core prices increased at 2.0 percent. In the fiftieth wave, CPI prices increased at 1.8 percent annual equivalent in Jan-Feb 2020 and core prices at 2.4 percent. In the fifty-first wave, CPI prices decreased at annual equivalent 4.3 percent in Mar-May 2020 while core prices decreased at 3.0 percent. In the fifty-second wave, CPI prices increased at 6.2 percent annual equivalent in Jun-Jul 2020 and core prices increased at 4.3 percent. In the fifty-third wave, CPI prices increased at annual equivalent 3.7 percent and core prices increased at 3.0 percent in Aug-Sep 2020. In the fifty-fourth wave, CPI prices increased at 1.2 percent annual equivalent and core prices at 1.2 percent in Oct 2020. In the fifty-fifth wave, CPI prices increased at 2.8 percent annual equivalent in Nov 2020-Jan 2021 and core prices at 0.8 percent. In the fifty-sixth wave, CPI prices increased at annual equivalent 6.2 percent in Feb-Mar 2021 and core prices at 2.4 percent. In the fifty-seventh wave, CPI prices increased at annual equivalent 9.6 percent in Apr-Jun 2021 and core prices at 10.5 percent. In the fifty-eight wave, CPI prices increased at annual equivalent 4.9 percent in Jul-Sep 2021 and core prices at 2.4 percent. In the fifty-ninth wave, CPI prices increased at annual equivalent 10.7 percent in Oct-Nov 2021 while core prices increased at 6.8 percent. In the sixtieth wave, CPI prices increased at annual equivalent 6.2 percent and core prices increased at 7.4 percent in Dec 2021. The conclusion is that inflation accelerates and decelerates in unpredictable fashion because of shocks or risk aversion and portfolio reallocations in carry trades from zero interest rates to commodity derivatives.

Table I-5, US, Headline and Core CPI Inflation Monthly SA and 12 Months NSA ∆%

	All Items  SA Month	All Items NSA 12 month	Core SA Month	Core NSA 12 months
Dec 2021	0.5	7.0	0.6	5.5
AE Dec	6.2		7.4
Nov	0.8	6.8	0.5	4.9
Oct	0.9	6.2	0.6	4.6
AE Oct-Nov	10.7		6.8
Sep	0.4	5.4	0.2	4.0
Aug	0.3	5.3	0.1	4.0
Jul	0.5	5.4	0.3	4.3
AE Jul-Sep	4.9		2.4
Jun	0.9	5.4	0.9	4.5
May	0.6	5.0	0.7	3.8
Apr	0.8	4.2	0.9	3.0
AE Apr-Jun	9.6		10.5
Mar	0.6	2.6	0.3	1.6
Feb	0.4	1.7	0.1	1.3
AE ∆% Feb-Mar	6.2		2.4
Jan	0.3	1.4	0.0	1.4
Dec	0.2	1.4	0.0	1.6
Nov	0.2	1.2	0.2	1.6
AE ∆% Nov-Jan	2.8		0.8
Oct	0.1	1.2	0.1	1.6
AE ∆% Oct	1.2		1.2
Sep	0.2	1.4	0.2	1.7
Aug	0.4	1.3	0.3	1.7
AE ∆% Aug-Sep	3.7		3.0
Jul	0.5	1.0	0.5	1.6
Jun	0.5	0.6	0.2	1.2
AE ∆% Jun-Jul	6.2		4.3
May	-0.1	0.1	-0.1	1.2
Apr	-0.7	0.3	-0.4	1.4
Mar	-0.3	1.5	0.0	2.1
AE ∆% Mar-May	-4.3		-3.0
Feb	0.1	2.3	0.2	2.4
Jan	0.2	2.5	0.2	2.3
AE ∆% Jan-Feb	1.8		2.4
Dec 2019	0.1	2.3	0.1	2.3
Nov	0.2	2.1	0.2	2.3
Oct	0.3	1.8	0.2	2.3
AE ∆% Oct-Dec	2.4		2.0
Sep	0.2	1.7	0.2	2.4
Aug	0.1	1.7	0.2	2.4
AE ∆% Aug-Sep	1.8		2.4
Jul	0.2	1.8	0.2	2.2
AE ∆% Jul	2.4		2.4
Jun	0.0	1.6	0.3	2.1
May	0.0	1.8	0.1	2.0
AE ∆% May-Jun	0.0		2.4
Apr	0.5	2.0	0.3	2.1
Mar	0.5	1.9	0.2	2.0
Feb	0.2	1.5	0.1	2.1
AE ∆% Feb-Apr	4.9		2.4
Jan	0.0	1.6	0.2	2.2
Dec 2018	-0.1	1.9	0.2	2.2
Nov	0.0	2.2	0.2	2.2
AE ∆% Nov-Jan	-0.4		2.4
Oct	0.3	2.5	0.2	2.1
AE ∆% Oct	3.7		2.4
Sep	0.2	2.3	0.2	2.2
Aug	0.2	2.7	0.1	2.2
Jul	0.1	2.9	0.2	2.4
Jun	0.1	2.9	0.1	2.3
AE ∆% Jun-Sep	1.8		1.8
May	0.2	2.8	0.2	2.2
Apr	0.3	2.5	0.2	2.1
AE ∆% Apr-May	3.0		2.4
Mar	0.1	2.4	0.3	2.1
AE ∆% Mar	1.2		3.7
Feb	0.2	2.2	0.2	1.8
Jan	0.4	2.1	0.3	1.8
Dec 2017	0.1	2.1	0.2	1.8
AE ∆% Dec-Feb	2.8		2.8
Nov	0.3	2.2	0.1	1.7
Oct	0.0	2.0	0.2	1.8
AE ∆% Oct-Nov	1.8		1.8
Sep	0.5	2.2	0.2	1.7
Aug	0.4	1.9	0.2	1.7
AE ∆% Aug-Sep	5.5		2.4
Jul	0.0	1.7	0.1	1.7
AE ∆% Jul	0.0		1.2
Jun	0.1	1.6	0.1	1.7
May	-0.1	1.9	0.1	1.7
AE ∆% May-Jun	0.0		1.2
Apr	0.2	2.2	0.2	1.9
AE ∆% Apr	2.4		2.4
Mar	0.0	2.4	0.0	2.0
AE ∆% Mar	0.0		0.0
Feb	0.1	2.7	0.2	2.2
AE ∆% Feb	1.2		2.4
Jan	0.4	2.5	0.2	2.3
AE ∆% Jan	4.9		2.4
Dec 2016	0.3	2.1	0.2	2.2
Nov	0.1	1.7	0.1	2.1
AE ∆% Nov-Dec	2.4		1.8
Oct	0.2	1.6	0.1	2.1
Sep	0.3	1.5	0.2	2.2
AE ∆% Sep-Oct	3.0		1.8
Aug	0.2	1.1	0.2	2.3
AE ∆ Aug	2.4		2.4
Jul	-0.1	0.8	0.1	2.2
AE ∆% Jul	-1.2		1.2
Jun	0.3	1.0	0.2	2.2
May	0.2	1.0	0.2	2.2
AE ∆% May-Jun	3.0		2.4
Apr	0.4	1.1	0.3	2.1
Mar	0.3	0.9	0.2	2.2
AE ∆% Mar-Apr	4.3		3.0
Feb	-0.1	1.0	0.2	2.3
AE ∆% Feb	-1.2		2.4
Jan	0.0	1.4	0.2	2.2
Dec 2015	-0.1	0.7	0.1	2.1
AE ∆% Dec-Jan	-0.6		1.8
Nov	0.1	0.5	0.2	2.0
Oct	0.1	0.2	0.2	1.9
AE ∆% Oct-Nov	1.2		2.4
Sep	-0.2	0.0	0.2	1.9
Aug	0.0	0.2	0.1	1.8
AE ∆% Aug-Sep	-1.2		1.8
Jul	0.2	0.2	0.2	1.8
AE ∆% Jul	2.4		2.4
Jun	0.3	0.1	0.2	1.8
May	0.3	0.0	0.1	1.7
Apr	0.1	-0.2	0.2	1.8
Mar	0.3	-0.1	0.2	1.8
Feb	0.3	0.0	0.2	1.7
AE ∆% Feb-Jun	3.2		2.2
Jan	-0.6	-0.1	0.1	1.6
Dec 2014	-0.3	0.8	0.1	1.6
Nov	-0.2	1.3	0.1	1.7
AE ∆% Nov-Jan	-4.3		1.2
Oct	0.0	1.7	0.2	1.8
Sep	0.0	1.7	0.2	1.7
AE ∆% Sep-Oct	0.0		2.4
Aug	0.0	1.7	0.1	1.7
AE ∆% Aug	0.0		1.2
Jul	0.1	2.0	0.2	1.9
Jun	0.1	2.1	0.1	1.9
May	0.2	2.1	0.2	2.0
Apr	0.2	2.0	0.2	1.8
AE ∆% Apr-Jul	1.8		2.1
Mar	0.2	1.5	0.2	1.7
Feb	0.1	1.1	0.1	1.6
Jan	0.2	1.6	0.1	1.6
Dec 2013	0.3	1.5	0.2	1.7
AE ∆% Dec-Mar	2.4		1.8
Nov	0.2	1.2	0.2	1.7
Oct	0.1	1.0	0.1	1.7
AE ∆% Oct-Nov	1.8		1.8
Sep	0.0	1.2	0.2	1.7
Aug	0.2	1.5	0.2	1.8
Jul	0.2	2.0	0.2	1.7
Jun	0.2	1.8	0.2	1.6
May	0.0	1.4	0.1	1.7
AE ∆% May-Sep	1.4		2.2
Apr	-0.2	1.1	0.0	1.7
Mar	-0.3	1.5	0.1	1.9
AE ∆% Mar-Apr	-3.0		0.6
Feb	0.5	2.0	0.1	2.0
AE ∆% Feb	6.2		1.2
Jan	0.2	1.6	0.2	1.9
Dec 2012	0.0	1.7	0.2	1.9
Nov	-0.2	1.8	0.1	1.9
AE ∆% Nov-Jan	0.0		2.0
Oct	0.3	2.2	0.2	2.0
Sep	0.5	2.0	0.2	2.0
Aug	0.6	1.7	0.1	1.9
AE ∆% Aug-Oct	5.7		2.0
Jul	0.0	1.4	0.2	2.1
Jun	-0.1	1.7	0.2	2.2
May	-0.2	1.7	0.1	2.3
AE ∆% May-Jul	-1.2		2.0
Apr	0.2	2.3	0.2	2.3
Mar	0.2	2.7	0.2	2.3
Feb	0.2	2.9	0.1	2.2
AE ∆% Feb-Apr	2.4		2.0
Jan	0.3	2.9	0.2	2.3
Dec 2011	0.0	3.0	0.2	2.2
AE ∆% Dec-Jan	1.8		2.4
Nov	0.2	3.4	0.2	2.2
Oct	0.1	3.5	0.2	2.1
AE ∆% Oct-Nov	1.8		2.4
Sep	0.2	3.9	0.1	2.0
Aug	0.3	3.8	0.3	2.0
Jul	0.3	3.6	0.2	1.8
AE ∆% Jul-Sep	3.2		2.4
Jun	0.0	3.6	0.2	1.6
May	0.3	3.6	0.2	1.5
AE ∆%  May-Jun	1.8		2.4
Apr	0.5	3.2	0.1	1.3
Mar	0.5	2.7	0.1	1.2
Feb	0.3	2.1	0.2	1.1
Jan	0.3	1.6	0.2	1.0
AE ∆%  Jan-Apr	4.9		1.8
Dec 2010	0.4	1.5	0.1	0.8
Nov	0.3	1.1	0.1	0.8
Oct	0.3	1.2	0.1	0.6
Sep	0.2	1.1	0.1	0.8
Aug	0.1	1.1	0.1	0.9
Jul	0.2	1.2	0.1	0.9
Jun	0.0	1.1	0.1	0.9
May	-0.1	2.0	0.1	0.9
Apr	0.0	2.2	0.0	0.9
Mar	0.0	2.3	0.0	1.1
Feb	-0.1	2.1	0.0	1.3
Jan	0.1	2.6	-0.1	1.6

Note: Core: excluding food and energy; AE: annual equivalent

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

The behavior of the US consumer price index NSA from 2001 to 2021 is in Chart I-20. Inflation in the US is very dynamic without deflation risks that would justify symmetric inflation targets. The hump in 2008 originated in the carry trade from interest rates dropping to zero into commodity futures. There is no other explanation for the increase of the Cushing OK Crude Oil Future Contract 1 from $55.64/barrel on Jan 9, 2007 to $145.29/barrel on July 3, 2008 during deep global recession, collapsing under a panic of flight into government obligations and the US dollar to $37.51/barrel on Feb 13, 2009 and then rising by carry trades to $113.93/barrel on Apr 29, 2012, collapsing again and then recovering again to $105.23/barrel, all during mediocre economic recovery with peaks and troughs influenced by bouts of risk appetite and risk aversion (data from the US Energy Information Administration EIA, https://www.eia.gov/). The unwinding of the carry trade with the TARP announcement of toxic assets in banks channeled cheap money into government obligations (see Cochrane and Zingales 2009). There is sharp increase in 2021.

Chart I-20, US, Consumer Price Index, NSA, 2001-2021

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

Chart I-21 provides 12-month percentage changes of the consumer price index from 2001 to 2021. There was no deflation or threat of deflation from 2008 into 2009. Commodity prices collapsed during the panic of toxic assets in banks. When stress tests in 2009 revealed US bank balance sheets in much stronger position, cheap money at zero opportunity cost exited government obligations and flowed into carry trades of risk financial assets. Increases in commodity prices drove again the all items CPI with interruptions during risk aversion originating in multiple fears but especially from the sovereign debt crisis of Europe. There are sharp increases in 2021.

Chart I-21, US, Consumer Price Index, 12-Month Percentage Change, NSA, 2001-2021

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

The trend of increase of the consumer price index excluding food and energy in Chart I-22 does not reveal any threat of deflation that would justify symmetric inflation targets. There are mild oscillations in a neat upward trend.

Chart I-22, US, Consumer Price Index Excluding Food and Energy, NSA, 2001-2021

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

Chart I-23 provides 12-month percentage change of the consumer price index excluding food and energy. Past-year rates of inflation fell toward 1 percent from 2001 into 2003 because of the recession and the decline of commodity prices beginning before the recession with declines of real oil prices. Near zero interest rates with fed funds at 1 percent between Jun 2003 and Jun 2004 stimulated carry trades of all types, including in buying homes with subprime mortgages in expectation that low interest rates forever would increase home prices permanently, creating the equity that would permit the conversion of subprime mortgages into creditworthy mortgages (Gorton 2009EFM; see https://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Inflation rose and then collapsed during the unwinding of carry trades and the housing debacle of the global recession. Carry trades into 2011 and 2012 gave a new impulse to CPI inflation, all items and core. Symmetric inflation targets destabilize the economy by encouraging hunts for yields that inflate and deflate financial assets, obscuring risk/return decisions on production, investment, consumption and hiring. There is sharp increase in 2021.

Chart I-23, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 2001-2021

Source: US Bureau of Labor Statistics

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

Table I-7 provides 12-month percentage changes of the CPI all items, CPI core and CPI housing from 2001 to 2021. There is no evidence in these data supporting symmetric inflation targets that would only induce greater instability in inflation, interest rates and financial markets. Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval (1.99, 2.0). Symmetric targets appear to have been abandoned in a favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output.

Table I-7, CPI All Items, CPI Core and CPI Housing, 12-Month Percentage Change, NSA 2001-2021

	CPI All Items	CPI Core ex Food and Energy	CPI Housing
Year	Dec	Dec	Dec
2001	1.6	2.7	2.9
2002	2.4	1.9	2.4
2003	1.9	1.1	2.2
2004	3.3	2.2	3.0
2005	3.4	2.2	4.0
2006	2.5	2.6	3.3
2007	4.1	2.4	3.0
2008	0.1	1.8	2.4
2009	2.7	1.8	-0.3
2010	1.5	0.8	0.3
2011	3.0	2.2	1.9
2012	1.7	1.9	1.7
2013	1.5	1.7	2.2
2014	0.8	1.6	2.5
2015	0.7	2.1	2.1
2016	2.1	2.2	3.0
2017	2.1	1.8	2.9
2018	1.9	2.2	3.0
2019	2.3	2.3	2.6
2020	1.4	1.6	2.0
2021	7.0	5.5	5.1

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

Chart CPI-H provides 12 months percentage changes of the US Consumer Price Index from 1981 to 2021. The increase of 7.0 percent of the US CPI in the 12 months ending in Dec 2021 is the highest since 7.1 percent in Jun 1982 in the beginning adjustment from the Great Inflation.

Chart CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-2021

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

Both the US and Japan experienced high rates of inflation during the US Great Inflation of the 1970s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, http://www.johnbtaylor.com/ 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 difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan. Fear of deflation as had occurred during the Great Depression and in Japan was used as an argument for the first round of unconventional monetary policy with 1 percent interest rates from Jun 2003 to Jun 2004. The 1 percent interest rate combined with quantitative easing in the form of withdrawal of supply of 30-year securities by suspension of the auction of 30-year Treasury bonds with the intention of reducing mortgage rates. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.htm

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart VI-1B for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart VI-1B cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s. The loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy.  This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises frm the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Yellen (2014Aug22) states that “Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction.”

Chart VI-1B provides the tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable consumer price index and unemployment data in Brazil for that period. Chart VI-1B used the more reliable indicator of inflation, the wholesale price index, and idle capacity of manufacturing as a proxy of unemployment in large urban centers.

Chart VI1-B, Brazil, Phillips Circuit, 1963-1987

Source: ©Carlos Manuel Pelaez, Cruzado e o Austral: Análise das Reformas Monetárias do Brasil e da Argentina. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

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

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

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

W = Y/r (1)

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

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.