CMP Associates Regulation Blog: 2011

Slow Growth, Falling Real Disposable Income, Repression of Savings, “Large-scale Lender of Last Resort,” Euro Zone Survival Risk and World Economic Slowdown

Carlos M. Pelaez

Executive Summary

I Slow Growth

II Falling Real Disposable Income and Repression of Savings

IIA Falling Real Disposable Income

IIB Repression of Savings

III World Financial Turbulence

IIIA Financial Risks

IIIB Fiscal Compact

IIIC European Central Bank Large Scale Lender of Last Resort

IIID Euro Zone Survival Risk

IIIE Appendix on Sovereign Bond Valuation

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

Appendix I The Great Inflation

V World Economic Slowdown. The JP Morgan Global All-Industry Output Index produced by JPMorgan and Markit in association with ISM and IFPSM registered improvement in Nov, increasing from the low of the recovery in Oct of 51.3 to 52.0 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8909). There was acceleration in both manufacturing and nonmanufacturing in the US with composite activity growing at highest rhythm since Mar. Joseph Lupton, Global Economist at JPMorgan, finds that the combination of low employment and level of new orders could imply continuing global growth below trend in 2012. The JP Morgan Global Manufacturing PMI^™ produced by JP Morgan and Markit in association with ISM and IFPSM registered 49.6 in Nov compared with 49.9 in Oct, which means that global manufacturing is contracting at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The JP Morgan Global Manufacturing PMI^™ fell for a third consecutive month. The proximity of the index to 50 suggests near stagnation of world manufacturing but it masks that growth in the US with share of 28.2 percent in the index was the sharpest in seven months. World manufacturing excluding the US fell at the fastest rhythm in 36 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8874). The table “World-Wide Factory Activity, by Country,” of Real Time Economics produced by WSJ Research and published in the Wall Street Journal on Dec 1 (http://blogs.wsj.com/economics/2011/12/01/world-wide-factory-activity-by-country-20/tab/interactive/) shows only six countries with manufacturing indexes above 50 in Nov: Canada (53.3), India (51.0), Russia (52.6), South Africa (51.6), Turkey (52.3) and the US (52.7). The HSBC Brazil Services PMI^TM compiled by Markit, combining manufacturing and services, registered 51.5 in Nov, which is higher than 51.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8889). While the increase is moderate, André Loes, Chief Economist of HSBC in Brazil, finds that the index has been above the neutral point of 50 during 28 consecutive months and the increase in Nov is the fastest in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8889). The HSBC Industrial Production PMI^™ for Brazil increased from 46.5 in Oct to 48.7 in Nov, which means contraction at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Andre Loes, Chief Economist of HBSC in Brazil, finds that the index registered the highest level since Jun and the fastest rate of monthly change since Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8846). Inventory adjustment in response to expectations on the economy may have caused the decline of industrial production. Loes finds that if this interpretation is valid industry may improve performance in 2012..

VA United States. The Manufacturing ISM Report on Business^® purchasing managers’ index jumped 1.9 percentage points from 50.8 in Oct to 52.7 in Nov, indicating continuing growth for 28 consecutive months but at slower rate of change (http://www.ism.ws/ISMReport/MfgROB.cfm). New orders, which are an indicator of future business, rose 4.3 percentage points, from 52.4 in Oct to 56.7 in Nov, indicating growth at a faster rate. The employment index fell 1.7 percentage points from 53.5 in Oct to 51.8 in Nov, indicating growth at slower rate of change. Prices paid or costs of inputs rose 4.0 percentage points from 41.0 in Oct to 45.0 in Oct, which is the second reading below 50 since May.

The nonmanufacturing index of the Institute for Supply Management^™ fell 0.9 percentage points in Nov to 52.0 from 52.9 in Oct. According to the IMS, the reading for Nov is the lowest since 50.7 in Jan 2010 (http://www.ism.ws/ISMReport/NonMfgROB.cfm). There are favorable aspects of the Nonmanufacturing ISM Report on Business^®: (1) business activity production increase by 2.4 percentage points from 53.8 in Oct to 56.2 in Nov; (2) new orders, indicating future activity, increase 0.6 percentage points from 52.4 in Oct to 53.0 in Nov; and new export orders increased 1.5 percentage points from 54.0 in Oct to 55.5 in Nov. Perhaps the most unfavorable aspect is the decline of employment by 4.4 percentage points from expansion at 53.3 in Oct to contraction at 48.9 in Nov. The establishment survey of the Bureau of Labor Statistics for Nov shows 92.199 million jobs in private service-providing activities in the US compared with 11.803 million jobs in manufacturing (Table B-1, page 29 http://www.bls.gov/news.release/pdf/empsit.pdf). Contraction of jobs in nonmanufacturing can affect many more workers than in manufacturing. Another unfavorable aspect is the increase in prices of 5.4 percentage points from 57.1 in Oct to 62.5 in Nov. Table USA provides the indicators for the US economy.

Table USA, US Economic Indicators

Consumer Price Index	Nov 12 months NSA ∆%: 3.4; ex food and energy ∆%: 2.2 Oct month ∆%: 0.0; ex food and energy ∆%: 0.2 Blog 12/18/11
Producer Price Index	Nov 12 months NSA ∆%: 5.7; ex food and energy ∆% 2.9 Oct month SA ∆% = 0.3; ex food and energy ∆%: 0.1 Blog 12/18/11
PCE Inflation	Nov 12 months NSA ∆%: headline 2.5; ex food and energy ∆% 1.7 Blog 12/27/11
Employment Situation	Household Survey: Nov Unemployment Rate SA 8.6% Blog calculation People in Job Stress Nov: 28.9 million NSA Establishment Survey: Nov Nonfarm Jobs 100,000; Private +120,000 jobs created Oct 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.6% Blog 12/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Oct 2011 4.091 million lower by 1.605 million than 5.696 million in Oct 2006 Blog 12/18/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 First three quarters AE ∆% 1.2 Blog 12/27/11
Personal Income and Consumption	Nov month ∆% SA Real Disposable Personal Income (RDPI) 0.0 Nov month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.2 12 months NSA ∆%: RDPI: -0.1; RPCE ∆%: 1.3 Blog 12/27/11
Quarterly Services Report	IIIQ11/IIQII SA ∆%: Information 0.6 Professional 0.8 Administrative 1.7 Hospitals -0.9 Blog 12/11/11
Employment Cost Index	IIIQ2011 SA ∆%: 0.3 Sep 12 months ∆%: 2.0 Blog 10/30/11
Industrial Production	NOV month SA ∆%: 0.2 Nov 12 months SA ∆%: 3.7 Capacity Utilization: 77.8 Blog 12/18/11
Productivity and Costs	Nonfarm Business Productivity IIIQ2011∆% SAAE 2.1; IIIQ2011/IIIQ2010 ∆% 0.9; Unit Labor Costs IIIQ2011 ∆% -2.5; IIIQ2011/IIIQ2010 ∆%: 0.4 Blog 12/04/11
New York Fed Manufacturing Index	General Business Conditions From 0.61 Nov to Dec 9.53 New Orders: From -2.07 Nov to minus 5.10 Dec Blog 12/18/11
Philadelphia Fed Business Outlook Index	General Index from 3.6 Nov to 10.3 Dec New Orders from 1.3 Nov to 9.7 Dec Blog 12/18/11
Manufacturing Shipments and Orders	Oct/Sep New Orders SA ∆%: minus 0.4; ex transport ∆%: 0.2 12 months Jan-Oct NSA ∆%: 12.3; ex transport ∆% 12.8 Blog 12/11/11
Durable Goods	Nov New Orders SA ∆%: 3.8; ex transport ∆%: 0.3 Jan-Nov months NSA New Orders ∆%: 9.5; ex transport ∆% : 9.1 Blog 12/27/11
Sales of New Motor Vehicles	Jan-Nov 2011 11.532 million; Jan-Oct 2011 10.444 million; Jan-Nov 2010 12.28 million. Nov SAAR 13.62 million, Oct SAAR 13.25, Nov 2010 SAAR 12.28 million Blog 12/04/11
Sales of Merchant Wholesalers	Jan-Oct 2011/2010 ∆%: Total 14.8; Durable Goods: 12.4; Nondurable Goods 16/7 Blog 12/11/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Oct 11/Oct 10 NSA ∆%: Total Business 10.4; Manufacturers 11.0 Retailers 7.1; Merchant Wholesalers 12.8 Blog 12/18/11
Sales for Retail and Food Services	Jan-Nov 2011/Jan-Nov 2010 ∆%: Retail and Food Services: 7.8; Retail ∆% 8.1 Blog 12/18/11
Value of Construction Put in Place	Oct SAAR month SA ∆%: 0.8 Oct 12 months NSA: 0.3 Blog 12/04/11
Case-Shiller Home Prices	Sep 2011/Sep 2010 ∆% NSA: 10 Cities minus 3.3; 20 Cities: minus 3.6 ∆% Sep SA: 10 Cities minus 0.4 ; 20 Cities: minus 0.6 Blog 12/04/11
FHFA House Price Index Purchases Only	Oct SA ∆% -0.2; 12 month ∆%: minus 2.7 Blog 12/27/11
New House Sales	Nov month SAAR ∆%: 1.6 Jan-Nov 2011/Jan-Nov 2010 NSA ∆%: minus 6.1 Blog 12/27/11
Housing Starts and Permits	Nov Starts month SA ∆%: 9.3; Permits ∆%: 5.7 Jan-Nov 2011/2010 NSA ∆% Starts 2.1; Permits ∆% 1.9 Blog 12/27/11
Trade Balance	Balance Oct SA -$43,466 million versus Sep -$44,170 million Exports Oct SA ∆%: -0.8 Imports Oct SA ∆%: -0.9 Goods Exports Jan-Oct 2011/2010 NSA ∆%: 17.6 Good Imports Jan-Oct 2011/2010 NSA ∆%: 16.3 Blog 12/11/11
Export and Import Prices	Nov 12 months NSA ∆%: Imports 9.9; Exports 4.7 Blog 12/18/11
Consumer Credit	Oct ∆% annual rate: 3.7 Blog 12/11/11
Net Foreign Purchases of Long-term Treasury Securities	Oct Net Foreign Purchases of Long-term Treasury Securities: $4.8 billion Oct versus Sep $68.3 billion Major Holders of Treasury Securities: China $1134 billion; Japan $979 billion Blog 12/18/11
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 7.0; Outlays -5.9; Individual Income Taxes 16.0 Deficit Fiscal Year 2011 $1,298,80 million Deficit Fiscal Year 2012 Oct-Nov $315,474 million Blog 12/18/11
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIIQ2011 -131B %GDP 2.9 Blog 12/18/11

Links to blog comments in Table USA:

12/18/2011 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/2011 II http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/4/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

Durable goods new orders seasonally-adjusted increased 3.8 percent in Nov relative to Oct and shipments fell 0.4 percent, as shown in Table VA-1. The data are not adjusted for price changes and include large-value items that cause fluctuations in monthly data. Orders excluding transportation increased 0.3 percent in Nov while shipments increased 0.2 percent. Excluding defense orders increased 3.7 percent in Nov and shipments fell 0.5 percent. New orders of computers and related products fell 6.0 percent in Nov but after increasing 4.1 percent in Oct after increasing 6.4 percent in Sep. New orders of motor vehicles fell 0.5 percent in Nov after increasing 5.9 percent in Oct. Financial markets focus on capital goods on the argument that it would suggest investment. New orders of capital goods rose 7.7 percent in Nov after decreasing 5.3 percent in Oct. Nondefense new orders of capital goods increased 8.1 percent in Nov after dropping 3.5 percent in Oct. Nondefense capital goods orders excluding aircraft lost 1.2 percent in Nov. The volatility of durable goods data is found in nondefense aircraft new orders increasing 73.3 percent in Nov after falling 14.9 percent in Oct and creasing 26.7 percent in Sep but after increasing 26.2 percent in Aug.

Table VA-1, Durable Goods Manufacturers’ Shipments and New Orders, SA, ∆%

2011	Nov ∆%	Oct ∆%	Sep∆%
Total
S	-0.4	1.5	-0.4
NO	3.8	0.0	-1.4
Excluding Transport
S	0.2	0.4	0.1
NO	0.3	1.5	0.8
Excluding Defense
S	-0.5	1.9	-0.3
NO	3.7	1.1	-1.5
Computers & Electronic Products
S	-2.3	1.1	-0.8
NO	-4.4	1.3	2.2
Computers & Related Products
S	-8.1	6.7	4.0
NO	-6.0	4.1	6.4
Transport Equipment
S	-2.5	5.2	-1.9
NO	14.7	-4.5	-7.5
Motor Vehicles & Parts
S	-1.3	6.6	-1.8
NO	-0.5	5.9	-2.2
Nondefense Aircraft
S	-11.4	8.3	3.1
NO	73.3	-14.0	-26.7
Capital Goods
S	-2.1	-0.4	-0.4
NO	7.7	-5.3	-2.8
Nondefense Capital Goods
S	-2.2	0.4	-0.5
NO	8.1	-3.5	-3.5
Nondefense Capital Goods Excluding Aircraft
S	-1.0	-0.8	-0.5
NO	-1.2	-0.9	1.4

Note: S: shipments; NO: new orders; Transport: transportation. Data adjusted for seasonality but not adjusted for inflation.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Chart VA-1 of the US Bureau of the Census shows new orders for durable goods from Dec 2010 to Nov 2011. There is significant volatility in these data that clouds analysis of the trend of growth of output.

Chart VA-1, US, Durable Goods New Orders 2010-2010, SA, Monthly Percentage Changes

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr021.html

Table VA-2 shows growth of new orders and shipments of durable goods in the first eleven months of 2011 relative to the same period in 2010. Data are not adjusted for seasonality or price changes. The cumulative values for Jan-Nov 2011 in billions of dollars and percent of total are also included to provide relative value contribution. There are many general categories other than those in Table VA-2 and some sub-segments are part of general categories such that percentages do not add. Total new orders rose 9.5 percent in Jan-Nov 2011 relative to the same period a year earlier, 9.1 percent excluding transportation equipment and 11.0 percent excluding defense. The value of shipments and new orders of durable goods is about $2 trillion. The monthly and 12 months rate of growth are consistent with continuing expansion of the US economy. While new orders of the more aggregate component of computers and electronic products fell 0.9 percent relative to a year earlier, the sub-segment of new orders of computers and related products grew 10.7 percent. Transportation equipment new orders, accounting for 24.8 percent of the total, rose 10.7 percent and motor vehicles, accounting for 15.0 percent of total orders, rose 10.1 percent. Nondefense aircraft new orders rose 33.2 percent but account for only 4.7 percent of the total. New orders of total capital goods, accounting for 40.6 percent of the total, rose 9.7 percent and nondefense capital goods excluding aircraft rose 10.7 percent.

Table VA-2, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %

	Billions of Dollars Nov 2011	% Total	Jan-Nov 2011/Jan-Nov 2010 ∆%
Total
S	2,176.2	100.0	8.0
NO	2,156.4	100.0	9.5
Excluding Transport
S	1,663.4	76.4	9.1
NO	1,622.1	75.2	9.1
Excluding Defense
S	2,068.4	95.0	9.7
NO	2,046.2	94.9	11.0
Computers & Electronic Products
S	336.2	15.4	1.6
NO	261.3	12.1	-0.9
Computers & Related Products
S	56.7	2.6	10.5
NO	56.9	2.6	9.9
Transport Equipment
S	512.8	23.6	4.5
NO	534.3	24.8	10.7
Motor Vehicles
S	323.9	14.9	9.9
NO	323.8	15.0	10.1
Nondefense Aircraft
S	78.8	3.6	11.5
NO	101.3	4.7	33.2
Capital Goods
S	828.6	38.1	5.6
NO	874.9	40.6	9.7
Nondefense Capital Goods
S	744.8	34.2	9.5
NO	788.6	36.6	12.8
Nondefense Capital Goods Excluding Aircraft
S	698.9	32.1	9.5
NO	722.7	33.5	10.7

Note: S: shipments; NO: new orders; Transport: transportation. Data not adjusted for seasonality and not adjusted for inflation. Percentages do not add to total because not all major categories are included and some items are sub-segments of major categories.

Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

New orders and shipments of durable goods are highly cyclical, as shown in Table VA-3. New orders and shipments fell during the contraction in 2008 and 2009 and also in 2003 in the tail of the contraction of 2001.

Table VA-3, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders

Jan/Nov Relative to Earlier Year	Shipments ∆%	New Orders ∆%
2011	8.0	9.5
2010	7.5	14.3
2009*	-15.9	-20.2
2008	-2.1	-4.2
2007	0.5	0.6
2006	6.3	7.6
2005	6.0	7.5
2004	10.4	11.1
2003	0.1	2.0

*Jan-Dec

Source: http://www.census.gov/manufacturing/m3/historical_data/index.html

Data and other information continue to provide depressed conditions in the US housing market. Table VA-4 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). There is good news in the increase of sales of new houses in Nov by 1.6 following increases of 1.3 percent in Oct by 5.5 percent in Sep. The cumulative percentage from Jan to Nov is minus 4.8 percent and becomes positive by 9.8 percent when including the 15.3 percent increase in Dec.

Table VA-4, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Nov 2011	315	1.6
Oct	310	1.3
Sep	306	5.5
Aug	290	-1.7
Jul	295	-2.6
Jun	303	-1.6
May	308	-2.5
Apr	316	3.6
Mar	305	8.5
Feb	281	-9.4
Jan	310	-6.3
Cumulative ∆% Jan-Nov		-4.8
Dec 2010	331	15.3

Source: http://www.census.gov/construction/nrs/pdf/newressales.pdf

There is additional information of the report of new house sales in Table VA-5. The stock of unsold houses stabilized in Apr-Aug at 6.6 monthly equivalent sales at current sales rates and then dropped to 6.3 in Sep, 6.2 in Oct and 6.0 in Nov. Median and average house prices oscillate. In Nov, median and average prices of new houses sold without seasonal adjustment fell 3.8 percent and 4.1 percent, respectively. There are only two months with price increases in both median and average house prices: Jun with 8.2 percent in median prices and 3.9 percent in average prices and Apr with 1.9 percent in median prices and 3.1 percent in average prices.

Table VA-5, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Nov 2011	6.0	214,100	-3.8	242,900	-4.1
Oct	6.2	222,600	3.5	253,200	-0.1
Sep	6.3	215,100	-2.0	253,500	-2.2
Aug	6.7	219,600	-4.5	259,300	-4.1
Jul	6.8	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.5	222,000	-1.2	262,700	-2.3
Apr	6.6	224,700	1.9	268,900	3.1
Mar	7.0	220,500	0.2	260,800	-0.8
Feb	7.8	220,100	-8.3	262,800	-4.7
Jan	7.2	240,100	-0.5	275,700	-5.5
Dec 2010	6.9	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

Source: http://www.census.gov/construction/nrs/pdf/newressales.pdf

The depressed level of residential construction and new house sales in the US is evident in Table VA-6 providing new house sales in the first eleven months of various years. Sales of new houses in the first eleven months of 2011 are substantially lower than in any year between 1995 and 2011. Sales of new houses in the first eleven months of 2011 are lower by 6.1 percent in relation to the same period in 2010 and 14.3 percent below the level in the same period in 2009. The housing boom peaked in 2005 and 2006 when increases in fed funds rates affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in the first eleven months of 2011 relative to the same period in 2005 fell 74.9 percent and 69.4 percent relative to the same period in 2006. Similar percentage declines are also observed for 2011 relative to years from 2000 to 2004. Sales of new houses in the first eleven months of 2011 fell 51.8 per cent relative to the same period in 1995.

Table VA-6, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Nov 2011	300
Jan-Nov 2010	282
∆%	-6.1*
Jan-Nov 2009	350
∆% Jan-Nov 2011/ Jan-Nov 2009	-14.3
Jan-Nov 2008	459
∆% Jan-Nov 2011/ Jan-Nov 2008	-34.6
Jan-Nov 2007	732
∆% Jan-Nov 2011/ Jan-Nov 2007	-59.0
Jan-Nov 2006	980
∆% Jan-Nov 2011/Jan-Nov 2006	-69.4
Jan-Nov 2005	1,196
∆% Jan-Nov 2011/Jan-Nov 2005	-74.9
Jan-Nov 2004	1,120
∆% Jan-Oct 2011/Jan-Nov 2004	-73.2
Jan-Nov 2003	1,011
∆% Jan-Nov 2011/ Jan-Nov 2003	-70.3
Jan-Nov 2002	903
∆% Jan-Nov 2011/ Jan-Nov 2001	-66.8
Jan-Nov 2001	842
∆% Jan-Nov 2011/ Jan-Nov 2001	-64.4
Jan-Nov 2000	812
∆% Jan-Nov 2011/ Jan-Nov 2000	-63.1
Jan-Nov 1995	622
∆% Jan-Nov 2011/ Jan-Nov 1995	-51.8

*Computed using unrounded data

Source: http://www.census.gov/construction/nrs/historical_data/historic_releases.html

Table VA-7 provides the entire available series of new house sales from 1963 to 2010. The level of 323 thousand new houses sold in 2010 is the lowest since 1963 in the 47 years of available data. In that period, the population of the US rose from 179 million in 1960 to 309 million in 2010, or 72.6 percent. In fact, there is no year from 1963 to 2010 in Table 4 with sales of new houses below 400 thousand.

Table VA-7, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323

Source: http://www.census.gov/const/www/newressalesindex.html

Chart VA-2 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart VA-2, US, New One-Family Houses Sold in the US, SAAR (Seasonally-Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr051.html

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table VA-8. The percentage change of new house sales from 1963 to 2010 is minus 42.3 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in the first eleven months of 2011 fell 51.8 percent relative to the same period in 1995.

Table VA-8, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2010	-42.3	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2010	-51.6	NA
2000-2010	-63.2	NA
2005-2010	-74.8	NA

NA: Not Applicable

Source: http://www.census.gov/const/www/newressalesindex.html

The available historical data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table VA-9. On a yearly basis, median and average prices reached a peak in 2007 and the fell substantially.

Table VA-9, US, Median and Average Prices of New Houses Sold, Annual Data

Period	Median	Average
1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900

Source: http://www.census.gov/const/www/newressalesindex.html

Percentage changes of median and average prices of new houses sold in selected years are shown in Table VA-10. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between Nov 2006 and Nov 2011, median prices of new houses sold fell 10.8 percent and average prices fell 16.8 percent. Between Nov 2010 and Nov 2011, median prices fell 2.5 percent and average prices declined 13.8 percent.

Table VA-10, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% Nov 2000 to Nov 2003	18.5	27.3
∆% Nov 2000 to Nov 2005	36.1	39.7
∆% Nov 2000 to Nov 2011	22.6	15.3
∆% Nov 2005 to Nov 2011	-10.0	-17.5
∆% Nov 2000 to Nov 2006	37.4	38.5
∆% Nov 2006 to Nov 2011	-10.8	-16.8
∆% Nov 2009 to Nov 2011	-2.1	-11.6
∆% Nov 2010 to Nov 2011	-2.5	-13.8

Source: http://www.census.gov/econ/currentdata/ressales/?programCode=RESSALES&geoLevelCode=US&yearStart=1963&yearEnd=2011&categoryCode=SOLD&dataTypeCode=TOTAL&adjusted=1&notadjusted=0&errorData=0&submit=GET+DATA

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-11. Housing starts jumped 9.3 percent in Nov after falling 2.9 percent in Oct. The increase of 15 percent in Sep was revised to 10.4 percent. Housing permits, indicating future activity, rose 10.9 percent in Oct after falling 5.8 percent in Sep but jumped 5.7 percent in Nov. Monthly rates in starts and permits fluctuate significantly on a monthly basis as shown in Table VA-11.

Table VA-11, US, Housing Starts and Permits SSAR Month ∆%

	Housing Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Nov 2011	685	9.3	681	5.7
Oct	627	-2.9	644	9.3
Sep	646	10.4	589	-5.8
Aug	585	-4.9	625	4.0
Jul	615	0.0	601	-2.6
Jun	615	11.2	617	1.3
May	553	0.7	609	8.2
Apr	549	-7.4	563	-1.9
Mar	593	14.5	574	7.5
Feb	518	-18.6	534	-6.0
Jan	636	20.9	568	-9.8
Dec 2010	526	-4.5	630	-9.8
Nov	551	2.3	564	1.6
Oct	539	-9.7	555	-1.2
Sep	597	-1.5	562	-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Cumulative housing starts and permits from Jan to Nov not-seasonally adjusted are provided in Table VA-12. Housing starts increased 2.1 percent in the cumulative of Jan-Nov 2011 relative to the same period in 2010 and in the same period new permits rose 1.9 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 66.5 percent in Jan-Nov 2011 relative to Jan-Nov 2006 and fell 70.8 percent relative to Jan-Nov 2005. Housing permits fell 67.5 percent from Jan-Nov 2006 to Jan-Nov 2011 and fell 72.0 percent from Jan-Nov 2005.

Table VA-12, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan-Nov 2011	564.9	561.4
Jan-Nov 2010	553.1	551.0
∆% Jan-Nov 2011/Jan-Nov 2010	2.1	1.9
Jan-Nov 2006	1688.5	1727.4
∆%/Jan-Nov 2011	-66.5	-67.5
Jan-Nov 2005	1932.2	2004.0
∆%/ Jan-Nov 2011	-70.8	-72.0

Source: http://www.census.gov/construction/nrc/pdf/newresconst.pdf http://www.census.gov/construction/nrc/pdf/newresconst_200711.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200611.pdf

Chart VA-3 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-3 shows a mild downward trend or stagnation from mid 2010 to the present.

Chart VA-3, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr020.html

A longer perspective on residential construction in the US is provided by Table VA-13 with annual data from 1960 to 2010. Housing starts fell 71.6 percent from 2005 to 2010, 62.6 percent from 2000 to 2010 and 53.1 percent relative to 1960. Housing permits fell 71.9 percent from 2005 to 2010, 62.0 percent from 2000 to 2010 and 39.4 percent from 1960 to 2010. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-13, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,1637.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.7	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

Source: http://www.census.gov/const/www/newresconstindex.html

The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae- and Freddie Mac-acquired mortgages” (http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf). Table VA-14 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index. House prices catapulted from 2000 to 2003, 2005 and 2006. From IIIQ2000 to IIIQ2006, the index for the US as a whole rose 57.3 percent and by close or higher than 70 percent for New England, Middle Atlantic and South Atlantic but only by 32.5 percent for East South Central. Prices fell relative to 2011 from all years since 2005. From IIIQ2000 to IIIQ2011, prices rose for the US and the four regions in Table VA-14.

Table VA-14, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
3Q2000 to 3Q2003	23.5	40.5	35.3	25.0	10.8
3Q2000 to 3Q2005	49.7	69.7	68.6	60.2	22.3
3Q2000 to 3Q2006	57.3	68.6	75.9	71.5	32.5
3Q2005 t0 3Q2011	-14.0	-12.8	-3.9	-19.5	0.9
3Q2006 to 3Q2011	-18.1	-12.3	-7.9	-24.8	-5.8
3Q2007 to 3Q2011	-18.0	-10.8	-8.9	-24.7	-8.8
3Q2009 to 3Q2011	-6.4	-2.9	-3.1	-9.6	-4.8
3Q2010 to 3Q2011	-3.6	-2.3	-2.2	-4.1	-2.6
3Q2000 to 3Q2011	28.7	47.9	62.0	30.0	24.8

Source: http://www.fhfa.gov/webfiles/22802/3q2011HPI.pdf

Data of the FHFA HPI for the remaining US regions are provided in Table VA-15. Behavior is not very different than in Table VA-14 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2011, there was still appreciation relative to 2000.

Table VA-15, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
3Q2000 to 3Q2003	11.7	18.5	14.6	18.4	42.3
3Q2000 to 3Q2005	22.8	31.4	24.7	55.1	108.1
3Q2000 to 3Q2006	31.4	35.8	26.1	69.1	117.1
3Q2005 t0 3Q2011	9.8	-4.8	-14.9	-23.9	-35.8
3Q2006 to 3Q2011	2.6	-7.9	-15.9	-30.2	-38.4
3Q2007 to 3Q2011	-2.2	-8.8	-14.3	-31.2	-34.8
3Q2009 to 3Q2011	-1.4	-3.8	-5.8	-13.0	-9.2
3Q2010 to 3Q2011	-1.7	-2.3	-2.8	-6.8	-6.8
3Q2000 to 3Q2011	34.8	25.1	6.0	18.1	33.7

Source: http://www.fhfa.gov/webfiles/22802/3q2011HPI.pdf

Chart VA-4 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IIIQ1998 to IIIQ2011. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIIQ2008 but there was another decline after IIIQ2010. The rate of decline improved in IIIQ2011.

Chart VA-4, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change

Source: Federal Housing Finance Agency

http://www.fhfa.gov/Default.aspx?Page=14

Monthly and 12 months percentage changes of the FHFA House Price Index are provided in Table VA-16. Percentage monthly increases of the FHFA index were positive from Apr to Jul while 12 months percentage changes improved steadily from more than minus 6 percent in Mar to May to minus 4.4 percent in Jun. The FHFA house price index fell 0.2 percent in Oct and fell 2.7 percent in the 12 months ending in Oct.

Table VA-16, US, FHFA House Price Index Purchases Only SA. Month and NSA 12 Months ∆%

2011	Month ∆% SA	12 Month ∆% NSA
Oct	-0.2	-2.7
Sep	0.4	-2.7
Aug	-0.2	-4.1
Jul	0.0	-4.0
Jun	0.6	-4.4
May	0.2	-6.0
Apr	0.4	-6.1
Mar	-0.4	-6.0
Feb	-1.5	-5.4
Jan	-0.9	-4.6
Dec 2010		-3.8
Dec 2009		-1.8
Dec 2008		-9.4
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.9
Dec 2004		10.1
Dec 2003		7.9
Dec 2002		7.8
Dec 2001		6.8
Dec 2000		7.1

Source: http://www.fhfa.gov/Default.aspx?Page=87

The monthly archive of the NSA (not seasonally-adjusted) house price index of FHFA is used to construct Table VA-17. The fastest period of price appreciation was from Dec 2000 to Dec 2005 at the extremely high average yearly compound rate of 8.5 percent. Stimulus of housing had already begun in the second half of the 1990s with cumulative appreciation of 27.9 percent and average yearly rate of 5.1 percent. Between 2000 and 2011, the FHFA index increased 27.9 percent at the average yearly rate of 2.3 percent. Appreciation of house prices since 1991, when the FHFA index begins, to 2011, accumulated 82.0 percent for yearly average rate of 3.0 percent.

Table VA-17, US, FHFA House Price Index NSA ∆% and Average Yearly Growth Rate

	∆%	Average Yearly Growth Rate
Dec 1991 to Dec 2000	42.4	4.0
Dec 1991-Dec 1995	11.3	2.7
Dec 1995-Dec 2000	27.9	5.1
Dec 2000 to Dec 2005	50.3	8.5
Dec 2000 to Dec 2006	54.0	7.5
Oct 2000 to Oct 2011	27.9	2.3
Oct 1991 to Oct 2011	82.0	3.0

Source: http://www.fhfa.gov/Default.aspx?Page=87

Weakness in the housing sector is being considered as an important factor of the financial crisis, global recession and slow growth recession. Chairman Bernanke (2011Oct4JEC, 2-3) states:

“Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.”

The answer to these arguments can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

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 (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions 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→∞.

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 close to zero interest rates, 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 to purchase 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).

VB Japan. The Markit Japan Services PMI^™ Composite Output Index fell 3.5 percentage points from 52.4 in Oct to 48.9 in Nov, meaning that private-sector activity has fallen into contraction territory (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8899). Alex Hamilton, economist at Markit and author of the report, finds that panelists view unfavorably the outlook of private-sector activity in the coming 12 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8899). The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Japan Manufacturing PMI^TM registered 49.1 in Nov from 50.6 in Oct for the sharpest acceleration of decline of output since Apr after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Alex Hamilton, economist at Markit and author of the report, finds that weakening demand originated in the appreciated yen together with declining new orders from emerging Asia especially China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8837). Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Nov ∆% 0.1 12 months ∆% 1.7 Blog 12/18/11
Consumer Price Index	Oct SA ∆% 0.1 Oct 12 months NSA ∆% -0.2 Blog 11/27/11
Real GDP Growth	IIIQ2011 ∆%: 1.4 on IIQ2011; IIIQ2011 SAAR 5.6% ∆% from quarter a year earlier: -0.7 % Blog 12/11/11
Employment Report	Oct Unemployed 2.88 million Change in unemployed since last year: minus 460 thousand Unemployment rate: 4.5% Blog 12/04/11
All Industry Index	Oct month SA ∆% 0.8 12 months NSA ∆% 0.2 Blog 12/27/11
Industrial Production	Oct SA month ∆%: 2.4 12 months NSA ∆% 0.4 Blog 12/04/11
Machine Orders	Total Oct ∆% 3.2 Private ∆%: -9.2 Sep ∆% Excluding Volatile Orders -6.9 Blog 12/04/2011
Tertiary Index	Oct month SA ∆% 0.6 Oct 12 months NSA ∆% 0.5 Blog 12/18/2011
Wholesale and Retail Sales	Oct 12 months: Total ∆%: 0.9 Wholesale ∆%: 0.5 Retail ∆%: 1.9 Blog 12/04/11
Family Income and Expenditure Survey	Oct 12 months ∆% total nominal consumption minus 0.6, real minus 0.4 Blog 12/04/11
Trade Balance	Exports Nov 12 months ∆%: -4.5 Imports Nov 12 months ∆% 11.4 Blog 12/27/11

Links to blog comments in Table JPY: 12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/2011 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial.html

12/0411 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/iv-world-economic-slowdown.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP grew at 1.4 percent in the third quarter, industry at 4.3 percent and the tertiary sector 1.2 percent. The all industry index grew at 2.1 percent in IIIQ2011. Industry contributed 0.75 percentage points to growth of the all industry index and the tertiary index contributed 0.82 percentage points. All components of the indices of all industry activity grew with the exception of government. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 2.0 percent and flat GDP when it was unexpectedly hit by the Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.2 percent in IIQ2011 relative to IQ2011 but recovery at 3.8 percent in IIIQ2011. Industrial production fell 4.0 percent from IQ2011 into IIQ2011 but grew 4.3 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.9 percent in IQ2011 caused by decline of industrial production by 2.0 percent and services by 1.4 percent with GDP falling 1.7 percent.

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2011
IIIQ	3.8	4.3	1.2	-0.1	2.1	1.4
Cont to IIIQ % Change	0.17	0.75	0.82	-0.01
IIQ	-7.2	-4.0	0.0	0.7	-0.4	-0.5
IQ	2.7	-2.0	-1.4	0.2	-1.9	-1.7
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	0.0
III Q	1.9	-1.0	0.6	0.0	0.7	0.5
IIQ	-0.9	0.7	0.4	-0.2	0.8	-0.1
IQ	0.7	7.4	0.7	-0.4	1.3	2.3

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201110j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201107j.pdf

There are more details in Table VB-2. The all industry activity index rose 0.8 percent in Nov relative to Oct with increase of the tertiary or services sector by 0.6 percent and increase of industry of 3.3 percent while construction fell 3.9 percent. Industry added to growth in Oct by 0.39 percentage points and the tertiary sector contributed 0.47 percentage points with negative contribution of 0.18 percentage points by construction. Weakness in Sep and Aug had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Oct 2011	-3.9	2.2	0.6	0.2	0.8
Cont to Oct % Change	-0.18	0.39	0.40	0.02
Sep	2.3	-3.3	-0.4	-0.1	-0.7
Aug	1.8	0.6	0.1	0.0	-0.3
Jul	0.8	0.4	-0.2	-0.6	0.4
Jun	-0.3	3.8	1.9	0.3	2.2
May	3.7	6.2	0.9	1.0	2.0
Apr	-5.7	1.6	2.7	-0.1	1.7
Mar	-8.6	-15.5	-5.9	-0.1	-6.4
Feb	6.3	1.8	0.8	0.2	0.9
Jan	2.3	0.0	-0.1	0.0	-0.5
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201110j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2010	-7.0	16.4	1.3	-0.7	3.1	4.4
Cont to 2010 % Change	-0.35	2.62	0.88	-0.09
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2011
III Q	-2.9	-2.1	0.1	0.5	-0.4	-0.7
Cont to IIIQ % Change	-0.13	-0.38	0.07	0.06
IIQ	-4.8	-6.8	-0.5	0.5	-1.7	-1.7
IQ	1.6	-2.5	-0.1	-0.4	-0.5	-0.2
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	3.1
III Q	-3.2	14.0	1.8	-0.6	3.2	5.4
IIQ	-11.3	21.3	1.4	-0.7	3.5	3.1
IQ	-12.4	28.0	0.8	-0.5	3.9	5.6

Source:

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Rates of change of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index rose 0.2 percent in Oct 2011 relative to Oct 2010 with increases of all segments with the exception of construction. Industry rose 0.1 percent in Oct 2011 relative to a year earlier, contributing to an increase in the all industry index by a meager 0.02 percentage points. The tertiary sector increased 0.5 percent, contributing to an increase of the index of all industry by 0.33 percentage points. Construction reduced the index by 0.20 percentage points while government increased it by 0.08 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Oct 2011	-4.0	0.1	0.5	0.7	0.2
Cont to Oct % Change	-0.20	0.02	0.33	0.08
Sep	-0.1	-3.3	0.0	0.4	-0.6
Aug	-4.2	0.4	0.6	-0.3	0.2
Jul	-4.5	-3.0	-0.2	1.2	-0.8
Jun	-4.5	-1.7	0.9	1.1	0.2
May	-6.0	-5.5	-0.2	0.1	-1.3
Apr	-3.8	-13.6	-2.3	0.4	-4.0
Mar	-1.1	-13.1	-3.1	-0.3	-4.5
Feb	4.4	2.9	2.0	-0.3	2.0
Jan	1.3	4.6	1.1	-0.5	1.4
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201110j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201109j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201108j.pdf

http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201106j.pdf

Japan’s trade balance is in Table VB-5. Japan experienced another deficit in trade balance in Nov, which is sixth deficit in 2011 and the second consecutive. The adversity caused by the Great East Earthquake/tsunami is manifested in drops of exports in 12 months ending in Mar through Jul with the first 12-month increase of 2.8 percent in Aug and 2.3 percent in Sep but decline by 3.8 percent in Oct and sharper decline by 4.5 percent in Nov. At the same time, imports rose rapidly because of the need to reconstruct the country in recovering internal production. The combination of risk aversion in international finance with unconventional monetary policy of zero interest rates and quantitative easing has caused an adverse appreciation of the Japanese yen relative to the dollar. Yen appreciation undermines the competitiveness of Japanese products in world markets.

Table VB-5, Japan, Exports, Imports and Trade Balance, NSA JPY Billions and ∆%

	Exports JPY Billions	12 months ∆%	Imports JPY Billions	12 months ∆%	Balance YPY Billions
Nov 2011	5,197.7	-4.5	5,882.4	11.4	-684.7
Oct	5,507,5	-3.8	5,786.6	17.9	-279.1
Sep	5,976.7	2.3	5,682.8	12.2	293.9
Aug	5,356.6	2.8	6,136.1	19.2	-775.3
Jul	5,781.0	-3.4	5,713.2	9.9	71.6
Jun	5,775.6	-1.6	5,708.2	9.8	68.6
May	4,760.0	-10.3	5,617.3	12.4	-857.3
Apr	5,156.6	-12.4	5.624.3	9.0	-467.7
Mar	5,861.2	-2.3	5,674.9	12.0	186.3
Feb	5.589.0	9.0	4,938.7	10.0	650.3
Jan	4,970.3	1.4	5,449.7	12.2	-479.4
Dec 2010	6,112.0	12.9	5,392.4	10.7	32.6
Nov	5,439.8	9.1	5,282.2	14.3	157.6
Oct	5,722.5	7.8	4,909.9	8.9	812.6
Sep	5,839.6	14.3	5,065.3	10.3	774.3
Aug	5,209.8	15.5	5,146.0	18.4	63.8
Jul	5,981.9	23.5	5,197.3	16.1	784.6
Jan-Mar 2011	16,420.5	2.4	16,063.3	11.4	357.3
Apr-Jun 2011	15,692.2	-8.0	16,948.5	10.4	-1,256.3

Source: http://www.customs.go.jp/toukei/info/index_e.htm

The structure of exports and imports of Japan is in Table VB-6. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 31.4 percent of Japan’s imports and increased 28.1 percent in the 12 months ending in Nov. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 12.9 percent of Japan’s exports with decline of 4.7 percent in the 12 months ending in Nov. Machinery contributes 20.5 percent of Japan’s exports with decline of 4.1 percent in the 12 months ending in Nov. Electrical machinery contributes 16.8 percent of Japan’s exports with decline of 10.7 percent in the 12 months ending in Nov. The best outcome is transport equipment with share of 24.5 percent in total exports and growth of 3.9 percent in the 12 months ending in Nov. The breakdown of transport equipment in Table 3 shows decline of the major categories of motor vehicles by 0.6 percent and of cars by 5.5 percent with strong growth in the minor categories of 32.8 percent for buses and trucks, 3.5 percent for parts of motor vehicles, 11.6 percent for motorcycles and 27.4 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

Table VB-6, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Nov 2011	Value JPY Billions	% of Total	12 Months∆%	Contribution Degree %
Exports	5,197,716	100.0	-4.5	-4.5
Foodstuffs	31,992	0.6	-9.5	-0.1
Raw Materials	78,965	1.5	7.5	0.1
Mineral Fuels	77,083	1.5	-2.3	-0.0
Chemicals	483,023	9.3	-12.5	-1.3
Manufactured Goods	668,313	12.9	-4.7	-0.6
Machinery	1,066,509	20.5	-4.1	-0.8
Electrical Machinery	874,575	16.8	-10.7	-1.9
Transport Equipment	1,273,841	24.5	3.9	0.9
Motor Vehicles	772,218	14.9	-0.6	-0.1
Cars	636,581	12.2	-5.5	-0.7
Buses & Trucks	126,405	2.4	32.8	0.6
Parts of Motor Vehicles	256,413	4.9	3.5	0.2
Motorcycles	26,269	0.5	11.6	0.1
Ships	176,920	3.4	27.4	0.7
Other	643,416	12.4	-5.5	-0.7
Imports	5,882,445	100.0	11.4	11.4
Foodstuffs	530,580	9.0	19.4	1.6
Raw Materials	413,263	7.0	1.5	0.1
Mineral Fuels	1,847,816	31.4	28.1	7.7
Chemicals	543,640	9.2	19.6	1.7
Manufactured Goods	506,548	8.6	7.0	0.6
Machinery	414,994	7.1	1.9	0.1
Electrical Machinery	772,540	12.3	-4.6	-0.7
Transport Equipment	178,210	3.0	6.5	0.2
Other	724,885	12.3	-0.4	-0.1

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/2011114e.pdf

Table VB-7 provides Japan’s exports and imports from 1979 to 2010. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year.

Table VB-7, Japan, Exports and Imports Fiscal Year 1979-2010 Billion Yens

Years	Exports	Imports

1979	22,531	24,245
1980	29,382	31,995
1981	33,468	31,464
1982	34,432	32,656
1983	34,909	30,014
1984	40,325	32,321
1985	41,955	31,084
1986	35,289	21,550
1987	33,315	21,736
1988	33,939	24,006
1989	37,822	28,978
1990	41,456	33,855
1991	42,359	31,900
1992	43,012	29,527
1993	40,202	26,826
1994	40,497	28,104
1995	41,530	31,548
1996	44,731	37,993
1997	50,937	40,956
1998	50,645	36,653
1999	47,547	35,268
2000	51,654	40,938
2001	48,979	42,415
2002	52,108	42,227
2003	54,548	44,362
2004	61,169	49,216
2005	65,656	56,949
2006	75,246	67,344
2007	83,931	73,135
2008	81,018	78,954
2009	54,170	51,499
2010	67,399	60,764

Source: http://www.customs.go.jp/toukei/suii/html/time_e.htm

The geographical breakdown of exports by imports with selected regions and countries is provided in Table VB-8 for Nov 2011. The share of Asia in Japan’s trade is more than one half, 53.9 percent of exports and 44.7 percent of imports. Within Asia, exports to China are 19.3 percent of total exports and imports from China 22.6 percent of total imports. The second largest export market for Japan is the US with share of 17.1 percent of total exports and share of imports from the US of 8.6 percent in total imports.

Table VB-8, Japan, Value and 12 Months Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yenes

Nov 2011	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,197,716	-4.5	5,882,445	11.4
Asia	2,800,515	-8.0	2,630,666	7.8
China	1,004,628	-7.9	1,327,365	6.6
USA	886,848	2.0	507,761	-0.8
Canada	67,432	6.3	80,908	0.6
Brazil	37,543	-9.4	91,459	16.8
Mexico	67,034	1.0	25,972	-5.9
Western Europe	651,200	-7.0	652,150	21.3
Germany	152,916	-1.8	176,362	25.2
France	50,242	11.3	85,951	14.4
UK	136,419	10.0	48,685	11.2

Source: http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/2011114e.pdf

VC China. The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 52.6 in Oct to 48.9 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8898

). The composite index combined activity in manufacturing and services such that joint output has moved into contraction territory below 50. A favorable aspect in the index is growth of services employment at the fastest rate in five months, which could maintain demand at high levels. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy could build on the growth of employment in services and the reduction of price pressures to ensure growth above 8 percent in 2012. The HSBC China Manufacturing PMI^™ compiled by Markit fell from 51.0 in Oct to 47.7 in Nov, which is the lowest in 32 months, indicating sharp deterioration of manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8859). The good news in the index is the decline in average input costs for the first time in 16 months. The decline in new business was the prime reason for falling output but export business continued to increase. Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC finds that the combination of weakening production and subdued inflation can lead to easing policies that may still ensure growth of 8 percent for China in 2012. The HSBC Flash China Manufacturing PMI^™, compiled by Markit, rose from 47.7 in Nov to 49.0 in Dec while the China Manufacturing Output index rose to 49.5 in Dec from 46.1 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8932). Both indexes rose to two-month highs and indicate marginal contraction. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Nov 12 months ∆%: 2.7 Jan-Nov ∆%: 6.4 Nov month ∆%: -0.7 Blog 12/11/11
Consumer Price Index	Nov month ∆%: -0.2 Nov 12 month ∆%: 4.2 Jan-Nov ∆%: 5.5 Blog 12/11/11
Value Added of Industry	Nov 12 month ∆%: 12.4 Jan-Nov 2011/Jan-Oct 2010 ∆%: 14.0 Blog 12/18/11
GDP Growth Rate	Year IIIQ2011 ∆%: 9.1 Quarter IIQ2011 ∆%: 2.2 Blog 10/23/11
Investment in Fixed Assets	Total Jan-Nov ∆%: 24.4 Jan-Nov ∆% real estate development: 29.9 Blog 12/18/11
Retail Sales	Nov month ∆%: 1.3 Nov 12 month ∆%: 17.3 Jan-Nov ∆%: 17.0 Blog 12/11/11
Trade Balance	Nov balance $14.52 billion Exports ∆% 13.8 Imports ∆% 22.1 Cumulative Nov: $138.55 billion Blog 12/11/11

Links to blog comments in Table CNY: 12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

VD Euro Area. The Markit Eurozone PMI^® Composite Output Index, combining manufacturing and services with high correlation with euro zone GDP, improved from 46.5 in Oct to 47.0 in Nov, meaning contraction of private-sector economic activity for the third consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8887). The output of all big-four economies of the euro zone—Germany, France, Italy and Spain—contracted simultaneously for the first time since Jul 2009. Chris Williamson, Chief Economist at Markit, finds that the data in the index are consistent with economic contraction of the euro zone by 0.6 percent in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8887). Italy’s GDP could decline by 1 percent in IVQ2011 with France and Spain contracting by 0.5 percent. Germany could experience a milder decline but manufacturing is falling with weakness in export orders. The Markit Eurozone Manufacturing PMI^® that is highly associated with euro zone manufacturing fell from 47.1 in Oct to 46.4 in Nov, which is the lowest reading in 28 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). Chris Williamson, Chief Economist at Markit, finds that production and new orders declined at the fastest rates since the first half of 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8840). All individual indexes of countries in the report fell for the first time since the middle of 2009.

Table EUR provides the regional country data table for the euro zone. The Nov index is consistent with a rate of contraction of manufacturing output at 2 percent in the final quarter of 2011. The debt crisis has introduced significant uncertainty in regional business. The Markit Flash Eurozone PMI^® Composite Output Index rose to 47.9 in Dec from 47.0 in Nov, indicating milder contraction in the weakest quarter in the euro zone in two and half years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8939). Table EUR provides the regional country data table for the euro zone.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 12/04/11
Unemployment	Oct 2011: 10.3% unemployment rate Oct 2011: 16.294 million unemployed Blog 12/04/11
HICP	Nov month ∆%: 0.1 12 months Nov ∆%: 3.0 Blog 12/18/11
Producer Prices	Euro Zone industrial producer prices Oct ∆%: 0.1 Oct 12 months ∆%: 5.5 Blog 12/04/11
Industrial Production	Oct month ∆%: -0.1 Sep 12 months ∆%: 1.3 Blog 12/18/11
Industrial New Orders	Sep month ∆%: minus 6.4 Sep 12 months ∆%: 1.6 Blog 12/04/11
Construction Output	Oct month ∆%: -1.4 Oct 12 months ∆%: -2.8 Blog 12/27/11
Retail Sales	Oct month ∆%: minus 0.4 Oct 12 months ∆%: minus 0.4 Blog 12/04/11
Confidence and Economic Sentiment Indicator	Sentiment 93.7 Nov 2011 down from 107 in Dec 2010 Confidence minus 20.4 Oct 2011 down from minus 11 in Dec 2010 Blog 12/04/11
Trade	Jan-Oct 2011/2010 Exports ∆%: 13.3 Imports ∆%: 13.8 Blog 12/18/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 12/04/11 9/04/11

Links to blog comments in Table EUR:

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

Construction is weak throughout most advanced economies. Growth of euro zone construction output in Table VD-1 has fluctuated with alternation of negative change. Jul is the only strong month with monthly percentage increase of 0.8 percent and 2.0 percent in 12 months. Percentage changes have been negative since Jul. In Oct, construction output fell 1.4 percent and fell 2.8 percent in 12 months.

Table VD-1, Euro Zone, Construction Output ∆%

	Month ∆%	12 Months ∆%
Oct	-1.4	-2.8
Sep	-1.1	0.1
Aug	-0.4	1.7
Jul	0.8	2.0
Jun	-0.6	-11.3
May	0.6	-0.8

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-19122011-AP/EN/4-19122011-AP-EN.PDF

VE Germany. The Markit Germany Composite Output Index, combining output of the manufacturing and service sectors, fell below the zone of 50.0 below zero for the first time since Jul 2009, registering 49.4 in Nov compared with 50.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8876

). The decline in manufacturing production offset the Markit Germany Services Business Activity Index at 50.3 in Nov, which was lower than 50.6 in Oct. New work in services is experiencing the longest period of decline since the global recession in 2008 and 2009. Tim Moore, Senior Economist at Markit and author of the report, evaluates that stagnation may be the best outcome for the German economy in IVQ2011. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®) fell from 49.1 in Oct to 47.9 in Nov for the seventh consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). The index registered the fastest deterioration of overall manufacturing since Jul 2009. While the declines in output and new orders were the fastest since Jun 2009, the rates of decline are much more benign than those experienced during the global recession of 2008 and 2009. Tim Moore, Senior Economist at Markit and author of the report, finds resilience in output of consumer goods that compensated for declines in manufacturing export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8860). The Markit Flash Germany PMI^® Composite Output Index rose from 49.4 in Nov to 51.3 in Dec, for a four-month high, indicating return to expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8927).

Table DE, Germany, Economic Indicators

GDP	IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5 Blog 11/27/11
Consumer Price Index	Oct month SA ∆%: 0.0 Oct 12 months ∆%: 2.4 Blog 12/11/11
Producer Price Index	Oct month ∆%: 0.1 12 months NSA ∆%: 5.2 Blog 12/27/11
Industrial Production	Oct month SA ∆%: minus 0.8 12 months NSA: 1.4 Blog 12/11/11
Machine Orders	Oct month ∆%: 5.2 Oct 12 months ∆%: 2.0 Blog 12/11/11
Retail Sales	Oct Month ∆% 0.7 12 Months ∆% -0.4 Blog 12/04/11
Employment Report	Employment Accounts: Oct Employed 12 months NSA ∆%: 2.9 Labor Force Survey: Aug Unemployment Rate: 5.2% Blog 12/04/11
Trade Balance	Exports Oct 12 month NSA ∆%: 3.8 Imports Oct 12 months NSA ∆%: 8.6 Exports Oct month SA ∆%: -3.6 percent; Imports Oct month SA minus 1.0 Blog 12/11/11

Links to blog comments in Table DE:

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

11/27/11 http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html

VF France. There was an improvement in the Markit France Services Activity Index for a two-month high from 44.6 in Oct to mild contraction at 49.6 in Nov that compensated the acceleration of decline in manufacturing. As a result the Markit France Composite Output Index, combining manufacturing and services, rose to a two-month high of 48.8 in Nov from 45.6 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8906). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds that weak readings are suggesting contraction of the French economy in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8906). Uncertainty from the euro zone debt crisis is driving down confidence in the service sector. The Markit France Manufacturing Purchasing Managers Index^® (PMI^®) fell to 47.3 in Nov from 48.5 in Oct, which is the lowest reading since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). The index has been in the contraction zone below 50 during four consecutive months. New orders fell at the sharpest rate since Apr 2009 and have fallen during five consecutive months. Jack Kennedy, Senior Economist at Markit, and author of the France Manufacturing PMI^® find increasing weakness in domestic and export demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8861). The Markit Flash France PMI^® Composite Output Index increased from 48.8 in Nov to a three-month high at 49.8 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8926). Table FR provides France’s country data table.

Table FR, France, Economic Indicators

CPI	Nov month ∆% 0.3 12 months ∆%: 2.5 12/18/11
PPI	Oct month ∆%: 0.4 Oct 12 months ∆%: 5.6 Blog 12/27/11
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.3 IIIQ2011/IIIQ2010 ∆%: 1.5 Blog 12/27/11
Industrial Production	Oct/Sep SA ∆%: Industrial Production 0.0; Manufacturing minus 0.0 Oct 12 months NSA ∆%: Industrial Production 2.3; Manufacturing 3.1 Blog 12/11/11
Industrial New Orders	Mfg Oct/Sep ∆% 0.3 YOY ∆% 5.0 Blog 12/27/11
Consumer Spending	Oct Manufactured Goods ∆%: 0.3 Oct 12 Months Manufactured Goods ∆%: minus 0.2 Blog 12/04/11
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/04/11
Trade Balance	Oct Exports ∆%: month 0.5, 12 months 6.3 Oct Imports ∆%: month minus 0.3, 12 months 7.4 Blog 12/11/11
Confidence Indicators	Historical averages 100 Dec: France 92 Mfg Business Climate 94 Retail Trade 93 Services 91 Building 99 Household 79 Blog 12/18/11

Links to blog comments in Table FR:

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

Growth of GDP in a quarter relative to the prior quarter is provided for France in Table VF-1. The French economy contracted 0.1 percent in IIQ2011 but grew revised 0.3 percent in IIIQ2011. Growth in the first five quarters of expansion from IQ2010 to IQ2011 was at the annual equivalent rate of 1.9 percent while growth in the second and third quarters of 2011 has been at the annual equivalent rate of 0.4 percent. Recovery has been much weaker than the cumulative 2.7 percent in the four quarters of 2006. Weak recoveries in advanced economies have prevented full utilization of labor, capital and productive resources.

Table VF-1, France, Quarterly Real GDP Growth, Quarter on Prior Quarter ∆%

	IQ	IIQ	IIIQ	IVQ
2011	0.9	-0.1	0.3
2010	0.1	0.5	0.4	0.4
2009	-1.6	0.1	0.3	0.6
2008	0.3	-0.7	-0.3	-1.4
2007	0.6	0.5	0.4	0.2
2006	0.6	1.1	0.2	0.8
2005	0.1	0.4	0.6	0.7

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20111223

Growth rates of France’s real GDP in a quarter relative to the same quarter a year earlier are shown in Table VF-2. France has not recovered the rates of growth in excess of 2 percent prior to the global recession. GDP fell 3.9 percent in IQ2009, 3.2 percent in IIQ2009, 2.7 percent in IIIQ2009 and 0.6 percent in IVQ2009.

Table VF-2, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	2.2	1.7	1.5
2010	1.0	1.5	1.6	1.4
2009	-3.9	-3.2	-2.7	-0.6
2008	1.5	0.3	-0.5	-2.1
2007	2.7	2.1	2.4	1.8
2006	2.3	3.0	2.6	2.7
2005	2.0	1.7	1.9	1.8
2004	1.9	2.7	2.4	2.5

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20111223

Percentage changes and contributions of segments of GDP in France are provided in Table VF-3. Internal demand contributed revised 0.2 percentage points to GDP growth in IIIQ2011 after contributing minus 0.4 percentage points in IIQ2011. Net foreign trade contributed revised 0.0 percentage points in IIIQ2011 after contributing 0.5 percentage points in IIQ2011.

Table VF-3, France, Contributions to GDP Growth, Calendar and Seasonally Adjusted, %

∆% from Prior Period	IVQ 2010	IQ 2011	IIQ 2011	IIIQ 2011	2010	2011
GDP	0.4	0.9	-0.1	0.3	1.4	1.7
Imports	-0.1	3.0	-1.0	0.7	8.3	5.4
Household Consump.	0.4	0.2	-1.0	0.3	1.3	0.3
Govt. Consump.	0.1	0.4	0.1	0.2	1.2	0.8
GFCF	0.4	1.2	0.6	0.2	-1.4	2.7
Exports	0.5	1.3	0.7	0.8	9.3	4.5
% Point Contribs.
Internal Demand	0.3	0.4	-0.4	0.2	0.8	0.9
Inventory Changes	-0.1	1.0	-0.1	0.1	0.5	1.1
Net Foreign Trade	0.1	-0.5	0.5	0.0	0.1	-0.3

Notes: Consump.: Consumption; Gvt.: Government; GFCF: Gross Fixed Capital Formation; Contribus.: Contributions

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20111223

Chart VF-1 of France’s Institut National de la Statistique et des Études Économiques provides percentage point contributions to GDP growth. GDP grew sharply into IQ2011 and then stalled in IIQ2011. Final consumption was the key negative contributor to GDP growth in IIQ2011. GDP growth strengthened in IIIQ2011 with the impulse originating in final consumption.

Chart VF-1, France, Percentage Point Contributions to GDP Growth

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20111223

France’s industrial new orders are provided in Table VF-4. Manufacturing new orders rose 0.3 percent in Oct after falling 3.6 percent in Sep, increasing 5.4 percent relative to a year earlier. Nondomestic manufacturing new orders increased 0.3 percent in Oct and 5.0 percent relative to a year earlier. Motor vehicles new orders increased 1.7 percent in Oct after falling 7.4 percent but are 2.5 percent below a year earlier.

Table VF-4, France, Industrial New Orders, ∆%

2011	Weight	Oct/ Sep	Sep/ Aug	Quarter on Quarter	Year on Year*
Mfg	931	0.3	-3.6	-0.9	5.4
Mfg Non-Domestic	477	0.3	-3.1	0.0	5.0
Electric and Electronic	212	-0.5	-2.0	-1.3	6.5
Motor Vehicles	240	1.7	-7.4	-2.9	-2.5
Other Mfg	479	0.0	-2.8	-0.1	7.8

Notes: Mfg: Manufacturing; * Last three months/same three months last year

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=91&date=20111220

VG Italy. The Markit/ADACI Business Activity Index rose from 43.9 in Oct to 45.8 in Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8900

). Business activity in Italian services has contracted during seven consecutive months. Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds increasing evidence that the economy of Italy may have moved into recession during the second half of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8900). Cost inflation fell to the lowest since Feb 2010. The Markit/ADACI Italy Purchasing Managers’ Index^® (PMI^®) rose slightly from the 28-month low of 43.3 in Oct to 44.0 in Nov in the fourth month of deterioration of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8842). The pace of decline of new business for Italy’s manufacturing continued at the two-and-a half year low registered in Oct and export business declined at the fastest rhythm since Aug 2009. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Nov month ∆%: -0.1 Nov 12 months ∆%: 3.3 Blog 12/18/11
Producer Price Index	Oct month ∆%: -0.2 Oct 12 months ∆%: 4.7 Blog 12/04/11
GDP Growth	IIIQ2011/IIIQ2010 SA ∆%: 0.2 IIIQ2011/IIQ2011 NSA ∆%: -0.2 Blog 12/27/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Oct month ∆%: minus 0.9 12 months ∆%: minus 4.2 Blog 12/11/11
Retail Sales	Oct month ∆%: -0.5 Oct 12 months ∆%: minus 1.5 Blog 12/27/11
Business Confidence	Mfg Nov 94.4, Jun 100.2 Construction Oct 80.1, Jun 74.5 Blog 12/04/11
Consumer Confidence	Consumer Confidence Dec 91.6, Nov 96.1 Economy Dec 77.2, Nov 83.1 Blog 12/27/11
Trade Balance	Balance Oct SA -€ 1965 million versus Sep -€ 1332 Exports Oct month SA ∆%: -3.2; Imports Oct month SA ∆%: -1.1 Exports 12 months NSA ∆%: 4.5 Imports 12 months NSA ∆%: -0.3 Blog 12/27/11

Links to blog comments in Table IT:

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

09/04/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

Table VG-1 provides percentage changes of GDP in Italy of quarter on prior quarter and quarter on same quarter a year earlier. GDP had been growing during six consecutive quarters but at very low rates. Growth in IVQ2010 has been revised to zero and growth in IIIQ2011 is estimated at minus 0.2 percent. The yearly rate has fallen from 1.6 percent in IIQ2010 to 0.2 percent in IIIQ2011. The fiscal adjustment of Italy is significantly more difficult with the economy not growing especially on the side of increasing government revenue.

Table VG-1, Italy, GDP ∆%

	Quarter ∆% Relative to Preceding Quarter	Quarter ∆% Relative to Same Quarter Year Earlier
IIIQ2011	-0.2	0.2
IIQ2011	0.3	0.7
IQ2011	0.1	0.8
IVQ2010	0.0	1.6
IIIQ2010	0.3	1.5
IIQ2010	0.4	1.6
IQ2010	0.8	1.0
IVQ2009	-0.1	-2.9
IIIQ2009	0.5	-4.6
IIQ2009	-0.1	-6.1
IQ2009	-3.2	-6.5
IVQ2008	-1.9	-3.1
IIIQ2008	-1.1	-1.7
IIQ2008	-0.5	-0.3
IQ2008	0.4	0.4
IV2007	-0.4	0.1
IIIQ2007	0.3	1.7
IIQ2007	0.2	2.0
IQ2007	0.0	2.4

Source: http://www.istat.it/it/archivio/48512

Chart VG-1 of the Italian National Institute of Statistics (ISTAT) provides growth of GDP of Italy at market prices. The year on year rate of growth pulled strongly out of the contraction. There is what appears to be the beginning of a trend of deceleration toward stagnation in 2011 much the same as in many advanced economies.

Chart VG-1, Italy, GDP at Market Prices, ∆%

Source: http://www.istat.it/it/

Percentage change of GDP and expenditures components for Italy is shown in Table VG-2. All the percentage changes are negative with the exception of exports with growth of 1.6 percent in IIIQ2011 and 5.7 percent relative to the same quarter a year earlier. Household consumption grew 0.1 percent in IIIQ2011 relative to the same quarter a year earlier but fell 0.6 percent relative to IIQ2011.

Table VG-2, Italy, Percentage Change in GDP and Expenditure Components, SA and Calendar Adjusted, Chain-linked Volumes, ∆%

	IIIQ2011/ IIQ2011 ∆%	IIIQ2011/ IIIQ2010 ∆%
GDP	-0.2	0.2
Imports	-1.1	-0.9
Consumption	-0.3	-0.1
Household	-0.2	0.1
Government	-0.6	-0.6
GFCF	-0.8	-2.0
Equipment	0.5	1.4
Transport	-4.9	-9.6
Construction	-1.2	-3.2
Inventory ∆	-	-
Exports	1.6	5.7

Note: GFCF: Gross Fixed Capital Formation

Source: http://www.istat.it/it/archivio/48512

Value added by sectors and GDP for Italy is shown in Table VG-3. Industry as in most advanced economies had been driving recovery but contracted 0.1 percent in the quarter and grew 0.6 relative to the same quarter a year earlier. Services stagnated in IIIQ2011 and grew 0.2 relative to the same quarter a year earlier. Agriculture fell 0.9 percent and fell 0.1 percent relative to the same quarter a year earlier.

Table VG-3, Italy, Value Added by Sectors, SA and Calendar Adjusted, ∆%

	IIIQ20011/ IIQ2011 ∆%	IIIQ2011/ IIIQ2010 ∆%
Agriculture	-0.9	-0.1
Industry	-0.1	0.6
Services	0.0	0.2
GDP at Market Prices	-0.2	0.2

Source: http://www.istat.it/it/archivio/48512

An important part of the analysis of Blanchard (2011WEOSep) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-4 provides retail sales growth for Italy. Retail sales rose 0.1 percent in Oct relative to Sep and declined 0.8 percent in Jan-Oct 2011 relative to Jan-Oct 2010. The only strength is in retail sales of food with growth of 0.7 percent in Oct, 0.9 percent in 12 months and 0.2 percent in the first ten months relative to a year earlier.

Table VG-4, Italy, Retail Sales ∆%

	Oct 2011/ Sep 2011 SA	Aug-Oct 11/ May-Jul 11 SA	Oct 2011/ Oct 2010 NSA	Jan-Oct 2011/ Jan-Oct 2010
Total	0.1	-0.5	-1.5	-0.8
Food	0.7	0.3	0.9	0.2
Non-food	-0.1	-0.8	-2.5	-1.4

Source: http://www.istat.it/it/archivio/48622

A longer perspective of retail sales in Italy is provided by 12 month rates in 2011 and yearly rates from 2008 to 2010 in Table VG-5. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010. There is an evident declining trend in 2011.

Table VG-5, Italy, Retail Sales 12 Months ∆%

	12 Months ∆%
Oct 2011	-1.5
Sep	-1.6
Aug	-0.3
July	-2.3
Jun	-1.1
May	-0.4
Apr	2.2
Mar	-2.1
Feb	0.0
Jan	-1.1
Dec 2010	0.6
2010	0.2
2009	-1.7
2008	-0.3

Source: http://www.istat.it/it/archivio/48622

Chart VG-2 of the Istituto Nazionale di Statistica provides the 12 months rates of change of retail sales in Italy. Continued deterioration since May was reversed in Aug but continued in Oct with negative yearly growth.

Chart VG-2, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Exports and imports of Italy and monthly growth rates are provided in Table VG-6. There have been significant fluctuations. Seasonally-adjusted exports fell 3.2 percent in Oct and imports fell 1.1 percent. There was increase of the trade deficit from €1332 million in Sep to €1965 million in Oct. Exports rose 2.1 percent in Sep and imports fell 0.9 percent.

Table VG-6, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Oct 2011	30,878	-3.2	32,843	-1.1	1,965
Sep	31,888	2.1	33,220	-0.9	-1,332
Aug	31,245	-0.2	33,528	0.2	-2,283
Jul	31,309	1.3	33,464	2.1	-2,155
Jun	30,907	-0.9	32,760	-4.1	-1,853
May	31,172	-0.1	34,162	-0.3	-2,990
Apr	31,211	0.5	34,276	-1.2	-3,065
Mar	31,058	2.0	34,694	4.4	-3,636
Feb	30,448	-1.4	33,222	-0.8	-2,774
Jan	30,883	3.7	33,494	1.1	-2,611
AE ∆%
Dec 2010	29,790	0.4	33,140	0.4	-3,350

AE: annual equivalent

Source: http://www.istat.it/it/archivio/48334

Italy’s trade not seasonally adjusted is provided in Table VG-7. Values are different because the data are original and not adjusted. Twelve months rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.3 percent. The actual or not seasonally adjusted trade balance fell from €1881 million in Sep to €1077 million in Oct. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table VG-7, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Oct 2011	32,131	4.5	33,208	-0.3	-1,077
Sep	32,997	10.2	34,878	3.6	-1,881
Aug	24,177	14.9	27,082	12.1	-2,905
Jul	35,264	5.8	33,743	6.1	1,521
Jun	32,605	7.9	34,309	1.6	-1,704
May	33,491	19.8	35,722	18.4	-2,231
Apr	31,045	12.5	33,869	18.0	-2,824
Mar	34,418	14.0	38,203	19.8	-3,785
Feb	29,595	17.7	32,621	16.2	-3,026
Jan	26,146	24.6	32,455	28.4	-6,309
Dec 2010	29,714	20.2	32,732	31.7	-3,018
Year
2010	337,346	15.8	367,390	23.4	-30,034
2009	291,733	-20.9	297,609	-22.1	-5,876
2008	369,016	1.2	382,050	2.3	-13,034

Source: http://www.istat.it/it/archivio/48334

Growth rates of Italy’s trade and major products are provided in Table VG-8 for the period Jan-Oct 2011 relative to Jan-Oct 2010. Growth rates are high for the total and all segments with the exception of a decline in imports of consumer durables of 5.9 percent.

Table VG-8, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Oct 2011/ Jan-Sep 2010	Imports Share %	Imports ∆% Jan-Oct 2011/ Jan-Oct 2010
Consumer Goods	29.5	9.5	25.3	8.8
Durable	6.3	5.2	3.5	-5.9
Non Durable	23.2	10.7	21.8	10.6
Capital Goods	32.4	11.9	22.4	1.5
Inter- mediate Goods	33.5	15.1	33.9	16.8
Energy	4.6	17.4	18.4	19.9
Total ex Energy	95.4	12.3	81.6	9.9
Total	100.0	12.5	100.0	11.7

Source: http://www.istat.it/it/archivio/48334

Italy’s structure of regional trade in Jan-Sep 2011 and growth rates is in Table VG-9. Exports to members of the European Union are 57.3 percent of the total. Exports to the euro zone or European Monetary Union (EMU) are 43.6 percent. Imports from members of the European Union account for 54.8 percent of the total and imports from members of EMU are 44.6 percent of the total. After years of integration, members of EMU are dependent on each other such that the end of the common currency could be disruptive.

Table VG-9, Italy, Exports and Imports by Regions and Countries, % Share and 12 Months ∆%

	Exports % Share	∆% Jan-Oct 2011/ Jan-Oct 2010	Imports % Share	Imports ∆% Jan-Sep 2011/ Jan-Oct 2010
EU	57.3	10.2	54.8	7.9
EMU 17	43.6	10.4	44.6	7.6
France	11.6	12.9	8.8	4.5
Germany	13.0	14.2	16.1	7.9
Spain	5.8	2.9	4.6	10.0
UK	5.2	-1.4	2.7	10.5
Non EU	42.7	16.6	45.2	18.1
Europe non EU	12.0	24.9	10.3	20.8
USA	6.0	12.1	3.0	19.3
China	2.6	16.7	7.8	7.8
OPEC	5.3	-0.8	9.5	0.1
Total	100.0	12.5	100.0	11.7

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/48334

Italy’s index of consumer confidence is in Table VG-10. Overall confidence has fallen from 96.5 in Aug to 91.6 in Dec after sharp contraction from 96.1 in Nov. There is significant deterioration in all categories from Nov to Dec. Confidence on the economy fell from 83.1 in Nov to 77.2 in Dec and confidence on the future fell from 88.9 in Nov to 82.9 in Dec. The debt crisis is having adverse impacts on confidence.

Table VG-10, Italy, Index of Consumer Confidence SA 2005=100

2011	Dec	Nov	Oct	Sep	Aug
Confidence	91.6	96.1	92.9	94.1	96.5
Economy	77.2	83.1	75.7	78.5	81.8
Personal	97.3	101.6	98.6	100.6	101.9
Current	98.4	102.2	101.0	101.2	104.3
Future	82.9	88.9	81.9	85.5	86.2

Source: http://www.istat.it/it/archivio/48711

VH United Kingdom. The Markit/CIPS UK Services PMI^® finds a recurring pattern of weakness in manufacturing partly compensated by relatively stronger services. The Markit/CIPS Business Activity Index registered 52.1 in Nov, suggesting modest growth somewhat higher than 51.3 in Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8903). The index has exceeded the no change zone of 50 in all the first ten months of 2011. Chris Williamson, Chief Economist at Markit, finds that the sharp drop of manufacturing combined with modest improvement in services suggests stagnation of the UK economy in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8903).The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) declined to 47.6 in Nov from the upwardly revised 47.8 in Oct for the lowest level since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8853). There have been three consecutive monthly declines of manufacturing output in the UK and the rate of decline in Nov was the fastest in more than two-and-a-half year. Declining new orders determined the decline in output as a result of weak domestic and international markets. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators


CPI	Nov month ∆%: 0.2 Nov 12 months ∆%: 5.0 Blog 12/18/11
Output/Input Prices	Output Prices: Nov 12 months NSA ∆%: 5.4; excluding food, petroleum ∆%: 3.2 Input Prices: Nov 12 months NSA ∆%: 13.4 Excluding ∆%: 10.0 Blog 12/11/11
GDP Growth	IIIQ2011 prior quarter ∆% 0.6; year earlier same quarter ∆%: 0.5 Blog 12/27/11
Industrial Production	Oct 2011/Oct 2010 NSA ∆%: Industrial Production minus 1.7; Manufacturing 0.3 Blog 12/11/11
Retail Sales	Nov month SA ∆%: -0.4 Oct 12 months ∆%: 0.7 Blog 12/18/11
Labor Market	Aug-Oct Unemployment Rate: 8.3% Blog 12/18/11
Trade Balance	Balance Oct minus ₤1,552 million Exports Oct ∆%: 5.8 Aug/Oct ∆%: 9.9 Imports Oct ∆%: -0.1 Aug/Oct ∆%: 7.2 Blog 12/11/11

Links to blog comments in Table UK:

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data are analyzed here. Table VH-1 provides quarter on quarter chained value measures of GDP since 2000. Growth in IIQ2011 was reduced to 0.0 percent. The third estimate for IIIQ2011 is higher at 0.6 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table VH-1, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	0.4	0.0	0.6
2010	0.4	1.1	0.7	-0.5
2009	-1.6	-0.2	0.2	0.7
2008	0.0	-1.3	-2.0	-2.3
2007	1.1	1.2	1.2	0.6
2006	0.8	0.4	0.2	0.7
2005	0.3	0.8	0.8	0.8
2004	0.8	0.4	0.1	0.5
2003	0.7	1.2	1.0	1.2
2002	0.8	0.7	0.8	0.7
2001	1.4	0.4	0.7	0.4
2000	1.4	1.1	0.4	0.7

Source: http://www.ons.gov.uk/ons/datasets-and-tables/search/index.html?pageSize=50&newquery=GDP&sortBy=pubdate&sortDirection=DESCENDING&content-type=Dataset

Revised annual data in Table VH-2 show the strong impact of the global recession in the UK with decline of GDP of 4.6 percent in 2009 after dropping 0.9 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years.

Table VH-2, UK, Gross Value Added at Chained Volume Measures Basic Prices, ∆%

	∆% on Prior Year
1998	4.1
1999	3.8
2000	4.6
2001	2.9
2002	2.4
2003	3.6
2004	2.8
2005	2.3
2006	2.5
2007	3.5
2008	-0.9
2009	-4.6
2010	2.1

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/tsd-qna-q3-2011.html

There was growth throughout almost all components in the UK economy in 2010. Table VH-3 provides growth of GDP in 2010 by components and the contribution to growth. Total production grew 1.9 percent, contributing 0.3 percentage points, with manufacturing growing 3.7 percent, contributing 0.4 percentage points. Services contributed 1.0 percentage points with growth of 1.4 percent. Services for business and finance contributed 0.4 percentage points with growth of 1.3 percent. Construction grew 8.2 percent, contributing 0.6 percentage points.

Table VH-3, Gross Value Added at Chained Volume Measures by Components, ∆% on Prior Year

	2010 ∆%	Contribution %
GDP	2.1
Agriculture	-1.5	0.0
Total Production	1.9	0.3
Manufacturing	3.7	0.4
Extraction	-4.9	-0.1
Electricity, Gas & Air	3.5	0.0
Water & Sewerage	-1.6	0.0
Construction	8.2	0.6
Total Services	1.4	1.0
Distn, Hotels, Catering	1.5	0.2
Transport, Storage & Comms	3.0	0.3
Business Services & Finance	1.3	0.4
Government & Other	0.7	0.2

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Table VH-4 provides percentage changes from the prior quarter of UK GDP and gross value added by components. Total indices of production grew at high rates of 1.2 percent in IIQ2010 and 1.3 percent in IQ2010 but there were declines of 0.3 percent in IQ2011 and 1.4 percent in IIQ2011 followed by growth of 0.2 percent in IIIQ2011. Services have grown somewhat more consistently, providing an important cushion for generation of economic activity in the UK. Total indices of production grew 0.2 percent in IIIQ2011 and services grew 0.7 percent.

Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter

	GDP	Total Production	Mfg	CONS	Services
IIIQ11	0.6	0.2	0.1	0.3	0.7
IIQ11	0.0	-1.4	0.0	3.1	0.1
IQ11	0.4	-0.3	0.8	-1.6	0.8
IVQ10	-0.5	0.2	0.7	-1.4	-0.3
IIIQ10	0.7	0.2	1.3	3.1	0.6
IIQ10	1.1	1.2	1.6	8.1	0.5
IQ10	0.2	1.3	1.2	0.9	0.0

Note: CONS: construction

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Contributions to growth of GDP and components in a quarter from the preceding quarter are provided in Table VH-5. Growth of 0.6 percent in IIIQ2011 originated almost entirely in the contribution by services of 0.5 percentage points with virtually nil contributions by other components. Growth in 2011 has mostly originated in services.

Table VH-5, UK, Contribution to Growth from Preceding Quarter

	GDP	Total Production	Mfg	CONS	Services
IIIQ11	0.6	0.0	0.0	0.0	0.5
IIQ11	0.0	-0.2	0.0	0.2	0.1
IQ11	0.4	0.0	0.1	-0.1	0.6
IVQ10	-0.5	0.0	0.1	-0.1	-0.2
IIIQ10	0.7	0.0	0.1	0.2	0.5
IIQ10	1.1	0.2	0.2	0.6	0.4
IQ10	0.2	0.2	0.1	0.1	0.0

Note: CONS: construction

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter in the UK in the years from 2000 to the present as shown in Table VH-6. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009 and 5.9 percent in IIQ2008. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 3.0 percent in IIIQ2010 and 2.5 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2011. Growth relative to the same quarter a year earlier fell from 2.5 percent in IVQ2010 to 1.7 percent in IQ2011, 0.6 percent in IIQ2011 and 0.5 percent in IIIQ2011. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

Table VH-6, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2011	1.7	0.6	0.5
2010	1.2	2.5	3.0	2.5
2009	-6.9	-5.9	-3.8	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7

Source: http://www.ons.gov.uk/ons/datasets-and-tables/search/index.html?pageSize=50&newquery=GDP&sortBy=pubdate&sortDirection=DESCENDING&content-type=Dataset

Contributions to growth from the same quarter a year earlier are shown in VH-7. Services have driven growth in the UK followed by manufacturing and construction.

Table VH-7, UK, Contribution to Growth from the Same Quarter a Year Earlier

	GDP	Total Production	Mfg	CONS	Services
IIIQ11	0.5	-0.2	0.1	0.0	1.0
IIQ11	0.6	-0.2	0.3	0.2	0.9
IQ11	1.7	0.2	0.4	0.6	1.3
IVQ10	2.5	0.4	0.5	0.7	0.6
IIIQ10	3.0	0.5	0.5	0.9	1.5
IIQ10	2.5	0.2	0.3	0.7	1.4
IQ10	1.2	0.0	0.1	-0.1	0.8

Note: CONS: construction

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Percentage changes from prior quarter of UK GDP expenditure components are provided in Table VH-8. Household consumption fell in three consecutive quarters from IVQ2010 to IIQ2011 and was flat in IIIQ2011. Gross fixed capital formation was flat in IVQ2010, falling 2.4 percent in IQ2011 and falling again 0.6 percent in IIQ2011 but rose 1.3 percent in IIIQ2011. Net exports were quite strong in all quarters of 2010 but fell 1.5 percent in IQ2011 and 0.6 percent in IIQ2011 but grew 0.5 percent in IIIQ2011. The UK was hit by weak internal and external demand.

Table VH-8, Percentage Changes from Prior Quarter of GDP Expenditure Components, ∆%

	1Q 10	2Q 10	3Q 10	4Q 10	IQ 11	2Q 11	3Q 11
Household Consumption	0.0	0.7	0.0	-0.3	-0.4	-0.4	0.0
NPISH Final Consumption	-2.0	2.9	1.1	0.8	-0.7	3.9	-3.5
General Government Final Consumption	0.4	0.7	-0.2	-0.1	0.5	0.4	0.2
Gross Capital Formation	9.4	0.8	9.1	-7.5	-3.5	0.5	5.5
Gross Fixed Capital Formation	5.4	-2.8	0.9	0.0	-2.4	-0.6	1.3
Exports	-0.1	4.6	0.6	4.1	1.3	-1.5	-0.8
Less Imports	2.2	2.9	3.0	1.2	-1.5	-0.6	0.5

NPISH: Nonprofit Institutions Serving Households

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Calculations of percentage point contributions to GDP growth from prior quarter by expenditure components by the UK Office for National Statistics are shown in Table VH-9. Household consumption contributed positively with 0.5 percentage points only in IIQ2010. In all the other seven quarters the contribution was nil in three and negative by 0.2 percentage points in final quarter of 2010 and the first two quarters of 2011. Gross fixed capital formation also deducted from GDP growth in the two first quarters of 2011 and the contribution was nil in IVQ2010. Gross fixed capital formation contributed 0.2 percentage points to growth of GDP in IIIQ2011. Net trade deducted 0.3 percentage points in IIQ2011 and 0.4 percentage points in IVQ2011.

Table VH-9, Percentage Point Contribution to GDP Growth from Prior Quarter by Expenditure Components, %

	1Q 10	2Q 10	3Q 10	4Q 10	IQ 11	2Q 11	3Q 11
Household Consumption	0.0	0.5	0.0	-0.2	-0.2	-0.2	0.0
NPISH Final Consumption	-0.1	0.1	0.0	0.0	0.0	0.1	-0.1
General Government Final Consumption	0.1	0.2	0.0	0.0	0.1	0.1	0.0
Gross Capital Formation	1.3	0.1	1.4	-1.3	-0.5	0.1	0.8
Gross Fixed Capital Formation	0.8	-0.4	0.1	0.0	-0.4	-0.1	0.2
Exports	0.0	1.3	0.2	1.2	0.4	-0.5	-0.2
Less Imports	0.7	0.9	0.9	0.4	-0.5	-0.2	0.1
Net Trade	-0.7	0.4	-0.7	0.8	0.9	-0.3	-0.4

NPISH: Nonprofit Institutions Serving Households

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Percentage changes from same quarter a year earlier of UK GDP expenditure components are provided in Table VH-10. Household consumption fell 1.0 percent in both IIQ2011 and IIIQ2011. Gross fixed capital formation had strong growth in all quarters in 2010 but fell in all quarters in 2011. Net imports grew strongly in all quarters of 2010 and 2011 with the exception of decline by 0.5 percent in IIIQ2011.

Table VH-10, Percentage Changes from Same Quarter Year Earlier of GDP Expenditure Components, ∆%

	1Q 10	2Q 10	3Q 10	4Q 10	IQ 11	2Q 11	3Q 11
Household Consumption	0.6	2.1	1.8	0.5	0.0	-1.0	-1.0
NPISH Final Consumption	-1.4	1.5	2.3	2.7	4.1	5.1	0.4
General Government Final Consumption	1.2	2.5	1.5	0.8	0.9	0.6	1.0
Gross Capital Formation	9.8	7.7	20.3	11.3	-1.8	-2.1	-5.4
Gross Fixed Capital Formation	1.8	3.9	3.6	3.3	-4.4	-2.2	-1.8
Exports	2.6	8.7	8.7	9.4	10.9	4.4	3.0
Less Imports	4.3	8.5	11.9	9.7	5.7	2.0	-0.5

NPISH: Nonprofit Institutions Serving Households

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

Calculations of percentage point contributions to GDP growth from a quarter relative to the same quarter a year earlier by expenditure components by the UK Office for National Statistics are shown in Table VH-11. Household consumption deducted 0.6 percentage points in both IIQ2011 and IIIQ2011. Gross fixed capital formation deducted 0.3 percentage points in both IIQ2011 and IIIQ2011. Consumption and investment, or internal demand, are contributing negatively to GDP growth relative to the same quarter a year earlier. Net trade, or foreign demand, contributed 1.4 percentage points in IQ2011, 0.7 percentage points in IIQ2011 and 1.0 percentage points in IIIQ2011.

Table VH-11, Percentage Point Contribution to GDP Growth from Prior Quarter by Expenditure Components, %

	1Q 10	2Q 10	3Q 10	4Q 10	IQ 11	2Q 11	3Q 11
Household Consumption	0.4	1.3	1.1	0.3	0.0	-0.6	-0.6
NPISH Final Consumption	0.0	0.0	0.1	0.1	0.1	0.1	0.0
General Government Final Consumption	0.3	0.6	0.3	0.2	0.2	0.1	0.2
Gross Capital Formation	1.4	1.1	2.9	1.6	-0.3	-0.3	-0.9
Gross Fixed Capital Formation	0.3	0.6	0.5	0.5	-0.7	-0.3	-0.3
Exports	0.7	2.4	2.4	2.7	3.1	1.3	0.9
Less Imports	1.3	2.5	3.5	2.9	1.7	0.6	-0.1
Net Trade	-0.5	-0.1	-1.1	-0.2	1.4	0.7	1.0

NPISH: Nonprofit Institutions Serving Households

Source: http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q3-2011/index.html

VI Valuation of Risk Financial Assets. 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/2011/07/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

Table VI-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 9.4 percent by Fri Dec 23, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table VI-1, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	12/23 /2011
Rate	1.1423	1.5914	1.192	1.304
CNY/USD	01/03 2000	07/21 2005	7/15 2008	12/23 2011
Rate	8.2798	8.2765	6.8211	6.3372
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

Sources: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

http://www.census.gov/const/www/newressalesindex_excel.html

http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Table VI-2 extracts four rows of Table VI-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VI-4 below, the dollar has devalued again to USD 1.304/EUR or by 9.4 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3484/USD on Fri Dec 23, 2011, or by an additional 7.1 percent, for cumulative revaluation of 23.4 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-3 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Nov 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table VI-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	12/26/03	7/14/08	6/07/10	12/23 /2011
Rate	1.1423	1.5914	1.192	1.304
CNY/USD	01/03 2000	07/21 2005	7/15 2008	12/23 2011
Rate	8.2798	8.2765	6.8211	6.3372
Weekly Rates	12/02/ 2011	12/09/ 2011	12/09/ 2011	12/16/ 2011
CNY/USD	6.3603	6.3644	6.3484	6.3372
∆% from Earlier Week*	0.3	-0.1	0.3	0.2

*Negative sign is depreciation, positive sign is appreciation

Source: Table VI-1 and same table in earlier blog posts.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table VI-3. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VI-1 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill recession. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table VI-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 12/23/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. After the surge in the week of Dec 2, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16 and end-of-the-year relaxed risk aversion in thin markets in the week of Dec 23 there are now only three financial values with negative change in valuation in column “∆% Trough to 12/23/11:” NYSE Financial minus 3.4 percent, Japan’s Nikkei Average minus 4.9 percent and Shanghai Composite minus 7.5 percent. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 26.9 percent and S&P 500 23.7 percent. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 26.9 percent from the trough and of the S&P 500 by 23.7 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 12/23/11” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations show increases of less than 10 percent: Dow Global is 5.9 percent above the trough; Dow Asia Pacific is now higher by 1.2 percent; and Dax is 3.7 percent above the trough on May 25, 2010. Japan’s Nikkei Average is 4.9 percent below the trough on Aug 31, 2010 and 26.3 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8395.16 on Fri Dec 23, which is 18.1 percent lower than 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 9.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 12/23/2011” in Table VI-4 shows increases of all risk financial assets in the week of Dec 23 with exception of equities indexes in Japan and China. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 12/23/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Dec 2, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 12/23/11” but also relative to the peak in column “∆% Peak to 12/23/11.” There are now only two US equity indexes above the peak in Table VI-4: DJIA 9.7 percent and S&P 500 3.9 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 23.1 percent, Nikkei Average by 26.3 percent, Shanghai Composite by 30.3 percent, STOXX 50 by 13.6 percent, Dow Global by 13.6 percent and Dow Asia Pacific by 11.4 percent. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. The situation of risk financial assets has worsened.

Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 12/23 /11	∆% Week 12/23/ 11	∆% Trough to 12/23 11
DJIA	4/26/ 10	7/2/10	-13.6	9.7	3.6	26.9
S&P 500	4/23/ 10	7/20/ 10	-16.0	3.9	3.7	23.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	-23.1	4.6	-3.4
Dow Global	4/15/ 10	7/2/10	-18.4	-13.6	2.9	5.9
Asia Pacific	4/15/ 10	7/2/10	-12.5	-11.4	0.9	1.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-26.3	-0.1	-4.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-30.3	-0.9	-7.5
STOXX 50	4/15/10	7/2/10	-15.3	-13.6	3.2	2.0
DAX	4/26/ 10	5/25/ 10	-10.5	-7.2	3.1	3.7
Dollar Euro	11/25 2009	6/7 2010	21.2	13.8	0.0	-9.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-2.6	3.1	13.9
10-Year T Note	4/5/ 10	4/6/10	3.986	2.027

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VI-5 for Dec 23 shows that the S&P 500 is now 4.4 percent above the Apr 26, 2010 level and the DJIA is 9.7 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table VI-6, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 12.5 percent to ZAR 8.144/USD on Dec 23, which is still 29.7 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 4.1 percent stronger at SGD 1.293/USD on Dec 23 relative to the trough of depreciation but still stronger by 16.7 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 7.1 percent relative to the trough to BRL 1.861/USD on Dec 23 but still stronger by 23.4 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Copom reduces the Selic rate to 11.00 percent

30/11/2011 7:47:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.

The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table VI-6, Exchange Rates

	Peak	Trough	∆% P/T	Dec 23, 2011	∆T Dec 23 2011	∆P Dec 23 2011
EUR USD	7/15 2008	6/7 2010		12/23 2011
Rate	1.59	1.192		1.304
∆%			-33.4		8.6	-21.9
JPY USD	8/18 2008	9/15 2010		12/23 2011
Rate	110.19	83.07		78.08
∆%			24.6		6.0	29.1
CHF USD	11/21 2008	12/8 2009		12/23 2011
Rate	1.225	1.025		0.938
∆%			16.3		8.5	23.4
USD GBP	7/15 2008	1/2/ 2009		12/23 2011
Rate	2.006	1.388		1.558
∆%			-44.5		10.9	-28.8
USD AUD	7/15 2008	10/27 2008		12/23 2011
Rate	1.0215	1.6639		1.014
∆%			-62.9		40.7	3.5
ZAR USD	10/22 2008	8/15 2010		12/23 2011
Rate	11.578	7.238		8.144
∆%			37.5		-12.5	29.7
SGD USD	3/3 2009	8/9 2010		12/23 2011
Rate	1.553	1.348		1.293
∆%			13.2		4.1	16.7
HKD USD	8/15 2008	12/14 2009		12/23 2011
Rate	7.813	7.752		7.775
∆%			0.8		-0.3	0.5
BRL USD	12/5 2008	4/30 2010		12/23 2011
Rate	2.43	1.737		1.861
∆%			28.5		-7.1	23.4
CZK USD	2/13 2009	8/6 2010		12/23 2011
Rate	22.19	18.693		19.717
∆%			15.7		-5.5	11.1
SEK USD	3/4 2009	8/9 2010		12/23 2011
Rate	9.313	7.108		6.877
∆%			23.7		3.2	26.2
CNY USD	7/20 2005	7/15 2008		12/23 2011
Rate	8.2765	6.8211		6.3372
∆%			17.6		7.1	23.4

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

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

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

Chart VI-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=122e3bcb627e8e53f1bf72a1a09cfb81&lastObs=260&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/JRXWTFB_N.B,H10/H10/JRXWTFN_N.B,H10/H10/JRXWTFO_N.B%7d

Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.027 percent at the close of market on Fri Dec 23 would be equivalent to price of 105.3883 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.1 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VI-7. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Dec 14, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2899 billion, or $2.9 trillion, with portfolio of long-term securities of $2613 billion, or $2.6 trillion, consisting of $1588 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $105 billion Federal agency debt securities and $852 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1504 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

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

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1

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

Source:

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

VII Economic Indicators. Crude oil input in refineries fell 0.3 percent to 14,768 thousand barrels per day on average in the four weeks ending on Dec 16 from 14,816 thousand barrels per day in the four weeks ending on Dec 9, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 85.6 percent on Dec 16, 2011, which is almost equal to 86.4 percent on Dec 17, 2010 and 85.7 percent on Dec 9, 2011. Imports of crude oil fell 2.1 percent from 8,749 thousand barrels per day on average in the four weeks ending on Dec 9 to 8,564 thousand barrels per day in the week of Dec 16. Slight increase in utilization in refineries but with sharply decreasing imports resulted in decrease of commercial crude oil stocks by 10.6 million barrels from 334.2 million barrels on Dec 9 to 323.6 million barrels on Dec 16. Motor gasoline production increased 0.2 percent from 9,332 thousand barrels per day in the week of Dec 9 to 9,312 thousand barrels per day on average in the week of Dec 16. Gasoline stocks declined 0.4 million barrels and stocks of fuel oil decreased 2.4 million barrels. Supply of gasoline fell from 9,150 thousand barrels per day on Dec 17, 2010, to 8,722 thousand barrels per day on Dec 16, 2011, or by 4.7 percent, while fuel oil supply rose 2.4 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VII-1 also shows increase in the WTI price of crude oil by 6.3 percent from Dec 17, 2010 to Dec 16, 2011. Gasoline prices rose 8.3 percent from Dec 20, 2010 to Dec 19, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

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

Four Weeks Ending Thousand Barrels/Day	12/16/11	12/09/11	12/17/10
Crude Oil Refineries Input	14,768 Week ∆%: -0.3	14,816	14,729
Refinery Capacity Utilization %	85.6	85.7	86.4
Motor Gasoline Production	9,312 Week ∆%: -0.2	9,332	9,246
Distillate Fuel Oil Production	4,961 Week ∆%: +1.2	4,902	4,493
Crude Oil Imports	8,564 Week ∆%: -2.1	8,749	8,449
Motor Gasoline Supplied	8,722 ∆% 2011/2010= -4.7%	8,650	9,150
Distillate Fuel Oil Supplied	3,878 ∆% 2011/2010 = +2.4%	3,796	3,788
	12/16/11	12/09/11	12/17/10
Crude Oil Stocks Million B	323.6 ∆= -10.6 MB	334.2	340.7
Motor Gasoline Million B	218.4 ∆= -0.4 MB	218.8	217.2
Distillate Fuel Oil Million B	139.1 ∆= -2.4 MB	141.5	160.7
WTI Crude Oil Price $/B	93.53 ∆% 2011/2010 6.3	99.41	88.02
	12/19/11	12/12/11	12/20/10
Regular Motor Gasoline $/G	3.229 ∆% 2011/2010 8.3	3.286	2.982

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

Chart VII-1 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but have been increasing in the past few weeks.

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

Source: US Energy Information Administration

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

Chart VII-2 of the US Energy Information Administration provides closer view of US crude oil stocks since Jun 2010. Crude oil stocks rose in a clear trend in 2011 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower. The final part of the chart shows the increase in oil stocks in the weeks of Nov 25 and Dec 2 and the declines in the weeks of Dec 9 and Dec 16.

Chart VII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims fell 4,000 from 368,000 on Dec 10 to 364,000 on Dec 17. Claims not adjusted for seasonality fell 17,256, from 435,722 on Dec 10 to 418,466 on Dec 17. There is strong seasonality in layoffs early in Dec.

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

2011	SA	NSA	4-week MA SA
Dec 17	364,000	418,466	380,250
Dec 10	368,000	435,722	388,250
Change	-4,000	-17,256	-8,000
Dec 3	385,000	528,793	394,250
Prior Year	423,000	495,548	428,500

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

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 629,867 on Dec 13, 2008 to 495,548 on Dec 18, 2010 and now to 418,466 on Dec 17, 2011. There is strong indication of significant decline in the level of layoffs in the US.

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Dec 16, 2000	402,476	354,000
Dec 15, 2001	440,906	389,000
Dec 14, 2002	486,258	429,000
Dec 13, 2003	412,627	363,000
Dec 18, 2004	374,749	322,000
Dec 17, 2005	359,108	312,000
Dec 16, 2006	361,672	318,000
Dec 15, 2007	393,042	348,000
Dec 13, 2008	629,867	560,000
Dec 19, 2009	571,378	477,000
Dec 18, 2010	495,548	423,000
Dec 17, 2011	418,466	364,000

Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In Jul-Nov 2011, CPI inflation for all items seasonally adjusted was 2.7 percent in annual equivalent, that is, compounding inflation in Jul-Nov and assuming it would be repeated for a full year. In the 12 months ending in Nov, CPI inflation of all items not seasonally adjusted was 3.4 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 1.9 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.00 percent for three months, 0.04 percent for six months, 0.11 percent for 12 months, 0.29 percent for two years, 0.44 percent for three years, 0.96 percent for five years, 1.49 percent for seven years, 2.02 percent for ten years and 3.05 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

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

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

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

	∆% 12 Months Nov 2011/Nov 2010 NSA	∆% Annual Equivalent Jul-Nov 2011 SA
CPI All Items	3.4	2.7
CPI ex Food and Energy	2.2	1.9

Source: http://www.bls.gov/news.release/pdf/cpi.pdf

VII Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first three quarters of 1.1 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 29 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. The crucial issue of “let’s twist again “monetary policy is if lowering the yields of long-term Treasury securities would have any impact on investment and consumption or aggregate demand. The decline of long-term yields of Treasury securities would have to cause decline of yields of asset-backed securities used to securitize loans for investment by firms and purchase of durable goods by consumers. The decline in costs of investment and consumption of durable goods would ultimately have to result in higher investment and consumption. It is possible that the decline in yields captured by event studies is ephemeral. The decline in yields just after “let’s twist again” monetary policy was caused by the flight out of risk financial assets into Treasury securities, which is the opposite of the desired effect of encouraging risk-taking in asset-backed securities and lending. The yield curve edged upwardly in spite of “let’s twist again monetary policy” (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10).

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Appendix I. The Great Inflation

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 I1 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 I1 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 from 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.”

Chart I1, Brazil, Phillips Circuit 1963-1987

©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (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). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982

	∆% GDP	∆% CPI	UNE
1960	2.5	1.4	6.6
1961	2.3	0.7	6.0
1962	6.1	1.3	5.5
1963	4.4	1.6	5.5
1964	5.8	1.0	5.0
1965	6.4	1.9	4.0
1966	6.5	3.5	3.8
1967	2.5	3.0	3.8
1968	4.8	4.7	3.4
1969	3.1	6.2	3.5
1970	0.2	5.6	6.1
1971	3.4	3.3	6.0
1972	5.3	3.4	5.2
1973	5.8	8.7	4.9
1974	-0.6	12.3	7.2
1975	-0.2	6.9	8.2
1976	5.4	4.9	7.8
1977	4.6	6.7	6.4
1978	5.6	9.0	6.0
1979	3.1	13.3	6.0
1980	-0.3	12.5	7.2
1981	2.5	8.9	8.5
1982	-1.9	3.8	10.8
1983	4.5	3.8	8.3
1984	7.2	3.9	7.3
1985	4.1	3.8	7.0
1986	3.5	1.1	6.6
1987	3.2	4.4	5.7
1988	4.1	4.4	5,3
1989	3.6	4.6	5.4
1990	1.9	6.1	6.3

Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series

Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bls.gov/web/empsit/cpseea01.htm

http://data.bls.gov/pdq/SurveyOutputServlet

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 I2 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 I2 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 I2, 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

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Tuesday, December 27, 2011

Slow Growth, Falling Real Disposable Income, Repression of Savings, “Large-scale Lender of Last Resort,” Euro Zone Survival Risk and World Economic Slowdown: Part II