United States GDP Growth Standstill Recession at Annual 0.7 Percent, Budget/Debt Quagmire, Global Growth Recession with Inflation and World Financial Turbulence
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
Executive Summary
I United States GDP Growth Standstill
II Budget/Debt Quagmire
III World Financial Turbulence
IV Global Inflation
V Global Growth Recession
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: The Great Inflation and Unemployment
Executive Summary
Real GDP grew at the seasonally-adjusted annual equivalent rate of 0.4 percent in the first quarter of 2011, IQ2011, and at 1.0 percent in IIQ2011. Discounting 0.4 percent to one quarter is 0.1 percent and discounting 1.0 percent is 0.25 percent. Real GDP growth in the first half of the 2011 accumulated to 0.35 percent (1.001 x 1.0025), which is equal to 0.7 percent (compounding 1.0035 for two successive half years). The US economy is close to a perilous standstill that could lead to continuing slow growth recession or possibly even contraction.
A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 29.6 million people in job stress, consisting of an effective number of unemployed of 18.3 million, 8.5 million employed part-time because they cannot find full employment and 2.8 million marginally attached to the labor force.
There were two contractions from IQ1980 to IIIQ1980 and IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table 4 anticipated here from the text shows extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the eight quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the two quarters of 2011 show the economy in standstill with annual equivalent growth of 0.7 percent. The expansion of IQ1983 to IV1985 was at the average annual growth rate of 5.7 percent.
Table 4, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number of Quarters | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.6 | 4.4 |
| IIQ1958 to IIQ1959 | 5 | 10.2 | 8.1 |
| IIQ1975 to IVQ1976 | 8 | 9.5 | 4.6 |
| IQ1983 to IV1985 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IIQ2011 | 8 | 4.9 | 2.4 |
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart 3 anticipated here from the text shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.
Chart 3, US, Real GDP, 1980-1989
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart 4 anticipated here from the text shows the entirely different situation of the real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first eight quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is in a perilous standstill.
Chart 4, US, Real GDP, 2007-2011
Source: http://www.bea.gov/iTable/index_nipa.cfm
The loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 4.8 percent. As a result, the level of real GDP in IIQ2011 is lower by 0.5 percent than the level of real GDP in IVQ2007.
I United States GDP Growth Standstill. Real GDP grew at the seasonally-adjusted annual equivalent rate of 0.4 percent in the first quarter of 2011, IQ2011, and at 1.0 percent in IIQ2011. Discounting 0.4 percent to one quarter is 0.1 percent and discounting 1.0 percent is 0.25 percent. Real GDP growth in the first half of the 2011 accumulated to 0.35 percent (1.001 x 1.0025), which is equal to 0.7 percent (compounding 1.0035 for two successive half years). The US economy is close to a standstill. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Fri Aug 26 the second estimate of GDP for IIQ2011 that was revised downwardly to 1.0 percent from an earlier estimate of 1.0 with less information. The objective of this section is analyzing US economic growth. There is initial brief discussion of the concept of slow-growth recession followed by comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of the quarterly performance in the first half of 2011.
The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 29.6 million people in job stress, consisting of an effective number of unemployed of 18.3 million, 8.5 million employed part-time because they cannot find full employment and 2.8 million marginally attached to the labor force (see Table 7 in http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.
In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:
“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”
Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.
The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):
“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”
Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.
Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table 1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase from contractions in comparison than the current slow-growth recession.
Table 1, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| IQ | IIQ | IIIQ | IVQ | |
| 1953 | 7.7 | 3.1 | -2.4 | -6.2 |
| 1954 | -1.9 | 0.5 | 4.6 | 8.3 |
| 1955 | 12.0 | 6.8 | 5.4 | 2.3 |
| 1957 | 2.5 | -1.0 | 3.9 | -4.1 |
| 1958 | -10.4 | 2.5 | 9.7 | 9.7 |
| 1959 | 8.3 | 10.5 | -0.5 | 1.4 |
| 1973 | 10.6 | 4.7 | -2.1/ | 3.9 |
| 1974 | 3.5 | 1.0 | -3.9 | 6.9 |
| 1975 | -4.8 | 3.1 | 6.9 | 5.3 |
| 1976 | 9.4 | 3.0 | 2.0 | 2.9 |
| 1979 | 0.7 | 0.4 | 2.9 | 1.1 |
| 1980 | 1.3 | -7.9 | -0.7 | 7.6 |
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 2.3 percent is more comparable to the latest revised 5.1 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table 2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981-1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the second estimate of IIQ2011 released on Aug 26, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_2nd.pdf). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.7 percent to -8.9 percent. The striking difference is that in the first eight quarters of expansion from IQ1983 to IIIQ1984, shown in Table 2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 7.1, 3.9, 3.3 and 5.4 while the percentage growth rates in the first eight quarters from IIIQ2009 to IQ2011, shown in relief in Table 2, was mediocre: 1.7, 3.8, 3.9, 3.8, 2.5, 2.3, 0.4 and 1.3. Asterisks denote the estimates that have been revised by the BEA. During half a year GDP has been growing at 0.4 percent in IQ2011 and 1.0 percent in IIQ2011 in what can be considered as a slow growth recession because of the 29.6 million in job stress. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. The key difference may be found in the negative incentive to business and household investment and business hiring from the structural shock to business models resulting from legislative restructurings and regulation with alleged benefits in the long-term but adverse short-term growth and jobs effects.
Table 2, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | 7.1 | -1.8* | -6.7* | 3.9* |
| II | -3.2 | 2.2 | 9.3 | 3.9 | 1.3* | -0.7 | 3.8* |
| III | 4.9 | -1.5 | 8.1 | 3.3 | -3.7* | 1.7 | 2.5* |
| IV | -4.9 | 0.3 | 8.5 | 5.4 | -8.9* | 3.8* | 2.3* |
| 1985 | 2011 | ||||||
| I | 3.8 | 0.4* | |||||
| II | 3.4 | 1.0 | |||||
| III | 6.4 | ||||||
| IV | 3.1 |
*Revised Jul 2011.
Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_2nd.pdf
http://www.bea.gov/iTable/index_nipa.cfm
The approach of Lucas (2011May19) is to evaluate the performance of the economy in terms of policies required for recovery but without neglect of efficiency in the use of productive resources and growth in long-term productive capacity. Business cycles could be analyzed as departures from a strong long-term trend of growth. Lucas (2011May19, 5) finds that real income per capita in the US multiplied by a factor of 12 between 1870 and 2010. Output in the US grows at a rate of 3 percent per year in the long-run and output per person at the rate of 2 percent. Business cycles can be measured as deviations from this long-term trend. Lucas (2011May 19, 7) provides the rates of growth of eight economies (US, UK, France, Germany, Canada, Italy, Spain and Japan) since 1870, showing that relative growth rates accelerated in countries starting from lower income levels until about the 1970s. The rate of growth of rich economies has continued at about 2 per cent per year but the income gap has stabilized. Different national policies could explain the slower reduction of income gaps. US GDP fell 30 percent below trend by 1933 and is currently about 10 percent below trend, as measured by Lucas (2011May19, 16).
Chart 1 provides the strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) defined labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.
Chart 1, US, Real GDP 1947-1999
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart 2 provides the growth of real quarterly GDP in the US between 1979 an 2010. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.
Chart 2, US, Real GDP 1970-2010
Source: http://www.bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical contractions are provided in Table 3 with the first column showing the number of quarter of contraction, the second column the cumulative percentage contraction and the final column the average quarterly rate of contraction in annual equivalent rate. There were two contractions from IQ1980 to IIIQ1980 and IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table 3, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions
| Number of Quarters | Cumulative Percentage Contraction | Average Percentage Annual Equivalent Rate | |
| IIQ1953 to IIQ1954 | 4 | -2.5 | -0.63 |
| IIIQ1957 to IIQ1958 | 3 | -3.1 | -9.0 |
| IQ1980 to IIIQ1980 | 2 | -2.2 | -1.1 |
| IIIQ1981 to IVQ1982 | 4 | -2.7 | -0.67 |
| IVQ2007 to IIQ2009 | 6 | -5.1 | -0.87 |
Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html
Data: http://www.bea.gov/iTable/index_nipa.cfm
Table 4 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the eight quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the two quarters of 2011 show the economy in standstill with annual equivalent growth of 0.7 percent. The expansion of IQ1983 to IV1985 was at the average annual growth rate of 5.7 percent.
Table 4, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number of Quarters | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.6 | 4.4 |
| IIQ1958 to IIQ1959 | 5 | 10.2 | 8.1 |
| IIQ1975 to IVQ1976 | 8 | 9.5 | 4.6 |
| IQ1983 to IV1985 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IIQ2011 | 8 | 4.9 | 2.4 |
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart 3 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.
Chart 3, US, Real GDP, 1980-1989
Source: http://www.bea.gov/iTable/index_nipa.cfm
Chart 4 shows the entirely different situation of the real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first eight quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy now is in a dangerous standstill.
Chart 4, US, Real GDP, 2007-2011
Source: http://www.bea.gov/iTable/index_nipa.cfm
As shown in Tables 3 and 4 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 5.1 percent. As a result, the level of real GDP in IIQ2011 is lower by 0.5 percent than the level of real GDP in IVQ2007. Table 5 provides in the first column real GDP in billions of chained 2005 dollars. The second column provides the percentage change of the quarter relative to IVQ2007; the third column provides the percentage change relative to the prior quarter; and the final column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.7 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 4 percent (1.023 x 1.017). Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.2 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in three successive quarters from IVQ2009 to IIQ2010 of equal growth at 0.9 percent for cumulative growth in those three quarters of 2.7 percent. The economy lost momentum already in IIIQ2010 and IVQ2010 growing at 0.6 percent in each quarter. The economy then stalled during the first half of 2011 with growth of 0.1 percent in IQ2011 and 0.25 percent in IIQ2011. Growth in a quarter relative to a year earlier in Table 5 slows from over 3 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.2 percent in IQ2011 and 1.5 percent in IIQ2011. The critical question for which there is not yet definitive solution is whether what lies ahead is growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction.
Table 5, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%
| Real GDP, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% over Year Earlier | |
| IVQ2007 | 13,326.0 | NA | NA | 2.2 |
| IQ2008 | 13,266.8 | -0.4 | -0.4 | 1.6 |
| IIQ2008 | 13,310.5 | -0.1 | 0.3 | 1.0 |
| IIIQ2008 | 13,186.9 | -1.0 | -0.9 | -0.6 |
| IVQ2008 | 12,883.5 | -3.3 | -2.3 | -3.3 |
| IQ2009 | 12,663.2 | -4.9 | -1.7 | -4.5 |
| IIQ2009 | 12,641.3 | -5.1 | -0.2 | -5.0 |
| IIIQ2009 | 12,694.5 | -4.7 | 0.4 | -3.7 |
| IV2009 | 12,813.5 | -3.8 | 0.9 | -0.5 |
| IQ2010 | 12,937.7 | -2.9 | 0.9 | 2.2 |
| IIQ2010 | 13,058.5 | -1.8 | 0.9 | 3.3 |
| IIIQ2010 | 13,139.6 | -1.4 | 0.6 | 3.5 |
| IVQ2010 | 13,216.1 | -0.8 | 0.6 | 3.1 |
| IQ2011 | 13,227.9 | -0.7 | 0.1 | 2.2 |
| IIQ2011 | 13,260.5 | -0.5 | 0.25 | 1.5 |
Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Some common explanations for the current slump are not valid. Negative effects of weak housing currently are inferior compared with negative exports in the 1980s that gave the pejorative name of “rust belt” to the US industrial corridor. Growth originates in aggregate demand consisting of investment and consumption. Taylor (2011Jul21) finds that real GDP growth currently is 60 to 70 percent lower than in the recovery of the 1980s, which is also the case of consumption and investment. Another common misperception is that there has been a systemic financial crisis with many ignoring the debt crisis of 1982 when US money-center banks had more than 40 percent of their capital in loans to emerging countries in default or near default. Several countries that had borrowed for financing balance of payments deficits declared moratoriums on their foreign debts, impairing balance sheets of money-center banks (see, for example, in vast literature, Krugman 1994, Pelaez 1986, 1987). The increase in interest rates to deal with stagflation caught the banking industry with short-dated funding and long-term fixed-rate assets. In a parallel of what could happen when monetary policy abandons its near zero interest rates, 1150 US commercial banks, close to 8 percent of the industry, failed, almost twice the number of banks that failed since establishment of the FDIC in 1934 until 1983 (Benston and Kaufman 1997, 139; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7). More than 900 savings and loans associations, equivalent to around 25 percent of the industry, had to be closed, merged or placed in conservatorship (Ibid). Taxpayer funds in the value of $150 billion were used in the resolution of failed savings and loans institutions. In terms of relative dimensions, $150 billion was equivalent to 2.6 percent of GDP of $5800 billion in 1990 and 3.6 percent of GDP of $4217 billion in 1985 (http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1980&LastYear=1990&3Place=N&Update=Update&JavaBox=no). The equivalent in terms of 2.6 to 3.6 percent of US GDP in 2010 of $14,657 billion would be $381 billion to $528 billion (data from Ibid). Wide swings in interest rates resulting from aggressive monetary policy can wreck the balance sheets of families, financial institutions and companies while posing another recession risk. While it is true that monetary policy can increase interest rates instantaneously, the increase from zero percent toward much higher levels to contain inflation can have devastating effects on the world economy.
The revised estimates and earlier estimates from IQ2008 to IQ2011 in seasonally adjusted annual equivalent rates are shown in Table 6. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent but growth in IIQ2010 is upwardly revised to 3.8 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession or even possibly contraction.
Table 6, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates
| Quarters | Revised Estimate | Earlier Estimate |
| 2008 | ||
| I | -1.8 | -0.7 |
| II | 1.3 | 0.6 |
| III | -3.7 | -4.0 |
| IV | -8.9 | -6.8 |
| 2009 | ||
| I | -6.7 | -4.9 |
| II | -0.7 | -0.7 |
| III | 1.7 | 1.6 |
| IV | 3.8 | 5.0 |
| 2010 | ||
| I | 3.9 | 3.7 |
| II | 3.8 | 1.7 |
| III | 2.5 | 2.6 |
| IV | 2.3 | 3.1 |
| 2011 | ||
| I | 0.4 | 1.9 |
Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf
The contributions to the rate of growth of GDP in percentage points (PP) are provided in Table 7. Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IQ2011. In an article for the WSJ, Feldstein (2011Jun8) argues that US economic growth will be subpar in the best conditions with continuing high levels of unemployment and underemployment. Feldstein (2011Jun8) analyzes the decline in the rate of growth of GDP from 3.2 percent in IVQ2010 (fourth quarter of 2010) to 1.8 percent in IQ2011, with data different than in Table 7 because they were based on the first estimate before the revision. Table 7 shows that the decomposition of the rate of growth of GDP of 0.4 percent in IQ2011, which now attributes 0.32 percentage points to change in inventories (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). GDP data are seasonally-adjusted quarterly growth rates expressed in annual equivalent. The argument by Feldstein (2011Jun8) is that growth of final sales after deducting inventory change from then estimated 1.8 percent GDP growth was only 0.6 percent, which is equivalent to growth of only 0.15 percent in the quarter ((1.006)1/4 or 0.6 percent discounted four quarterly periods). This argument was still valid with the third estimate of GDP growth of 1.9 percent in IQ2011 and of contribution of 1.31 PP by inventory change. The economy stalled with the new data: deducting 0.32 percentage points in inventory change from growth of 0.4 percent leaves only 0.08 percent growth, or virtually zero. Inventory accumulation cannot sustain economic growth that requires increasing demand in investment and consumption. Business only invests when sales increase. Consumers need to see their income growing and the evidence is that real disposable income stagnated in the first six months of 2011 with cumulative growth of 0.4 percent or 0.8 percent at annual equivalent rate (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html) (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). Real wages are falling, 40 million people struggle with food stamps (http://www.fns.usda.gov/pd/34SNAPmonthly.htm), hiring has collapsed and between 25 and 30 million people are unemployed or underemployed. Feldstein (2011Jun8) also finds significant weakness in short-term economic indicators, which are analyzed in this blog weekly. The arguments by Feldstein in Jun turned to be prophetic in that the estimate of GDP growth in IQ2011 is revised to 0.4 percent with the economy stalled in an evident slow-growth recession with only 1.0 percent growth in IIQ2011.
Table 7, Contributions to the Rate of Growth of GDP in Percentage Points
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 2011 | ||||||
| I | 0.4 | 1.47 | 0.47 | 0.32 | -0.34 | -1.23 |
| II | 1.0 | 0.30 | 0.78 | -0.23 | 0.09 | -0.18 |
| 2010 | ||||||
| I | 3.9 | 1.92 | 3.25 | 2.64 | -0.97 | -0.26 |
| II | 3.8 | 2.05 | 2.92 | 0.82 | -1.94 | 0.77 |
| III | 2.5 | 1.85 | 1.14 | 1.61 | -0.68 | 0.20 |
| IV | 2.3 | 2.48 | -0.91 | -3.42 | 1.37 | -0.58 |
| 2009 | ||||||
| I | -6.7 | -1.02 | -7.76 | -2.66 | 2.44 | -0.33 |
| II | -0.7 | -1.28 | -2.84 | -0.58 | 2.21 | 1.21 |
| III | 1.7 | 1.66 | 0.35 | 0.21 | -0.59 | 0.28 |
| IV | 3.8 | 0.33 | 3.51 | 3.93 | 0.15 | -0.18 |
| 1982 | ||||||
| I | -6.4 | 1.62 | -7.50 | -5.47 | -0.49 | -0.03 |
| II | -2.2 | 0.90 | -0.05 | 2.35 | 0.84 | 0.50 |
| III | -1.5 | 1.92 | -0.72 | 1.15 | -3.31 | 0.57 |
| IV | 0.3 | 4.64 | -5.66 | -5.48 | -0.10 | 1.44 |
| 1983 |
|
|
|
|
|
|
| I | 5.1 | 2.54 | 2.20 | 0.94 | -0.30 | 0.63 |
| II | 9.3 | 5.22 | 5.87 | 3.51 | -2.54 | 0.75 |
| III | 8.1 | 4.66 | 4.30 | 0.60 | -2.32 | 1.48 |
| IV | 8.5 | 4.20 | 6.84 | 3.09 | -1.17 | -1.35 |
| 1984 | ||||||
| I | 8.0 | 2.35 | 7.15 | 5.07 | -2.37 | 0.86 |
| II | 7.1 | 3.75 | 2.44 | -0.30 | -0.89 | 1.79 |
| III | 3.9 | 2.02 | -0.89 | 0.21 | -0.36 | 0.62 |
| IV | 3.3 | 3.38 | 1.79 | -2.50 | -0.58 | 1.75 |
| 1985 | ||||||
| I | 3.8 | 4.34 | -2.38 | -2.94 | 0.91 | 0.95 |
Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive
GDP: percent change at annual rate; percentage points at annual rates
Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_2nd.pdf
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp1q11_2nd.pdf
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
Table 8 provides more detailed information on the causes of the deceleration of GDP growth from 2.3 percent in IVQ2010 to 0.4 percent in IQ2011. The estimates incorporate the revisions of Jul 29, 2011 and Aug 26, 2011. The BEA finds three source of contribution to GDP growth in IQ2011: (1) growth of PCE by 2.1 percent; (2) growth of exports by 7.9 percent; (3) positive contribution of private inventory investment of 0.32 PP; and (4) growth of nonresidential fixed investment (NRFI) by 2.1 percent. The factors that contributed to reduction of growth in IQ2011 were: (1) decline in residential fixed investment by 2.4 percent; (2) increase of imports by 8.3 percent, which are a deduction to GDP growth; and (3) contraction of federal and state/local government or combined government (GOV) by 5.9 percent. There are three sources causing deceleration of growth: (1) deceleration of nonresidential fixed investment (NRFI) from 8.7 percent to 2.1 percent; (2) deceleration of PCE growth from 3.6 percent in IVQ2010 to 2.1 percent in IQ2011 (with durable goods growth declining from 17.2 percent in IVQ2010 to 11.7 percent in IQ2011; (3) change of growth of 2.5 percent of RFI in IVQ2010 to minus 2.4 percent in IQ2011; (4) acceleration of decline of government consumption and expenditures (GOV) from minus 2.8 percent to minus 5.9 percent with federal government consumption and expenditures decelerating from minus 3.0 percent to minus 9.4 percent, caused by decline in defense expenditures by -11.7 percent, and state/local from minus 2.7 percent to minus 3.4 percent.
Table 8, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %
| IVQ2010 | IQ2011 | |
| GDP | 2.3 | 0.4 |
| PCE | 3.6 | 2.1 |
| Durable Goods | 17.2 | 11.7 |
| NRFI | 8.7 | 2.1 |
| RFI | 2.5 | -2.4 |
| Exports | 7.8 | 7.9 |
| Imports | -2.3 | 8.3 |
| GOV | -2.8 | -5.9 |
| Federal GOV | -3.0 | -9.4 |
| State/Local GOV | -2.7 | -3.4 |
| ∆ PI (PP) | -1.79 | 0.32 |
| Gross Domestic Purchases | 0.9 | 0.7 |
| Prices Gross Domestic Purchases | 1.4 | 1.9 |
| Prices of GDP | 1.6 | 1.8 |
| Prices of GDP Excluding Food and Energy | 1.3 | 1.5 |
| Prices of PCE | 1.3 | 1.8 |
| Prices of PCE Excluding Food and Energy | 1.0 | 1.1 |
| Prices of Market Based PCE | 1.1 | 1.7 |
| Prices of Market Based PCE Excluding Food and Energy | 0.7 | 0.9 |
| Real Disposable Personal Income | 0.4 | 0.3 |
| Personal Savings As % Disposable Income | 5.2 | 5.0 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
*Percent change from quarter one year ago
Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_2nd.pdf
According to the BEA, the positive contributions to GDP growth in IIQ2011, shown in Table 9, are: (1) growth of exports of 3.1 percent; (2) growth of NRFI of 9.9 percent; and (3) growth of 2.0 percent of federal government spending. Offsetting factors of GDP growth are (1) negative growth of 2.8 percent of state and local government spending; and (2) growth of imports of 1.9 percent, which is a deduction from GDP growth. PCE, which is equivalent to about 71 percent of GDP (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1), stalled with growth of only 0.4 percent in seasonally-adjusted annual equivalent rate, which is 0.1 percent relative to the prior quarter. Real final sales of domestic product, which is equivalent to GDP growth less change in private inventories, is only 1.2 percent in IIQ2011 that is still in slow-growth recession range even if better than 0.0 percent in IQ2011. Current-dollar GDP, which the BEA defines as the market value of US output of goods and services, rose to a seasonally-adjusted annual level of $14,996.8 billion in IIQ2011. Without adjustment for inflation, current-dollar GDP rose 3.5 percent in IIQ2011 or $129.0 billion compared with an increase of 3.1 percent in IQ2011, or $112.8 billion.
Table 9, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %
| IQ2011 | IIQ2011 | |
| GDP | 0.4 | 1.0 |
| PCE | 2.1 | 0.4 |
| Durable Goods | 11.7 | -5.1 |
| NRFI | 2.1 | 9.9 |
| RFI | -2.4 | 3.4 |
| Exports | 7.9 | 3.1 |
| Imports | 8.3 | 1.9 |
| GOV | -5.9 | -0.9 |
| Federal GOV | -9.4 | 2.0 |
| State/Local GOV | -3.4 | -2.8 |
| ∆ PI (PP) | 0.32 | -0.23 |
| Real Final Sales of Domestic Product GDP less∆ PI | 0.0 | 1.2 |
| Real Gross Domestic Purchases | 0.7 | 0.9 |
| Prices Gross Domestic Purchases | 1.9 | 2.6 |
| Prices of GDP | 1.8 | 2.1 |
| Prices of GDP Excluding Food and Energy | 1.5 | 1.8 |
| Prices of PCE | 1.8 | 2.5 |
| Prices of PCE Excluding Food and Energy | 1.1 | 1.3 |
| Prices of Market Based PCE | 1.7 | 2.6 |
| Prices of Market Based PCE Excluding Food and Energy | 0.9 | 1.3 |
| Real Disposable Personal Income* | 2.5 | 1.3 |
| Personal Savings As % Disposable Income | 4.9 | 5.1 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
*Percent change from same quarter one year ago
Source:
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf
Percentage shares of GDP are shown in Table 10. PCE is equivalent to 70.6 percent of GDP and is growing at very low levels with stagnation of real disposable income, high levels of unemployment and underemployment and higher savings rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth.
Table 10, US Percentage Shares of GDP, %
| IVQ2010 | |
| GDP | 100.0 |
| PCE | 70.6 |
| Goods | 23.6 |
| Services | 47.0 |
| Gross Private Domestic Investment | 12.3 |
| Fixed Investment | 12.1 |
| NRFI | 9.8 |
| RFI | 2.2 |
| Change in Private Inventories | 0.3 |
| Net Exports of Goods and Services | -3.4 |
| Exports | 13.1 |
| Imports | 16.5 |
| Government | 20.5 |
| Federal | 8.4 |
| State and Local | 12.1 |
PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment
Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Table 11 shows the percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009 and 2010. The data incorporate the new revisions released by the BEA on Jul 29, 2011. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 3.0 percent in 2010 after six consecutive quarters of growth. The annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions. PCEs contributed 1.44 PPs to GDP growth in 2010 of which 0.99 PP in goods and 0.46 PP in services. GDI deducted 3.61 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.84 PP of ∆PI and added 1.96 PPs to GDI in 2010 of which 0.48 PPs of fixed investment and 1.64 PPs of ∆PI. Trade, or exports of goods and services net of imports, contributed 1.11 PPs in 2009 of which exports deducted 1.18 PPs and imports added 2.29 PPs. In 2010, trade deducted 0.51 PP with exports contributing 1.31 PPs and imports deducting 1.82 PPs. In 2009, Government added 0.34 PP of which 0.45 PP by the federal government and -0.11 PP by state and local government; in 2010, government added 0.14 PP of which 0.37 PP by the federal government with state and local government deducting 0.23 PP.
Table 11, Percentage Point Contributions to the Annual Growth Rate of GDP
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 1958 | -0.9 | 0.54 | -1.25 | -0.18 | -0.89 | 0.70 |
| 1959 | 7.2 | 3.61 | 2.80 | 0.86 | 0.00 | 0.76 |
| 1975 | -0.2 | 1.40 | -2.98 | -1.27 | 0.89 | 0.48 |
| 1976 | 5.4 | 3.51 | 2.84 | 1.41 | -1.08 | 0.10 |
| 1982 | -1.9 | 0.86 | -2.55 | -1.34 | -0.60 | 0.35 |
| 1983 | 4.5 | 3.65 | -1.45 | 0.29 | -1.35 | 0.76 |
| 1984 | 7.2 | 3.43 | 4.63 | 1.95 | -1.58 | 0.70 |
| 1985 | 4.1 | 3.32 | -0.17 | -1.06 | -0.42 | 1.41 |
| 2009 | -3.5 | -1.32 | -3.61 | -0.84 | 1.11 | -0.09 |
| 2010 | 3.0 | 1.44 | 1.96 | 1.64 | -0.51 | 0.14 |
Source:
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
II Budget/Debt Quagmire. The US is facing a major fiscal challenge. Table 12 provides federal revenues, expenditures, deficit and debt as percent of GDP and the yearly change in GDP in the eight decades from 1930 to 2011. The recent period of debt exceeding 90 percent of GDP based on yearly observations in Table 12 is between 1944 and 1948. The debt/GDP ratio actually rose to 106.2 percent of GDP in 1945 and to 108.7 percent of GDP in 1946. GDP fell 10.9 percent in 1946, which is only matched in Table 12 by the decline of 13.1 percent in 1932. Part of the decline is explained by the bloated US economy during World War II, growing at 17.1 percent in 1941, 18.5 percent in 1942 and 16.4 percent. Expenditures as a share of GDP rose to their highest in the series: 43.6 percent in 1943, 43.6 percent in 1944 and 41.9 percent in 1945. The repetition of 43.6 percent in 1943 and 1944 is in the original source of Table 12. During the Truman administration from Apr 1945 to Jan 1953, the federal debt held by the public fell systematically from the peak of 108.7 percent of GDP in 1946 to 61.6 percent of GDP in 1952. During the Eisenhower administration from Jan 1953 to Jan 1961, the federal debt held by the public fell from 58.6 percent of GDP in 1953 to 45.6 percent of GDP in 1960. The Truman and Eisenhower debt reductions were facilitated by diverse factors such as low interest rates, lower expenditure/GDP ratios that could be attained again after lowering war outlays and less rigid structure of mandatory expenditures than currently. There is no subsequent jump of debt as the one from 40.2 percent of GDP in 2008 to 69.0 percent of GDP in 2011.
Table 12, United States Central Government Revenue, Expenditure, Deficit, Debt and GDP Growth 1930-2011
| Rev % GDP | Exp % GDP | Deficit % GDP | Debt % GDP | GDP ∆% | |
| 1930 | 4.2 | 3.4 | 0.8 | -8.6 | |
| 1931 | 3.7 | 4.3 | -0.6 | -6.5 | |
| 1932 | 2.8 | 6.9 | -4.0 | -13.1 | |
| 1933 | 3.5 | 8.0 | -4.5 | -1.3 | |
| 1934 | 4.8 | 10.7 | -5.9 | 10.9 | |
| 1935 | 5.2 | 9.2 | -4.0 | 8.9 | |
| 1936 | 5.0 | 10.5 | -5.5 | 13.1 | |
| 1937 | 6.1 | 8.6 | -2.5 | 5.1 | |
| 1938 | 7.6 | 7.7 | -0.1 | -3.4 | |
| 1939 | 7.1 | 10.3 | -3.2 | 8.1 | |
| 1940s | |||||
| 1940 | 6.8 | 9.8 | -3.0 | 44.2 | 8.8 |
| 1941 | 7.6 | 12.0 | -4.3 | 42.3 | 17.1 |
| 1942 | 10.1 | 24.3 | -14.2 | 47.0 | 18.5 |
| 1943 | 13.3 | 43.6 | -30.3 | 70.9 | 16.4 |
| 1944 | 20.9 | 43.6 | -22.7 | 88.3 | 8.1 |
| 1945 | 20.4 | 41.9 | -21.5 | 106.2 | -1.1 |
| 1946 | 17.7 | 24.8 | -7.2 | 108.7 | -10.9 |
| 1947 | 16.5 | 14.8 | 1.7 | 96.2 | -0.9 |
| 1948 | 16.2 | 11.6 | 4.6 | 84.3 | 4.4 |
| 1949 | 14.5 | 14.3 | 0.2 | 79.0 | -0.5 |
| 1950s | |||||
| 1950 | 14.4 | 15.6 | -1.1 | 80.2 | 8.7 |
| 1951 | 16.1 | 14.2 | 1.9 | 66.9 | 7.7 |
| 1952 | 19.0 | 19.4 | -0.4 | 61.6 | 3.8 |
| 1953 | 18.7 | 20.4 | -1.7 | 58.6 | 4.6 |
| 1954 | 18.5 | 18.8 | -0.3 | 59.5 | -0.6 |
| 1955 | 16.5 | 17.3 | -0.8 | 57.2 | 7.2 |
| 1956 | 17.5 | 16.5 | 0.9 | 52.0 | 2.0 |
| 1957 | 17.7 | 17.0 | 0.8 | 48.6 | 2.0 |
| 1958 | 17.3 | 17.9 | -0.6 | 49.2 | -0.9 |
| 1959 | 16.2 | 18.8 | -2.6 | 47.9 | 7.2 |
| 1960s | |||||
| 1960 | 17.8 | 17.8 | 0.1 | 45.6 | 2.5 |
| 1961 | 17.8 | 18.4 | -0.6 | 45.0 | 2.3 |
| 1962 | 17.6 | 18.8 | -1.3 | 43.7 | 6.1 |
| 1963 | 17.8 | 18.6 | -0.8 | 42.4 | 4.4 |
| 1964 | 17.6 | 18.5 | -0.9 | 40.0 | 5.8 |
| 1965 | 17.0 | 17.2 | -0.2 | 37.9 | 6.4 |
| 1966 | 17.3 | 17.8 | -0.5 | 34.9 | 6.5 |
| 1967 | 18.4 | 19.4 | -1.1 | 32.9 | 2.5 |
| 1968 | 17.6 | 20.5 | -2.9 | 33.9 | 4.8 |
| 1969 | 19.7 | 19.4 | 0.3 | 29.3 | 3.1 |
| 1970s | |||||
| 1970 | 19.0 | 19.3 | -0.3 | 28.0 | 0.2 |
| 1971 | 17.3 | 19.5 | -2.1 | 28.1 | 3.4 |
| 1972 | 17.6 | 19.6 | -2.0 | 27.4 | 5.3 |
| 1973 | 17.6 | 18.7 | -1.1 | 26.0 | 5.8 |
| 1974 | 18.3 | 18.7 | -0.4 | 23.9 | -0.6 |
| 1975 | 17.9 | 21.3 | -3.4 | 25.3 | 0.2 |
| 1976 | 17.1 | 21.4 | -4.2 | 27.5 | 5.4 |
| 1977 | 18.0 | 20.7 | -2.7 | 27.8 | 4.6 |
| 1978 | 18.0 | 20.7 | -2.7 | 27.4 | 5.6 |
| 1979 | 18.5 | 20.1 | -1.6 | 25.6 | 3.1 |
| 1980s | |||||
| 1980 | 19.0 | 21.7 | -2.7 | 26.1 | -0.3 |
| 1981 | 19.6 | 22.2 | -2.6 | 25.8 | 2.5 |
| 1982 | 19.2 | 23.1 | -4.0 | 28.7 | -1.9 |
| 1983 | 17.5 | 23.5 | -6.0 | 33.1 | 4.5 |
| 1984 | 17.3 | 22.2 | -4.8 | 34.0 | 7.2 |
| 1985 | 17.7 | 22.8 | -5.1 | 36.4 | 4.1 |
| 1986 | 17.5 | 22.5 | -5.0 | 39.5 | 3.5 |
| 1987 | 18.4 | 21.6 | -3.2 | 40.6 | 3.2 |
| 1988 | 18.2 | 21.3 | -3.1 | 41.0 | 4.1 |
| 1989 | 18.4 | 21.2 | -2.8 | 40.6 | 3.6 |
| 1990s | |||||
| 1990 | 18.0 | 21.9 | -3.9 | 42.1 | 1.9 |
| 1991 | 17.8 | 22.3 | -4.5 | 45.3 | -0.1 |
| 1992 | 17.5 | 22.1 | -4.7 | 48.1 | 3.4 |
| 1993 | 17.5 | 21.4 | -3.9 | 49.3 | 2.9 |
| 1994 | 18.0 | 21.0 | -2.9 | 49.2 | 4.1 |
| 1995 | 18.4 | 20.6 | -2.2 | 49.1 | 2.5 |
| 1996 | 18.8 | 20.2 | -1.4 | 48.4 | 3.7 |
| 1997 | 19.2 | 19.5 | -0.3 | 45.9 | 4.5 |
| 1998 | 19.9 | 19.1 | 0.8 | 43.0 | 4.4 |
| 1999 | 19.8 | 18.5 | 1.4 | 39.4 | 4.8 |
| 2000s | |||||
| 2000 | 20.6 | 18.2 | 2.4 | 34.7 | 4.1 |
| 2001 | 19.5 | 18.2 | 1.3 | 32.5 | 1.1 |
| 2002 | 17.6 | 19.1 | -1.5 | 33.6 | 1.8 |
| 2003 | 16.2 | 19.7 | -3.4 | 35.6 | 2.5 |
| 2004 | 16.1 | 19.6 | -3.5 | 36.8 | 3.5 |
| 2005 | 17.3 | 19.9 | -2.6 | 36.9 | 3.1 |
| 2006 | 18.2 | 20.1 | -1.9 | 36.5 | 2.7 |
| 2007 | 18.5 | 19.6 | -1.2 | 36.2 | 1.9 |
| 2008 | 17.5 | 20.7 | -3.2 | 40.2 | -0.3 |
| 2009 | 14.8 | 24.7 | -9.9 | 53.0 | -3.5 |
| 2010s | |||||
| 2010 | 14.9 | 23.8 | -8.9 | 62.1 | 3.0 |
| 2011 | 14.8 | 24.1 | -9.3 | 69.0 |
Sources:
Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB.
Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Congressional Budget Office http://www.cbo.gov/
Chart 5 shows the sharp impact of the 1946 contraction of 10.9 percent of GDP. Growth rebounded strongly, as in all postwar expansion, with growth of 8.7 percent in 1950, 7.7 percent in 1951, 3.8 percent in 1952 and 3.8 percent in 4.6 percent in 1953. The data in Charts 5 and 6 are changes in the level of real GDP in a year, which is different from the seasonally-adjusted quarterly annual equivalent rates analyzed in Section I United States GDP Growth Standstill. The yearly changes in Chart 6 show vigorous recovery from the contractions of 1982, 1991 and 2001. Rapid growth recovered levels of employment prior to the contraction. The anemic recovery after IIQ2009 and the current standstill have not occurred in the US postwar economy.
Chart 5. Percentage Change of Real GDP 1945-2010
Source: Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Greater detail is shown in Chart 6 with the yearly percentage change of real GDP from 1945 to 2010. The yearly changes in Chart 6 show vigorous recovery from the contractions of 1982, 1991 and 2001. Rapid growth recovered levels of employment prior to the contraction. The anemic recovery after IIQ2009 and the current standstill have not occurred in the US postwar economy.
Chart 6. Percentage Change of Real GDP 1980-2010
Source: Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
The capital budgeting decision of business requires the calculation of present value of projects. This calculation consists of a projection toward the horizon of planning of revenues net of costs, which are discounted to present value by the weighted average cost of capital. Business invests in the projects with highest net present value. The nonpartisan Congressional Budget Office (CBO) provides a similar service. Congress and the administration send budget proposals and legislation for evaluation by the CBO of their effects on federal government revenues, expenditures, deficit or surpluses and debt. The CBO does not provide its own policy proposals but analyzes alternative policies. The CBO uses state of the art knowledge but significant uncertainty remains because of the hurdle of projecting financial and economic variables to the future.
Table 13 provides the latest exercise by the CBO (http://www.cbo.gov/ftpdocs/123xx/doc12316/08-24-BudgetEconUpdate.pdf) of projecting the fiscal accounts of the US with special interest on the US Budget Control Act of 2011 (http://www.gpo.gov/fdsys/pkg/BILLS-112s365eah/pdf/BILLS-112s365eah.pdf), which ended the confrontation on extending the federal debt limit. Table 13 extends data back to 1995 with the projections of the CBO from 2011 to 2021. Budget analysis in the US uses a ten-year horizon. The significant event in the data before 2011 is the budget surpluses from 1998 to 2001, from 0.8 percent of GDP in 1998 to 2.4 percent of GDP in 2000. Debt held by the public fell from 49.1 percent of GDP in 1995 to 32.5 percent of GDP in 2001. The CBO is projecting the deficit for 2011 as (CBO 2011AugBEO, IX):
“The United States is facing profound budgetary and economic challenges. At 8.5 percent of gross domestic product (GDP), the $1.3 trillion budget deficit that the Congressional Budget Office (CBO) projects for 2011 will be the third-largest shortfall in the past 65 years (exceeded only by the deficits of the preceding two years). This year’s deficit stems in part from the long shadow cast on the U.S. economy by the financial crisis and the recent recession. Although economic output began to expand again two years ago, the pace of the recovery has been slow, and the economy remains in a severe slump. Recent turmoil in financial markets in the United States and overseas threatens to prolong the slump.”
Table 13, US, CBO Baseline Budget Outlook 2011-2021
| Out | Out | Deficit | Deficit | Debt | Debt | |
| 1995 | 1,516 | 20.6 | -164 | -2.2 | 3,604 | 49.1 |
| 1996 | 1,560 | 20.2 | -107 | -1.4 | 3,734 | 48.4 |
| 1997 | 1,601 | 19.5 | -22 | -0.3 | 3,722 | 45.9 |
| 1998 | 1,652 | 19.1 | +69 | +0.8 | 3,721 | 43.0 |
| 1999 | 1,702 | 18.5 | +126 | +1.4 | 3,632 | 39.4 |
| 2000 | 1,789 | 18.2 | +236 | +2.4 | 3,410 | 34.7 |
| 2001 | 1,863 | 18.2 | +128 | +1.3 | 3,320 | 32.5 |
| 2002 | 2,011 | 19.1 | -158 | -1.5 | 3,540 | 33.6 |
| 2003 | 2,159 | 19.7 | -378 | -3.4 | 3,913 | 35.6 |
| 2004 | 2,293 | 19.6 | -413 | -3.5 | 4,295 | 36.8 |
| 2005 | 2,472 | 19.9 | -318 | -2.6 | 4,592 | 36.9 |
| 2006 | 2,655 | 20.1 | -248 | -1.9 | 4,829 | 36.5 |
| 2007 | 2,729 | 19.6 | -161 | -1.2 | 5,035 | 36.2 |
| 2008 | 2,983 | 20.7 | -459 | -3.2 | 5,803 | 40.2 |
| 2009 | 3,518 | 24.7 | -1,413 | -9.9 | 7,545 | 53.0 |
| 2010 | 3,456 | 23.8 | -1,294 | -8.9 | 9,019 | 62.1 |
| 2011 | 3,597 | 23.8 | -1,284 | -8.5 | 10,164 | 67.3 |
| 2012 | 3,609 | 23.0 | -973 | -6.2 | 11,153 | 71.2 |
| 2013 | 3,692 | 22.8 | -510 | -3.2 | 11,773 | 72.8 |
| 2014 | 3,803 | 22.4 | -265 | -1.6 | 12,148 | 71.6 |
| 2015 | 3,988 | 22.0 | -205 | -1.1 | 12,463 | 68.7 |
| 2016 | 4,249 | 22.2 | -278 | -1.5 | 12,840 | 67.2 |
| 2017 | 4,449 | 22.2 | -231 | -1.2 | 13,169 | 65.8 |
| 2018 | 4,635 | 22.1 | -211 | -1.0 | 13,473 | 64.3 |
| 2019 | 4,913 | 22.4 | -259 | -1.2 | 13,820 | 63.1 |
| 2020 | 5,161 | 22.6 | -277 | -1.2 | 14,181 | 62.0 |
| 2021 | 5,409 | 22.7 | -279 | -1.2 | 14,541 | 61.0 |
| 2012 | 43,908 | 22.4 | -3,487 | -1.8 |
Note: Out = outlays
Source: CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan.
The succession of deficits of more than one trillion dollars resulted in an increase in debt held by the public from 40.2 percent of GDP in 2008 to 67.3 percent of GDP in 2011 for a debt explosion without parallel in data after World War II in Table 12. An important part of the fiscal situation is the jump in federal government expenditures from $2,983 billion in 2008 to $3,518 billion in 2009, or 17.9 percent, equivalent to an increase of federal government expenditures from 20.7 percent of GDP in 2008 to 24.7 percent of GDP in 2009. A major problem in financing this new level of expenditures is that conflict with past experience in the US (CBO 2011BEO, XIII):
“According to CBO’s estimates, revenues this year will amount to 15.3 percent of GDP, compared with an average of 18.0 percent over the past 40 years, and outlays will amount to 23.8 percent of GDP, well above their 40-year average of 20.8 percent.”
The exercise by the CBO in Table 13 is not able to reduce expenditures back to 20 percent.
Chart 7 shows the total deficits or surpluses of the US from 1971 to 2021. The small surpluses from 1998 to 2011 are the only ones in Chart 7. There is a difficult climb from the record deficit of 10.0 percent in 2010.
Chart 7, US, Total Deficits or Surplus as Percent of GDP
Source: http://www.cbo.gov/
Table 14 shows the CBO deficit projections including and excluding provisions of the Joint Select Committee on Deficit Reduction. The deficit without the provisions would be $4,687 billion between 2012 and 2021, or 2.4 percent of GDP and with the provisions would be $3,487 billion or 1.8 percent of GDP. As a result, the deficit stabilizes at 1.2 percent of GDP after 2019. The form in which adjustment could occur is by provisions of the Joint Select Committee on Deficit Reduction created by the Budget Control Act of 2011 summarized by the CBO (CBO 2011AugBEO, 6) as:
“Establish caps on discretionary funding through 2021;
Allow certain amounts of additional spending for “program integrity” initiatives aimed at curtailing improper benefit payments;
Change the Pell Grant and student loan programs;
Require the House of Representatives and the Senate to vote on a joint resolution proposing a balanced budget amendment to the Constitution;
Establish a procedure for increasing the debt limit by $400 billion initially and procedures to raise the limit again in two additional steps, for a cumulative increase of between $2.1 trillion and $2.4 trillion;
Reinstate and modify certain budget process rules;
Create the Congressional Joint Select Committee on Deficit Reduction to propose further reductions that will amount to at least $1.5 trillion in budgetary savings over 10 years; and
Establish automatic procedures for reducing spending by as much as $1.2 trillion if legislation originating with the new deficit reduction committee does not achieve such savings.”
Table 14, US, CBO Deficit Projections Including and Excluding Provisions of the Joint Select Committee on Deficit Reduction, $ Billion and % of GDP
| Deficit Excluding Provisions $ Billions | % GDP | Effects of Provisions $ Billions | Deficit Including Provisions $ Billions | % GDP | |
| 2010 | -1,294 | -8.9 | 0 | -1,294 | -8.9 |
| 2011 | -1,284 | -8.5 | 0 | -1,284 | -8.5 |
| 2012 | -973 | -6.2 | 0 | -973 | -6.2 |
| 2013 | -623 | -3.9 | 113 | -510 | -3.2 |
| 2014 | -380 | -2.2 | 115 | -265 | -1.6 |
| 2015 | -322 | -1.8 | 118 | -205 | -1.1 |
| 2016 | -402 | -2.1 | 124 | -278 | -1.5 |
| 2017 | -362 | -1.8 | 132 | -231 | -1.2 |
| 2018 | -349 | -1.7 | 139 | -211 | -1.0 |
| 2019 | -405 | -1.8 | 146 | -259 | -1.2 |
| 2020 | -430 | -1.9 | 154 | -277 | -1.2 |
| 2021 | -440 | -1.8 | 161 | -279 | -1.2 |
| Total 2012-2016 | -2,701 | -3.1 | 469 | -2,232 | -2.6 |
| Total 2012-2021 | -4,687 | -2.4 | 1,200 | -3,487 | -1.8 |
Source: CBO (2011AugBEO).
The risk to the projections of the CBO is in the form of renewal of certain tax measures. Table 15 provides federal revenues, outlays, deficit and debt as percent of GDP. The adjustment depends on increasing the revenues from 14.9 percent of GDP in 2010 to 20.9 percent of GDP in 2021, which is above the 40 year average of 18 percent of GDP while outlays fall only from 23.8 percent of GDP in 2010 to 22.7 percent of GDP in 2021. The last row of Table 15 provides the CBO estimates of averages for 1971 to 2010 of 18.0 percent for revenues/GDP, 20.8 percent for outlays/GDP and 37.0 percent for debt/GDP. The diverging trends of two possibilities of adjustment after 2011 in Chart 7 are based on the possible changes in current law that could change some of the following provisions (CBO 2011AugBEO, 1):
”Provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312, referred to in this report as the 2010 tax act) that reduced the payroll tax for one year and limited the reach of the alternative minimum tax (AMT) for two years are set to expire on December 31, 2011.
Several other key provisions of the 2010 tax act—including the extension of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5)—are set to expire on December 31, 2012.
Medicare’s payments for physicians’ services are scheduled to be reduced by nearly 30 percent after December 31, 2011.
Discretionary appropriations between 2012 and 2021 will be subject to statutory caps set in the Budget Control Act of 2011 (P.L. 112-25). If adhered to, those caps will reduce discretionary outlays by about 5 percent in real (inflation-adjusted) terms over the 2012–2021 period relative to spending in 2011, CBO estimates.
Additional budgetary savings of $1.2 trillion required by the Budget Control Act will occur as a result of legislation produced by the Joint Select Committee on Deficit Reduction (referred to in this report as the deficit reduction committee) or, if lawmakers fail to enact such legislation, by means of automatic cuts in spending that will then be triggered.”
Congress can change some or all of these provisions and add new ones
Table 15, US, CBO Projections of Federal Government Revenues, Outlays, Deficit and Debt as Percent of GDP
| Revenues % GDP | Outlays % GDP | Deficit % GDP | Debt GDP | |
| 2010 | 14.9 | 23.8 | -8.9 | 62.1 |
| 2011 | 15.3 | 23.8 | -8.5 | 67.3 |
| 2012 | 16.8 | 23.0 | -6.2 | 71.2 |
| 2013 | 19.0 | 22.8 | -3.2 | 72.8 |
| 2014 | 20.2 | 22.4 | -1.6 | 71.6 |
| 2015 | 20.2 | 22.0 | -1.1 | 68.7 |
| 2016 | 20.1 | 22.2 | -1.5 | 67.2 |
| 2017 | 20.4 | 22.2 | -1.2 | 65.8 |
| 2018 | 20.5 | 22.1 | -1.0 | 64.3 |
| 2019 | 20.6 | 22.4 | -1.2 | 63.1 |
| 2020 | 20.7 | 22.6 | -1.2 | 62.0 |
| 2021 | 20.9 | 22.7 | -1.2 | 61.0 |
| Total 2012-2016 | 19.3 | 22.5 | -2.6 | NA |
| Total 2012-2021 | 20.0 | 22.4 | -1.8 | NA |
| Average 1971-2010 | 18.0 | 20.8 | NA | 37.0 |
Source: CBO (2011AugBEO).
The CBO (2011AugBEO, 31-59) projects economic variables required for the fiscal projections, which are shown in Table 16. Real GDP growth is projected at 2.3 percent in 2011 and 2.7 percent in 2012, jumping to 3.6 percent on average in 2013 to 2016 and 2.4 percent in 2017 to 2021. It is not possible to forecast another downturn that could worsen further the US fiscal situation. The CBO projects subdued inflation but the rate of unemployment remains at high levels, declining to 5.2 percent by 2017, which is the current measurement of the natural rate of unemployment. Interest rates are assumed to remain at relatively low levels but increase in the latter years of the projections. Different paths of economic variables would alter the projections of fiscal variables.
Table 16, US, CBO Economic Projections for Calendar Years 2011 to 2021, ∆%
| 2011 ∆% | 2012 ∆% | 2013-2016 Average ∆% | 2017-2021 Average ∆% | |
| Real GDP | 2.3 | 2.7 | 3.6 | 2.4 |
| PCE Inflation | 2.4 | 1.3 | 1.6 | 2.0 |
| Core PCE Inflation | 1.7 | 1.4 | 1.6 | 2.0 |
| CPI Inflation | 2.8 | 1.3 | 1.7 | 2.3 |
| Core CPI Inflation | 1.7 | 1.3 | 1.7 | 2.2 |
| Unem- ployment Rate | 8.9 | 8.5 | 5.3 | 5.2 |
| 3-Month Treasury Bill | 0.1 | 0.1 | 1.5 | 4.0 |
| 10-Year treasury Note | 3.3 | 3.2 | 4.1 | 5.3 |
Source: CBO (2011AugBEO).
The major hurdle in adjusting the fiscal situation of the US is shown in Table 17 in terms of the rigid structure of revenues that can be increased and outlays that can be reduced. There is no painless adjustment of a debt exceeding 70 percent of GDP. On the side of revenues, taxes provide 90.4 percent of revenue in 2010 and are projected to provide 92.5 percent in the total revenues from 2011 to 2021 in the CBO projections. Thus, revenue measures are a misleading term for what are actually tax increases. The choices are especially difficult because of the risks of balancing inequity and disincentives to economic activity. Individual income taxes are projected to increase from 41.6 percent of federal government revenues in 2010 to 51.5 percent in total revenues projected by the CBO from 2011 to 2021. There are equally difficult conflicts in what the government gives away in a rigid structure of expenditures. Mandatory expenditures account for 55.4 percent of federal government outlays in 2010 and are projected to increase to 58.94 percent of the total projected by the CBO for the years 2011 to 2021. The total of Social Security plus Medicare and Medicaid accounts for 43.2 percent of federal government outlays in 2010 and is projected to increase to 48.8 percent in the total for 2011 to 2021 projected by the CBO. The inflexibility of what to cut is more evident in the last row of Table 17 with the aggregate of defense plus Social Security plus Medicare plus Medicaid accounting for 63.2 percent of expenditures in 2010, rising to 66.7 percent of the total outlays projected by the CBO in 2011 to 2021. The cuts are in discretionary spending that declines from 38.9 percent of the total in 2010 to 30.9 percent of total outlays in the CBO projection for 2011 to 2021.
Table 17, Structure of Federal Government Revenues and Outlays, $ Billions and Percent
| 2010 $ Billions | % Total | Total 2011-2021 $ Billions | % Total | |
| Revenues | 2,163 | 100.00 | 39,221 | 100.00 |
| Individual Income Taxes | 899 | 41.56 | 20,204 | 51.51 |
| Social Insurance Taxes | 865 | 39.99 | 12,060 | 30.75 |
| Corporate Income Taxes | 191 | 8.83 | 4,000 | 10.20 |
| Other | 208 | 9.62 | 2,958 | 7.54 |
| Outlays | 3,456 | 100.00 | 43,908 | 100.0 |
| Mandatory | 1,913 | 55.35 | 25,879 | 58.94 |
| Social Security | 701 | 20.28 | 9,951 | 22.66 |
| Medicare | 520 | 15.05 | 7,401 | 16.86 |
| Medicaid | 273 | 7.90 | 4,081 | 9.29 |
| SS + Medicare + Medicaid | 1,494 | 43.23 | 21,433 | 48.81 |
| Income Security | 437 | 12.64 | 2,981 | 6.79 |
| Discre- tionary | 1,347 | 38.98 | 13,580 | 30.93 |
| Defense | 689 | 19.94 | 7,856 | 17.89 |
| Non- defense | 658 | 19.04 | 6,503 | 14.81 |
| Cap Reduction | -778 | -5.73 | ||
| Net Interest | 196 | 5.67 | 4,449 | 10.13 |
| Defense + SS + Medicare + Medicaid | 2,183 | 63.17 | 29,289 | 66.71 |
Source: CBO (2011AugBEO).
The CBO warns about the failure to adjust the fiscal accounts of the US. Table 18 provides fiscal projections under an alternative fiscal scenario, which is based on the following assumptions (CBO 2011LTBO, 2):
“The alternative fiscal scenario embodies several changes to current law that would continue certain tax and spending policies that people have grown accustomed to (because the policies are in place now or have been in place recently). Versions of some of the changes assumed in the scenario—such as those related to the tax cuts originally enacted in 2001, the AMT, certain other tax provisions, and Medicare’s payments to physicians—have regularly been enacted in the past and are widely expected to be made in some form over the next few years. After 2021, the alternative fiscal scenario also incorporates modifications to several provisions of current law that might be difficult to sustain for a long period. Thus, the scenario includes changes to certain restraints on the growth of spending for Medicare and to indexing provisions that would slow the growth of federal subsidies for health insurance coverage. In addition, the scenario includes unspecified changes in tax law that would keep revenues constant as a share of GDP after 2021.”
Table 18, CBO Long-term Budget Outlook Alternative Fiscal Scenario, % of GDP
| 2011 | 2021 | 2035 | |
| Spending | 24.1 | 25.9 | 33.9 |
| Primary | 22.7 | 21.5 | 25.0 |
| SS | 4.8 | 5.3 | 6.1 |
| Medicare | 3.7 | 4.3 | 6.7 |
| Medicaid | 1.9 | 2.8 | 3.7 |
| Other | 12.3 | 9.1 | 8.5 |
| Interest | 1.4 | 4.4 | 8.9 |
| Revenues | 14.8 | 18.4 | 18.4 |
| Deficit | -9.3 | -7.5 | -15.5 |
| Primary | -7.9 | -3.1 | -6.6 |
| Debt | 69 | 101 | 187 |
Primary spending is spending other than interest payments. Primary deficit or surplus is revenue less primary spending.
Source: http://www.cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf
An important distinguishing characteristic of the alternative fiscal scenario in Table 18 is the much sharper increase in debt held by the public from 69 percent of GDP in 2011 to 101 percent of GDP in 2021 and 187 percent of GDP in 2035. Accordingly, interest payments on the debt jump from 1.4 percent of GDP in 2011 to 8.9 percent of GDP in 2035. In contrast with the extended-baseline scenario, the alternative fiscal scenario fixes revenue as percent of GDP at 18.4 percent after 2035.
Fiscal projections by the CBO incorporate a host of assumptions on demographic variables, such as the rate of growth and consumption of the US population, economic variables, interest rates, labor market factors, real GDP and earnings per worker. The CBO (2011LTBO) analyzes how the performance of the economy would be affected by an increase in debt held by the public over 76 percent of GDP, which is used as benchmark economic conditions. A Solow-type model (after Solow 1956, 1989; see Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 11-16) is used for measuring effects on the economy of fiscal policies under the two scenarios. The method is discussed in CBO (2011PBB, Appendix A, 31-7). The calculations by the CBO (2011LTO, 28-31) are shown in Table 19. The impact is much softer on GDP than on GNP because “the change in GDP does not reflect the increased future outflow of profits and interest generated by the additional capital inflow” (CBO 2011LTO, 28). The striking result in Table 19 is the sharp reduction of GNP by 2035 of 6.7 percentage points to 17.6 percentage points over what it would be under the benchmark debt level of 76 percent and of GDP from 2.4 percentage points to 9.9 percentage points. Chairman Bernanke (2011Jul26JH, 11) finds difficulties in failure to adjust the US fiscal situation:
“To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.”
Table 19, Effects on GNP and GDP of Fiscal Policies in CBO’s Scenarios in Percentage Difference from Benchmark Level
| 2025 | 2035 | |
| Extended Baseline | ||
| GNP | -0.2 to –0.4 | -0.5 to –1.6 |
| GDP | (-0.05 to 0.05 to –0,2 | -0.2 to –1.3 |
| Alternative Fiscal | ||
| GNP | -2.2 to –5.7 | -6.8 to –17.6 |
| GDP | -0.4 to –3.1 | -2.4 to –9.9 |
Source: http://www.cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf
III World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past three weeks. Table 20, updated with every comment in this blog, provides beginning values on Aug 22 and daily values throughout the week ending on Aug 26 of a few financial variables. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Aug 19 and the percentage change in that prior week below the label of the financial risk asset. The first five rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of dollars USD per one euro EUR, USD 1.439/EUR in the first row, column 1 in the block for currencies in Table 20 for Fri Aug 19, appreciating to USD 1.4359 on Mon Aug 22, or by 0.2 percent. Table 20 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention is required to maintain consistency in characterizing movements of the exchange rate in Table 20 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.4359/EUR on Aug 22; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Aug 19, to the last business day of the current week, in this case Fri Aug 26, such as depreciation of 0.8 percent for the dollar to USD 1.450/EUR by Aug 26; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (negative sign) by 0.8 percent from the rate of USD 1.439/EUR on Fri Aug 19 to the rate of USD 1.450 on Fri Aug 26 and depreciated by 0.8 percent from the rate of USD 1.4382 on Thu Aug 25 to USD 1.450 on Fri Aug 26.
Table 20, Weekly Financial Risk Assets Aug 22 to Aug 26, 2011
| M 22 | Tu 23 | W 24 | Th 25 | Fr 26 | |
| USD/ 1.439 -1.0% | 1.4359 0.2% 0.2% | 1.4440 -0.3% -0.5% | 1.4415 -0.2% 0.1% | 1.4382 0.0% 0.2% | 1.450 -0.8% -0.8% |
| JPY/ 76.79 -0.3 | 76.7865 0.0% 0.0% | 76.6573 0.2% 0.2% | 76.9895 -0.2% -0.4% | 77.5110 -0.9% -0.7% | 76.65 0.2% 1.1% |
| CHF/ 0.786 -1.7% | 0.7904 -0.6% -0.6% | 0.7923 -0.8% -0.2% | 0.7954 -1.2% -0.4% | 0.7932 -0.9% 0.3% | 0.811 -3.2% -2.2% |
| CHF/EUR -2.9% | 1.1349 -0.3% -0.3% | 1.1442 -1.1% -0.8% | 1.1466 -1.4% -0.2% | 1.1407 -0.8% 0.5% | 1.1700 -3.4% -2.6% |
| USD/ 1.041 0.9606 0.5% | 1.0419 0.9598 0.1% 0.1% | 1.0526 0.9500 1.1% 1.0% | 1.0472 0.9549 0.6% -0.5% | 1.0435 0.9583 0.2% -0.4% | 1.057 0.9461 1.5% 1.3% |
| 10 Year 2.066 | 2.10 | 2.15 | 2.30 | 2.23 | 2.202 |
| 2 Year T Note | 0.20 | 0.22 | 0.23 | 0.21 | 0.20 |
| 10 Year German Bond 2Y 0.65 10Y 2.11 | 2Y 0.70 10Y 2.10 | 2Y 0.67 10Y 10Y 2.13 | 2Y 0.72 10Y 2.21 | 2Y 0.65 10Y 2.19 | 2Y 0.65 10Y 2.16 |
| DJIA 10817.65 -4.0% |
0.3% 0.3% |
3.3% 2.9% |
4.6% 1.3% |
3.1% -1.5% |
4.3% 1.2% |
| DJ Global 1787.56 -3.9% |
0.0% 0.0% |
2.4% 2.4% |
3,2% 0.8% |
2.3% -0.9% |
2.8% 0.5% |
| DJ Asia Pacific 1234.85 -2.0% |
-1.1% -1.1% |
0.9% 2.0% |
-0.3% -1.2% |
0.0% 0.3% |
0.4% 0.4% |
| Nikkei -2.7% |
-1.0% -1.0% |
0.2% 1.2% |
-0.9% -1.1% |
0.6% 1.5% |
0.9% 0.3% |
| Shanghai 2534.36 -2.3% |
-0.7% -0.7% |
0.8% 1.5% |
0.3% -0.5% |
3.2% 2.9% |
3.1% -0.1% |
| DAX -1.9% |
-0.1 -0.1% |
0.8% 1.1% |
3.6% 2.7% |
1.9% -1.7% |
1.0% -0.8% |
| DJ UBS Comm. 159.00 1.3% |
0.6% 0.6% |
1.1% 0.5% |
-0.4% -1.4% |
0.2% 0.6% |
1.3% 1.2% |
| WTI $ B -3.2% | 84.40 2.2% 2.2% | 85.950 4.0% 1.8% | 85.120 3.1% -0.9% | 84.870 2.7% -0.3% | 85.450 3.4% 0.7% |
| Brent $/B 109.00 1.0% | 108.34 -0.6% -0.6% | 109.98 0.9% 1.5% | 110.110 1.0% 0.1% | 110.420 1.3% 0.3% | 111.040 1.9% 0.6% |
| Gold $/oz 1854.20 6.1% | 1897.6 2.3% 2.3% | 1831.2 -1.2% -3.5% | 1756.70 -5.4% -4.1% | 1772.00 -4.4% 0.9% | 1826.80 -1.5% 3.1% |
Note: USD: US dollar; EUR: euro; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; B: barrels; oz: ounce
Sources:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Safe-haven currencies continue to attract funds from investors avoiding risks. Inflows of capital seeking refuge in Japan has caused the appreciation of the Japanese yen, JPY, to extremely strong levels that reduce the competitiveness of Japanese products at home and in international markets. The yen/dollar rate appreciated by 0.2 percent from JPY 76.79/USD on Fri Aug 19 to JPY 76.65/USD on Fri Aug 26. The JPY/USD rate depreciated temporarily from 76.9895/USD on Wed Aug 24 to JPY 77.511/USD on Thu Aug 25. Tatsuo Ito and Mitsuru Obe, writing on Aug 25, 2011, on “Japan rolls out new ways to halt yen,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903461304576527412989096014.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyze intervention by the government of Japan to prevent appreciation of the yen. The problem is the volume of $4 trillion of daily trading in foreign exchange worldwide. The first measure on Aug 4 consisted of the purchase of dollars against the yen in the value of JPY 4.6 trillion, or about $60.09 billion. On Wed Aug 24, the finance minister of Japan, Yoshihiko Noda, announced new measures of intervention. (1) Japan would create a $100 billion fund at the government-affiliated Japan Bank of International Cooperation (JBIC), which has the following mission (http://www.jbic.go.jp/en/about/company/policy/index.html):
“Our mission is to contribute to the sound development of the Japanese and international economy by conducting international finance operation in the following four fields. In conducting its operations to fulfill this mission, the role of JBIC is to complement the financing provided by private sector financial institutions.
· Promoting overseas development and acquisition of strategically important natural resources to Japan
· Maintaining and improving the international competitiveness of Japanese Industries
· Promoting the overseas business having the purpose of preserving the global environment, such as preventing global warming
· Responding to disruptions in financial order in the international economy.”
(2) A rule requiring major financial companies to report twice daily positions in currency trading. Japanese business has been aggressive in mergers and acquisitions in 2011, ranking third after the US and the UK, with 415 deals for $49.78 billion. The measure appears to encourage foreign acquisitions by Japanese companies that would cause capital flows out of Japan. Capital flows from deals in mergers and acquisitions are in much lower volumes than daily currency trading. The reporting rule could be a form of moral suasion on market participants of forthcoming controls on foreign capital. The Bank of Japan issued a brief statement on currency intervention (http://www.boj.or.jp/en/announcements/release_2011/rel110824a.htm/):
“The Bank of Japan expects that the measures announced by the Finance Minister today will contribute to the stability of the foreign exchange market.
The Bank of Japan will continue to carefully monitor the effects of developments in the foreign exchange market on the future course of economic activity and prices.”
While European sovereign risk issues continue to cause turmoil, the Swiss franc depreciated by 3.2 percent relative to the dollar, from CHF 0.786 on Aug 19 to CHF 0.811/USD on Aug 26 and by 3.4 percent relative to the euro, from CHF 1.1310/USD on Aug 19 to 1.1700/USD on Aug 26, as shown in Table 20. The good mood in stock markets contributed to depreciation of the dollar as funds flowed back into risk exposures but in limited volumes during slow vacation trading. The Australian dollar appreciated 1.5 percent from USD 1.041/AUD on Aug 19 to USD 1.057/AUD on Aug 26.
There was similar behavior in the government bonds of the US and Germany. The yield of the US 2-year Treasury note remained almost unchanged at around 0.20 percent with similar behavior around 0.65 percent for the 2-year Treasury bond of Germany. The yield of the 10-year Treasury note rose from 2.066 percent on Aug 19 to 2.202 percent on Aug 26 while the yield of the 10-year Government bond of Germany rose from 2.11 percent on Aug 19 to 2.16 percent on Aug 26.
The week was favorable to stock markets with all six equity indexes gaining. The US DJIA gained 4.3 percent during the week with decline only on Thu Aug 25 even with relatively weak economic data and no guidance on whether monetary policy would be eased further.
Oil gained in an environment of reduced risk aversion. Brent rose by 1.9 percent and WTI gained 3.4 percent. The DJ UBS commodity index gained again 1.3 percent in the week. Gold recovered from the fall during the week after touching $1900/oz and ended 1.5 percent lower.
Sovereign risks in Europe continue to agitate markets. Greece’s two years bonds were trading close to 40 percent per year during the week. Robin Wigglesworth, writing on Aug 25, 2011 on “Greek debt yields spike on collateral fears,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/66136c64-cf0e-11e0-86c5-00144feabdc0.html#axzz1W2OeSulS), explain that the spike in Greek bond yields was linked to concern by members of the euro zone of collateral agreed by Greece with Finland on the latter country’s participation in the bailout of Greek debt. Greece agreed the week earlier to deposit around €500 million into a Finnish escrow account that would serve as collateral for the participation of Finland in the recently agreed €109 billion bailout of Greece by euro zone members. Markets were concerned that the arrangement could create hurdles for the implementation of the bailout.
Another issue regarding European sovereign risks is the following note posted in the Greek stock exchange on the swap of government bonds (http://www.ase.gr/content/gr/announcements/Files/452141_26082011).PDF):
“Greece shall not be obliged to proceed with any portion of the transaction described in this letter unless holders of eligible GGBs tender, in response to Greece’s eventual Invitation to Tender, eligible GGBs having a principal amount equal to not less than 90% of all eligible GGBs, including 90% of that portion of the eligible GGBs maturing during the period from June 30, 2011 through August 31, 2014. If these thresholds (or either of them) are not met, Greece shall not proceed with any portion of the transaction described in this letter if it determines, in consultation with the official sector, that the total contribution of private sector creditors towards the financing needs of Greece and Greece’s debt sustainability resulting from this transaction is insufficient to permit the official sector to support the new multi-year adjustment program for Greece announced on July 21, 2011.”
Alkman Granitsas, writing on Aug 26, 2011 on “Greece sets out conditions for bond swaps,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111904875404576531742418633066.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that the note was part of a letter by the finance minister of Greece Evangelos Venizelos sent to 47 finance ministers with two conditions for Greece’s participation in the debt swap agreed in the euro zone bailout (Council of the European Union 2011Jul21). The letter requires two conditions for Greece’s participation in the swap. (1) There must be participation of at least 90 percent of investors holding Greek government bonds that are eligible for the program. (2) Participation must include at least 90 percent of bonds maturing between Jun 30, 2011 and Aug 31, 2014. Granitsas informs that the International Institute of Finance (IIF), which coordinated the swap proposal (IIF 2011Jul21), informs that financial institutions holding 60 to 70 percent of Greek government bonds have expressed participation in the swap agreement.
Nathalie Boschat and Noemie Bisserbe, writing on Aug 24, 2011, on “France cuts growth forecast, unveils austerity measures,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111904875404576527972323147058.html?mod=WSJPRO_hps_MIDDLEForthNews), analyze the new austerity measures in France. The prime minister of France announced the reduction of the forecast of GDP growth from 2 percent to 1.75 percent for 2011 and also 2 percent for 2012 instead of the previous forecast of 2.25 percent. France unveiled new measures to generate additional revenues of €11 billion in 2012 that would permit lowering the deficit target to 4.5 percent of GDP relative to 4.6 percent GDP in the earlier forecast, compared with the target of 5.7 percent of GDP in 2011.
The Managing Director of the International Monetary Fund, Christine Lagarde, proposed three measures for recovering European financial stability at the meeting of central bankers at Jackson Hole on Aug 27 (Lagarde 2011Aug27):
“First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing.
Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth.
Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project.”
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 21 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Newly available data on inflation is considered below in this section. The data in Table 21 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 21.
Table 21, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.9 | 3.6 | 7.0 | 9.1 |
| Japan | -0.7*** | 0.2 | 2.5 | 4.6 |
| China | 9.6 | 6.5 | 7.5 | |
| UK | 1.8 | 4.5* | 5.9* output | 7.7 |
| Euro Zone | 1.7 | 2.5 | 5.9 | 9.9 |
| Germany | 2.8 | 2.6 | 5.6 | 6.0 |
| France | 1.6 | 2.1 | 6.1 | 9.5 |
| Nether-lands | 1.5 | 2.9 | 9.1 | 4.2 |
| Finland | 3.7 | 3.7 | 7.2 | 7.8 |
| Belgium | 2.5 | 4.0 | 9.0 | 7.3 |
| Portugal | -0.9 | 3.0 | 5.9 | 12.4 |
| Ireland | -1.0 | 1.0 | 5.2 | 14.0 |
| Italy | 0.8 | 2.1 | 4.7 | 8.1 |
| Greece | -4.8 | 2.1 | 6.3 | 15.1 |
| Spain | 0.7 | 3.0 | 6.7 | 20.9 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics
PPI http://www.statistics.gov.uk/pdfdir/ppi0811.pdf
CPI http://www.statistics.gov.uk/pdfdir/cpi0611.pdf
** Excluding food, beverage, tobacco and petroleum
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF
***Change from IQ2011 relative to IQ2010 http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/gaiyou/main_1.pdf
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III World Financial Turbulence in this post, section I in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html section II in http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html and Section I Increasing Risk Aversion in http://cmpassocregulationblog.blogspot.com/2011/06/increasing-risk-aversion-analysis-of.html and section IV in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html); (2) the tradeoff of growth and inflation in China; (3) slow growth (see http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html http://cmpassocregulationblog.blogspot.com/2011/06/financial-risk-aversion-slow-growth.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011_03_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html), weak hiring (see Section IV United States Economic Uncertainty in http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html and section III Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html ) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/05/job-stress-of-24-to-30-million-falling.html http://cmpassocregulationblog.blogspot.com/2011/04/twenty-four-to-thirty-million-in-job_03.html http://cmpassocregulationblog.blogspot.com/2011/03/unemployment-and-undermployment.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the earthquake and tsunami affecting Japan that is having repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.
Table 22 provides the forecasts of the Federal Reserve Board Members and Federal Reserve Bank Presidents for the FOMC meeting in Jun. Inflation by the price index of personal consumption expenditures (PCE) was forecast for 2011 in the Apr meeting of the FOMC between 2.1 to 2.8 percent. Table 22 shows that the interval has narrowed to PCE (personal consumption expenditures) headline inflation of between 2.3 and 2.5 percent. The FOMC focuses on core PCE inflation, which excludes food and energy. The Apr forecast of core PCE inflation was an interval between 1.3 and 1.6 percent. Table 22 shows the revision of this forecast in Jun to a higher interval between 1.5 and 1.8 percent. The Statement of the FOMC meeting on Jun 22 analyzes inflation as follows (http://www.federalreserve.gov/newsevents/press/monetary/20110622a.htm):
“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
Table 22, Forecasts of PCE Inflation and Core PCE Inflation by the FOMC, %
| PCE Inflation | Core PCE Inflation | |
| 2011 | 2.3 to 2.5 | 1.5 to 1.8 |
| 2012 | 1.5 to 2.0 | 1.4 to 2.0 |
| 2013 | 1.5 to 2.0 | 1.4 to 2.0 |
| Longer Run | 1.7 to 2.0 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20110622.pdf
The FOMC statement on Aug 9 changed the “extended period” to specific 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm):
“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate”
At the meeting of central banks in Jackson Hole, Chairman Bernanke (2011Aug26JH, 6-7) expressed the view of the Federal Open Market Committee on inflation:
“With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.”
Chairman Bernanke (2011Aug26JH, 7) explained the views and policy on monetary policy of the FOMC:
“In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
In addition, Chairman Bernanke (2011Aug 26JH, 7) referred to tools available to the FOMC to execute its dual mandate that could be implemented whenever needed:
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
Japan has been experiencing very low rates of inflation on a monthly basis and negative inflation in some months and in 12 months rates, as shown in Table 23. Inflation was only high in Mar at 0.3 percent relative to Feb, during the height of the commodity price shock and in the month of the earthquake/tsunami. With the exception of 0.2 percent in Jul and 0.0 percent in Dec 2010, 12 months rates of inflation of consumer prices in Japan have been negative in six consecutive months in 2011.
Table 23, Japan, Consumer Price Index ∆%
| ∆% Month SA | ∆% 12 Months NSA | |
| Jul 2011 | 0.0 | 0.2 |
| Jun | -0.2 | -0.4 |
| May | 0.0 | -0.4 |
| Apr | 0.1 | -0.4 |
| Mar | 0.3 | -0.5 |
| Feb | 0.0 | -0.5 |
| Jan | -0.1 | -0.6 |
| Dec 2010 | –0.3 | 0.0 |
Source: http://www.e-stat.go.jp/SG1/toukeidb/GH07010102Forward.do
The drivers of CPI inflation in Japan are the segments of (1) fuel, light and water charges, increasing by 0.6 percent in Jul and 3.4 percent in 12 months; and (2) transport and communications, increasing by 0.6 percent in Jul and rising by 1.7 percent in 12 months, as shown in Table 24. Inflation in the Ku area of Tokyo was 0.1 percent in Jul but fell 0.2 percent in 12 months, with fuel, light and water charges increasing 0.9 percent and 2.7 percent in 12 months.
Table 24, Japan CPI Jun 2011 ∆%
| Jul/Jun ∆% | Year ∆% | |
| CPI | 0.0 | 0.2 |
| CPI Excluding Fresh Food | 0.0 | 0.1 |
| CPI Excluding Food, Alcoholic Berages and Energy | -0.1 | -0.5 |
| CPI Goods | -0.3 | 0.0 |
| CPI Services | 0.3 | 0.4 |
| CPI Excluding Imputed Rent | 0.0 | 0.3 |
| CPI Fuel, Light, Water Charges | 0.6 | 3.4 |
| CPI Transport Communications | 0.6 | 1.7 |
| CPI Ku-are Tokyo | 0.1 | -0.2 |
| Fuel, Light, Water Charges Ku Area Tokyo | 0.9 | 2.7 |
Note: Ku-area Tokyo CPI data preliminary for Jul
Source: http://www.stat.go.jp/english/data/cpi/1581.htm
V Global Growth Recession. There are new flash estimates of purchasing managers indexes for the euro zone, Germany, France and China that are discussed below together with the individual summary tables of indicators for regions and countries. New readings of world economic activity will be released at the turn of Aug but it is worthwhile to continue considering the information released on Aug 1 for Jul. The available information is that the world economy continued to expand in Jul. There is high association in the past 13 years between global GDP and the JP Morgan Global Manufacturing and Services PMITM (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416). Expansion is a reading above 50.0 and contraction a reading below 50.0. The JP Morgan Global Manufacturing and Services PMITM rose from 52.3 in Jun to 52.6 in Jul, which means that world overall output, manufacturing and services, expanded at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416). Output activity in the JP Morgan Global Services PMITM (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8417) rose from 52.2 in Jun to 53.1 in Jul, meaning that global services grew at a faster rate in Jul, compensating for decline in the JP Morgan Global Manufacturing PMITM from 52.3 in Jun to 50.6 in Jul, signaling that manufacturing was expanding at a slower rate in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8379). The index of new orders of the JP Morgan Global Manufacturing and Services PMITM fell from 52.0 in Jun to 51.1 in Jul, signaling expansion at a slower rate. Input prices continue to rise but at a slower rate, with the index of input prices falling from 58.6 in Jun to 56.3 in Jul. The employment index continues to increase at a slower rate, falling from 52.5 in Jun to 51.2 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416).
VA United States. Table USA provide economic indicators of the United States. The US economy is now caught in a growth standstill recession where economic growth is insufficient to move the economy toward full employment of productive resources. There is even risk of another contraction because the rate of growth of US GDP of 0.35 percent in the first half of the year, annualized at 0.7 percent, is in the borderline of contraction. There are many explanations of the inadequate recovery of the US economy and challenging growth and employment risks. Chairman Bernanke (2011Jul26JH, 6) links financial instability and economic growth:
“Nevertheless, financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling.”
Table USA, US Economic Indicators
| Consumer Price Index | Jun 12 months NSA ∆%: 3.6; ex food and energy ∆%: 1.6 |
| Producer Price Index | Jun 12 months NSA ∆%: 7.0; ex food and energy ∆% 2.4 |
| PCE Inflation | Jun 12 months NSA ∆%: headline 1.6; ex food and energy ∆% 1.3 |
| Employment Situation | Household Survey: Jul Unemployment Rate SA 9.1% |
| Nonfarm Hiring | Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million |
| GDP Growth | BEA Revised National Income Accounts back to 2003 |
| Personal Income and Consumption | Jun month ∆% SA Real Disposable Personal Income (RDPI) 0.3 |
| Employment Cost Index | IIQ2011 SA ∆%: 0.7 |
| Industrial Production | Jul month SA ∆%: 0.9 |
| New York Fed Manufacturing Index | General Business Conditions Aug: –7.72 |
| Philadelphia Fed Business Outlook Index | General Index from 3.2 Jul to -30.7 Aug |
| Manufacturing Shipments and Orders | Jun/May New Orders SA ∆%: –0.8; ex transport ∆%: 0.1 |
| Durable Goods | Jul New Orders SA ∆%: 4.0; ex transport ∆%: 0.7 |
| Sales of Merchant Wholesalers | Jan-Jun 2011/2010 ∆%: Total 15.2; Durable Goods: 11.9; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Jun 11/Jun 10 NSA ∆%: Total Business 12.1; Manufacturers 12.3 |
| Sales for Retail and Food Services | Jul 12 months ∆%: Retail and Food Services: 8.5; Retail ∆% 8.9 |
| Value of Construction Put in Place | Jun SAAR month SA ∆%: 0.2 |
| Case-Shiller Home Prices | May 2011/May 2010 ∆% NSA: 10 Cities –3.6; 20 Cities: –4.5 |
| FHFA House Price Index Purchases Only | Jul SA ∆% 0.9; 12 month ∆%: minus 4.3 Blog 08/28/11 |
| New House Sales | Jul month SAAR ∆%: |
| Housing Starts and Permits | Jul Starts month SA ∆%: -1.5; Permits ∆%: -3.2 |
| Trade Balance | Balance Jun SA -$53,067 million versus May -$50,831 million |
| Export and Import Prices | Jun 12 months NSA ∆%: Imports 13.6; Exports 9.9 |
| Consumer Credit | Jun ∆% annual rate: 7.7% |
| Net Foreign Purchases of Long-term Treasury Securities | May Net Foreign Purchases of Long-term Treasury Securities: $3.7 billion Jun versus May $24.2 billion |
| Treasury Budget | Fiscal Year to Jul 2011/2010 ∆%: Receipts 8.0; Outlays 2.4; Deficit -5.9; Individual Income Taxes 23.8 |
Links to blog comments in Table USA:
08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html
Durable goods orders are among the most important and difficult to interpret short-term economic indicators. An important source of volatility is large value items such as aircraft. New orders in Jul relative to Jun 2011 in Table 25 rose 4.0 percent after declining 1.3 percent in Jun relative to May. Motor vehicles and parts ended the slump attributed to the Japanese earthquake/tsunami, growing 11.5 percent in Jul. Excluding transport, new orders increased 0.7 percent in Jul, 0.6 percent in Jun and 0.8 percent in May. There were other aspects of the report that disturbed financial markets. New orders of computers and electronic products fell 3.4 percent and new orders of computers and related products fell 7.4 percent. The source of fluctuations is in orders for the big ticket items in nondefense aircraft that grew 43.4 percent in Jul after falling 24 percent in Jun and growing 31.4 percent in May. Capital goods rose 1.3 percent in Jul after falling 2.7 percent and nondefense capital goods rose 2.4 percent in Jul. Markets were disturbed by the decline of 1.5 percent in nondefense capital goods excluding aircraft, suggesting weak investment attitudes. While the report is encouraging in some respects, there are different items that raise concerns.
Table 25, Durable Goods Manufacturers’ Shipments and New Orders, SA, %
| Jul/Jun ∆% | Jun/May ∆% | May/Apr ∆% | |
| Total | |||
| S | 2.5 | 1.1 | 0.5 |
| NO | 4.0 | -1.3 | 2.0 |
| Excluding Transport | |||
| S | 0.9 | 1.3 | 0.9 |
| NO | 0.7 | 0.6 | 0.8 |
| Excluding Defense | |||
| S | 2.9 | 1.2 | 0.6 |
| NO | 4.8 | -0.9 | 1.6 |
| Computers & Electronic Products | |||
| S | 2.4 | -1.1 | -0.8 |
| NO | -3.4 | 1.0 | 0.4 |
| Computers & Related Products | |||
| S | 0.3 | 2.6 | -2.1 |
| NO | -7.4 | 1.9 | 2.0 |
| Transport Equipment | |||
| S | 8.0 | 0.3 | -0.6 |
| NO | 14.6 | -6.7 | 5.8 |
| Motor Vehicles & Parts | |||
| S | 11.7 | -0.2 | 0.1 |
| NO | 11.5 | 0.1 | 0.2 |
| Nondefense Aircraft | |||
| S | 7.9 | 3.2 | -1.5 |
| NO | 43.4 | -24.0 | 31.4 |
| Capital Goods | |||
| S | 0.6 | 1.6 | 1.0 |
| NO | 1.3 | -2.7 | 5.6 |
| Nondefense Capital Goods | |||
| S | 1.2 | 2.0 | 1.3 |
| NO | 2.4 | -2.6 | 5.4 |
| Nondefense Capital Goods Excluding Aircraft | |||
| S | 0.2 | 1.9 | 1.7 |
| NO | -1.5 | 0.6 | 1.9 |
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 7 of the report of the US Bureau of the Census of the Department of Commerce shows the significant fluctuations in durable goods news orders since Aug 2010. It is difficult to conclude on the strength of the sector. The resilience of growth after declines suggests continuing US economic growth in durable goods.
Chart 7, Durable Goods New Orders 2010-2911
Source: http://www.census.gov/briefrm/esbr/www/esbr021.html
Table 26 provides growth of new orders from Jan/Jul 2011 relative to Jan/Jul 2010 without seasonal adjustment. New orders rose 9.4 percent in the first seven months of 2011 relative to the first seven months of 2010 and excluding transport rose 9.2 percent in the same period. Nondefense capital goods excluding aircraft followed by markets rose 10.7 percent in the first seven months of 2011 relative to the same period in 2010. New orders are in current dollars. It is not possible to separate quantity and price effects in the data.
Table 26, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %
| Jan-Jul 2011/Jan-Jul 2010 ∆% | |
| Total | |
| S | 7.5 |
| NO | 9.4 |
| Excluding Transport | |
| S | 8.6 |
| NO | 9.2 |
| Excluding Defense | |
| S | 9.3 |
| NO | 10.8 |
| Computers & Electronic Products | |
| S | 3.0 |
| NO | 1.0 |
| Computers & Related Products | |
| S | 13.5 |
| NO | 12.8 |
| Transport Equipment | |
| S | 3.9 |
| NO | 10.4 |
| Motor Vehicles | |
| S | 10.7 |
| NO | 11.1 |
| Nondefense Aircraft | |
| S | 5.8 |
| NO | 29.1 |
| Capital Goods | |
| S | 4.7 |
| NO | 9.9 |
| Nondefense Capital Goods | |
| S | 8.9 |
| NO | 12.9 |
| Nondefense Capital Goods Excluding Aircraft | |
| S | 15.1 |
| NO | 10.7 |
Note: S: shipments; NO: new orders; Transport: transportation. Data not adjusted for seasonality and not adjusted for inflation.
Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
The comparison of growth of shipments and new orders of durable goods in the first six months of a year relative to the same period in the earlier year is provided in Table 27 for the years between 1995 and 2011. Durable goods are extremely cyclical as shown by the decline in new orders of 14.3 percent in the recession of 2001 and by 25.8 percent in 2009. Contractions of new orders of durable goods are followed by strong recoveries.
Table 27, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders
| Jan/Jul Relative to Earlier Year | Shipments ∆% | New Orders ∆% |
| 2011 | 7.5 | 9.4 |
| 2010 | 8.1 | 15.6 |
| 2009 | -19.2 | -25.8 |
| 2008 | 0.2 | -0.6 |
| 2007 | 0.1 | 1.2 |
| 2006 | 7.8 | 9.3 |
| 2005 | NA | NA |
| 2004 | 10.7 | 12.4 |
| 2003 | -1.0 | -0.1 |
| 2002 | 2.5 | 7.2 |
| 2001 | -8.4 | -14.3 |
| 2000 | -6.1 | 4.9 |
| 1999 | 7.6 | 10.0 |
| 1998 | 1.8 | 5.3 |
| 1997 | 10.2 | 4.9 |
| 1996 | 7.8 | 11.9 |
| 1995 | 5.6 | 6.5 |
Source: http://www.census.gov/manufacturing/m3/historical_data/index.html
The real estate sector of the US economy continues to operate at very depressed levels. New home sales in Table 28 fell 0.7 percent in Jul after declines of 2.9 percent in June and 2.2 percent in May. There were consecutive increases in Apr of 3.6 percent and in Mar of 8.5 percent that followed two sharp declines of 9.4 percent in Feb and 6.3 percent in Jan. The seasonally adjusted annual equivalent rate of 298 thousand in Jul 2011 is 9.9 percent below 331 thousand in Dec 2010.
Table 28, Sales of New Homes at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %
| SA Annual Rate Thousands | ∆% | |
| Jul 2011 | 298 | -0.7 |
| Jun | 300 | -2.9 |
| May | 309 | -2.2 |
| Apr | 316 | 3.6 |
| Mar | 305 | 8.5 |
| Feb | 281 | -9.4 |
| Jan | 310 | -6.3 |
| Dec 2010 | 331 | 15.3 |
Source: http://www.census.gov/const/newressales.pdf
The new home sales report also provides months of supply or ratio of houses for sale to houses sold expressed in months and the median and average prices of new homes, shown in Table 29. The number of months of supply and prices of new homes fluctuated in the first seven months of 2011. The number of months of supply is inversely related to house prices and stands at 6.6 months in Jul relative to 6.9 months in Dec 2010. The not-seasonally adjusted peak of months of supply in the recession occurred at 14.3 in Jan 2009 with numbers for months of supply exceeding 10 percent from Aug 2008 to Feb 2009 (http://www.census.gov/const/www/newressalesindex_excel.html). The not-seasonally adjusted median new home sales price of $222,000 in Jul 2011 is 7.9 percent lower than $241,200 in Dec 2010 and the average price of $272,300 in Jul 2011 is 6.7 percent lower than $291,700 in Dec 2010.
Table 29, New Home Stocks and Median and Average New Homes Sales Price
| Unsold* Stocks in Equiv. Months of Sales SA % | Median New Home Sales Price USD NSA | Month ∆% | Average New Home Sales Price USD NSA | Month ∆% | |
| Jul 2011 | 6.6 | 222,000 | -6.3 | 272,300 | 0.1 |
| Jun | 6.6 | 236,800 | 6.7 | 272,000 | 3.5 |
| May | 6.5 | 221,900 | -1.2 | 262,800 | -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/const/newressales.pdf
Table 30 provides sales of new homes not seasonally adjusted from the first seven months Jan-Jul 1995 to the first seven months Jan-Jul 2011 and percentage changes relative to Jan-Jul 2011. Sales of new homes are lower by 53.3 percent in Jan-Jul 2011 than in Jan-Jul 1995. There are declines for all years from 2000 to 2011 and for 1995. The highest declines are over 70 percent in 2003 to 2006. These were peak years in the sale of homes with subprime mortgages (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html).
Table 30, Sales of New Homes Not Seasonally Adjusted, Thousands and %
| Not Seasonally Adjusted Thousands | |
| Jan-Jul 2011 | 186 |
| Jan-Jul 2010 | 208 |
| ∆% | -10.6* |
| Jan-Jul 2009 | 225 |
| ∆% Jan-Jun 2011/ Jan-Jul 2009 | -17.3 |
| Jan-Jul 2008 | 327 |
| ∆% Jan-Jun 2011/ Jan-Jul 2008 | -43.1 |
| Jan-Jul 2007 | 516 |
| ∆% Jan-Jun 2011/ Jan-Jul 2006 | -63.9 |
| Jan-Jul 2006 | 668 |
| ∆% Jan-Jul 2011/Jan-Jun 2006 | -72.2 |
| Jan-Jul 2005 | 796 |
| ∆% Jan-Jun 2011/Jan-Jul 2005 | -76.6 |
| Jan-Jul 2004 | 739 |
| ∆% Jan-Jun 2011/Jan-Jul | -74.8 |
| Jan-Jul 2003 | 653 |
| ∆% Jan-Jun 2011/ Jan-Jul 2003 | -71.5 |
| Jan-Jul 2002 | 581 |
| ∆% Jan-Jun 2011/ Jan-Jul 2001 | -67.9 |
| Jan-Jul 2001 | 569 |
| ∆% Jan-Jun 2011/ Jan-Jul 2001 | -67.3 |
| Jan-Jul 2000 | 536 |
| ∆% Jan-Jun 2011/ Jan-Jul 2000 | -65.3 |
| Jan-Jul 1995 | 398 |
| ∆% Jan-Jun 2011/ Jan-Jul | -53.3 |
*Computed using unrounded data
Source: http://www.census.gov/const/www/newressalesindex.html
Chart 8 of the US Bureau of the Census shows the deep contraction of sales of new homes in the US from peaks in 2005 and 2006. There has been lateral movement in the series after it stopped declining.
Chart 8. US, New One-Family Houses Sold
Source: http://www.census.gov/briefrm/esbr/www/esbr051.html
Median and average new home sales prices are provided in Table 31 since 1963. Homes are not homogeneous in quality of construction. Location, as realtors advise their clients, is one of the prime determinants of house price, as for example, the price of a house in Manhattan relative to the same house in a remote rural locality
Table 31, US, Median and Average Sales Price of New Homes, USD
| Median Sales Price of New Homes Jul | Average Sales Price of New Homes Jun | |
| 2011 | $222,000 | $272,300 |
| 2010 | $212,100 | $252,100 |
| 2009 | $214,200 | $271,100 |
| 2008 | $247,300 | $301,900 |
| 2007 | $246,200 | $307,100 |
| 2006 | $238,100 | $311,300 |
| 2005 | $229,200 | $289,300 |
| 2004 | $212,400 | $279,200 |
| 2003 | $190,200 | $248,400 |
| 2002 | $175,600 | $217,800 |
| 2001 | $175,000 | $209,300 |
| 2000 | $169,000 | $202,200 |
| 1995 | $131,000 | $154,200 |
| 1990 | $118,700 | $149,800 |
| 1985 | $82,100 | $99,400 |
| 1980 | $64,000 | $76,700 |
| 1975 | $37,900 | $42,500 |
| 1970 | $22,900 | (NA) |
| 1963 | $18,400 | (NA) |
Source: http://www.census.gov/const/www/newressalesindex_excel.html
Median and average home prices have fallen from peaks in 2005 and 2006 relative to prices in 2011 but are still higher than in 2000, as shown in Table 32. New home median prices rose by 35.6 percent between 2000 and 2005 and by 43.1 percent for average home prices. The housing debacle was stimulated by low interest rates in 2003 and 2004 and then interrupted by the increase in interest rates by 25 basis points in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006. The increase in interest rates interrupted the increase in real estate values that frustrated refinancing of subprime mortgages which were programmed to occur in two to three years.
Table 32, US, Percentage Change of New Homes Median and Average Prices, NSA, ∆%
| Median New Home Sales Prices ∆% | Average New Home Sales Prices ∆% | |
| ∆% Jul 2000 to Jul 2003 | 12.5 | 22.8 |
| ∆% Jul 2000 to Jul 2005 | 35.6 | 43.1 |
| ∆% Jul 2000 to Jul 2011 | 31.4 | 34.7 |
| ∆% Jul 2005 to Jul 2011 | -3.1 | -5.9 |
| ∆% Jul 2006 to Jul 2011 | -6.8 | -12.5 |
| ∆% Jul 2009 to Jul 2011 | 3.6 | 0.4 |
| ∆% Jul 2010 to Jul 2011 | 4.7 | 8.0 |
Source: http://www.census.gov/const/www/newressalesindex_excel.html
Table 33 shows the euphoria of prices during the boom and the subsequent decline. House prices rose by 94.1 percent in the 10-city composite of the Case-Shiller home price index and 77.9 percent in the 20-city composite between May 2000 and May 2005. Prices have fallen 31.9 percent since 2006 for the 10-city composite and by 32.2 percent for the 20-city composite.
Table 33, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| ∆% May 2000 to May 2003 | 39.8 | 33.1 |
| ∆% May 2000 to May 2005 | 94.1 | 77.9 |
| ∆% May 2000 to May 2011 | 44.9 | 32.9 |
| ∆% May 2005 to May 2011 | -25.3 | -25.3 |
| ∆% Aug 2006 to May 2011 | -31.9 | -32.2 |
| ∆% May 2009 to May 2011 | 1.6 | -0.1 |
| ∆% May 2010 to May 2011 | -3.6 | -4.5 |
The seasonally adjusted S&P Case-Shiller indices are shown in Table 34. With the exception of Apr, prices have fallen in all months since Dec 2010.
Table 34, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| May | 0.1 | -0.1 |
| Apr | 0.4 | 0.4 |
| Mar | -0.3 | -0.6 |
| Feb | -0.4 | -0.3 |
| Jan | -0.4 | -0.3 |
| Dec 2010 | -0.4 | -0.4 |
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, calculates 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 35 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. The index for the US as a whole rose 59.5 percent between IIQ2000 and IIQ2006, NSA, and by more than 70 percent for New England, Middle Atlantic, South Atlantic but only by 31.6 percent for East South Central. Prices fell relative to 2011 from all years since 2005. From IIQ2000 to IIQ2011, prices rose for the US and the four regions in Table 35.
Table 35, US, FHFA House Price Index Purchases Only NSA ∆%
| United States | New England | Middle Atlantic | South Atlantic | East South Central | |
| 2Q2000 to 2Q2003 | 22.9 | 40.9 | 34.1 | 24.3 | 9.9 |
| 2Q2000 to 2Q2005 | 48.5 | 72.0 | 66.5 | 56.9 | 21.9 |
| 2Q2000 to 2Q2006 | 59.5 | 75.4 | 79.5 | 73.3 | 31.6 |
| 2Q2005 t0 2Q2011 | -12.4 | -11.9 | -1.1 | -17.2 | 1.6 |
| 2Q2006 to 2Q2011 | -18.4 | -13.6 | -8.3 | -25.1 | -5.9 |
| 2Q2007 to 2Q2011 | -19.4 | -12.3 | -9.9 | -26.6 | -10.2 |
| 2Q2009 to 2Q2011 | -7.5 | -4.8 | -3.8 | -10.9 | -6.6 |
| 2Q2010 to 2Q2011 | -5.8 | -2.4 | -3.2 | -7.8 | -4.6 |
| 2Q2000 to 2Q2011 | 30.0 | 51.5 | 64.6 | 29.8 | 23.8 |
Source:http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf
Data of the FHFA HPI for the remaining US regions are provided in Table 36. Behavior is not very different than in Table 35 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 36, US, FHFA House Price Index Purchases Only NSA ∆%
| West South Central | West North Central | East North Central | Moun-tain | Pacific | |
| 2Q2000 to 2Q2003 | 12.3 | 18.2 | 14.7 | 17.5 | 40.6 |
| 2Q2000 to 2Q2005 | 22.5 | 31.9 | 25.3 | 50.5 | 103.3 |
| 2Q2000 to 2Q2006 | 31.3 | 37.3 | 28.0 | 69.7 | 123.7 |
| 2Q2005 t0 2Q2011 | 12.2 | -5.7 | -15.2 | -20.8 | -32.7 |
| 2Q2006 to 2Q2011 | 4.7 | -9.3 | -17.0 | -29.7 | -38.8 |
| 2Q2007 to 2Q2011 | -0.6 | -10.9 | -16.4 | -31.9 | -36.9 |
| 2Q2009 to 2Q2011 | -1.2 | -6.3 | -7.8 | -14.6 | -8.7 |
| 2Q2010 to 2Q2011 | -1.9 | -5.7 | -5.1 | -9.7 | -9.1 |
| 2Q2000 to 2Q2011 | 37.5 | 24.4 | 6.2 | 19.2 | 36.8 |
Source: http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf
The FHFA HPI has been showing appreciation in the quarter Apr to Jun with a gain of 0.9 percent in Jun, as shown in Table 37. The 12 months rate of decrease has also declined to 4.3 percent.
Table 37, US, FHFA House Price Index Purchases Only SA. Month and 12 Months ∆%
| 2011 | Month ∆% | 12 Month ∆% |
| Jun | 0.9 | -4.3 |
| May | 0.4 | -6.2 |
| Apr | 0.3 | -6.3 |
| Mar | -0.4 | -6.0 |
| Feb | -1.6 | -5.6 |
| Jan | -1.1 | -4.8 |
Source: http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf
Chart 9 of the FHFA shows the HPI four-quarter price change falling sharply from IIQ2005 to IIQ2009. The four-quarter price change then erased significant part of the decline but then dropped again after IIQ2010.
Chart 9. FHFA House Price Index Four Quarter Price Change
Source: http://www.fhfa.gov/Default.aspx?Page=14
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. Economic indicators of the economy of Japan are provided in Table JPY. Japan has been recovering vigorously from the earthquake/tsunami of Mar 11, 2011. The major vulnerabilities of Japan’s recovery are whether international trade will continue to drive Japan’s growth and if risk aversion will subside such that capital inflow will not continue to appreciate the yen that is being used as safe-haven currency.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Jul ∆% 0.2 |
| Consumer Price Index | Jul SA ∆% 0.0 |
| Real GDP Growth | IIQ2011 ∆%: –0.3 on IQ2011; Seasonally adjusted annual equivalent rate ∆%: –1.3 |
| Employment Report | Jun Unemployed 2.93 million |
| All Industry Index | Jun month SA ∆% 2.3 |
| Industrial Production | Jun SA month ∆%: 3.9 |
| Machine Orders | Apr-Jun 2011 ∆% –9.6 |
| Tertiary Index | Jun month SA ∆% 1.19 |
| Wholesale and Retail Sales | Jun 12 months: |
| Trade Balance | Exports Jul 12 months ∆%: -3.3 Imports Jul 12 months ∆% 9.9 Blog 08/21/11 |
Links to blog comments in Table JPY:
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
VC China. Table CNY provides economic indicators for the economy of China. All indicators point to continuing strong growth. The HSBC flash China manufacturing PMI™ compiled by Markit (HSBC 2011Aug23) is based on data collected on Aug 12 to 19 and the first estimate is based on around 85 to 90 percent of responses in the total PMI survey. The final survey results will be released on Sep 1. The HSBC Flash China Manufacturing PMI™ registered 49.8 for Aug, which is higher than 49.3 in Jul and thus at a two-month high. The HSBC Flash China Manufacturing Output Index registered 49.4 in Aug, which is higher than 48.0 in Jul. This preliminary estimate shows output in manufacturing contracting at a slower rate but new orders changing direction into contraction. New export orders, which are quite important because China can be influenced by demand in advance economies, show contraction at a slower rate. Inflation of output prices, which is important in China, is moving at a faster rate, which is also the case of input prices.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Jul 12 months ∆%: 7.5 |
| Consumer Price Index | Jul month ∆%: 0.5 |
| Value Added of Industry | Jul 12 month ∆%: 14.0 |
| GDP Growth Rate | Year IIQ2011 ∆%: 9.6 |
| Investment in Fixed Assets | Jan-Jul ∆%: 25.4 |
| Retail Sales | Jul month ∆%: 1.3 |
| Trade Balance | Jul $31.5 billion |
Links to blog comments in Table CNY:
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
VD Euro Area. The economy of the euro area is decelerating. Euro area economic indicators are shown in Table EUR. GDP growth disappointed with only 0.2 percent in IIQ2011. Industrial production fell 0.7 percent in Jun. The Markit Flash Eurozone PMI® is based on data collected between Aug 12 and 22 and this preliminary estimate uses about 85 percent of typical monthly replies in the final survey that will be released on Sep 1 (Markit 2011Aug23EUR). There are four important indexes in the flash estimate. (1) The eurozone composite index was unchanged at 51.1 in Aug relative to Jul. (2) The services business activity index registered 51.5 in Aug, down from 51.6 in Jul, for the lowest level in 23 months. (3) The manufacturing index registered 49.7 in Aug, relative to 50.4 in Jul, for the lowest level in 23 months. The eurozone manufacturing output index registered 50.0 in Aug, relative to 50.2 in Jul, for the lowest level in 25 months. Chris Williamson, Chief Economist at Markit, finds eurozone growth in recent months to have been the lowest in about two years. The expectations segment of the survey suggests even slower growth in IIIQ2011 (Markit 2011Aug23EUR, 2
Table EUR, Euro Area Economic Indicators
| GDP | IIQ2011 ∆% 0.2; IIQ2011/IIQ2010 ∆% 1.7 Blog 08/21/11 |
| HICP | Month ∆%: -0.6 12 months Jun ∆%: 2.5 |
| Producer Prices | Jun month ∆%: 0.0 |
| Industrial Production | Jun month ∆%: -0.7 |
| Industrial New Orders | May month ∆%: 3.6 |
| Construction Output | May month ∆%: –1.1 |
| Retail Sales | Jun month ∆%: 0.9 |
| Trade | Jan-Jun 2011/2010 Exports ∆%: 16.8 |
Links to blog comments in Table EUR:
08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html
VE Germany. There is also evidence of slowing growth in the economy of Germany as shown in Table DE. GDP grew only 0.1 percent in IIQ2011. Industrial production fell 0.9 percent in Jun. The Markit Flash Eurozone PMI® finds that Germany’s economy is showing the weakest growth in the two years of recovery (Markit 2011Aug23EUR, 1). The services sector of Germany is close to stagnation. Manufacturing is moving forward but with the second lowest reading in 23 months (Ibid).
Table DE, Germany, Economic Indicators
| GDP | IIQ2011 0.1 ∆%; II/Q2011/IIQ2010 ∆% 2.7 |
| Consumer Price Index | Jul month SA ∆%: 0.4 |
| Producer Price Index | Jun month ∆%: 0.7 |
| Industrial Production | Jun month SA ∆%: –0.9 |
| Machine Orders | Jun month ∆%: 1.8 |
| Employment Report | Employment Accounts: |
| Trade Balance | Trade Balance NSA Jun €6.0 billion versus May €15.6 billion |
Links to blog comments in Table DE:
08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html
VF France. Table FR provides economic indicators for France. French GDP was flat in IIQ2011 relative to IQ2011 and industrial production fell 1.6 percent in Jun relative to May. Markit Flash Eurozone PMI® finds an increase in growth in France in Aug but only somewhat higher than in Jul, which was the lowest in 23 months (Markit 2011Aug23EUR, 1). While services grew again at the rate of Jun, manufacturing contracted for the first time since Jun 2009 (Ibid).
Table FR, France, Economic Indicators
| CPI | Jul month ∆% –0.4 12 months ∆%: 1.9 08/14/11 |
| PPI | Jun month ∆%: –0.1 |
| GDP Growth | IIQ2011/IQ2011 ∆%: 0.0 |
| Industrial Production | Jun/May SA ∆%: |
| Consumer Spending | Jun Manufactured Goods |
Links to blog comments in Table FR:
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
VF Italy. Table IT provides economic indicators for Italy. GDP growth in IIQ2011 relative to IQ2011 was 0.3 percent but GDP growth from the second quarter relative to the same quarter a year earlier was only 0.8 percent. Industrial production fell 0.6 percent in Jun and grew only 0.2 percent in 12 months.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Jul month ∆%: 0.3 |
| Producer Price Index | Jun month ∆%: 0.1 |
| GDP Growth | IIQ2011/IIQ2010 SA ∆%: 0.8 |
| Industrial Production | Jun month ∆%: –0.6 |
| Trade Balance | Balance Jun SA -€ 1,944 million versus May -€ 3,114 |
Links to blog comments in Table IT:
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
VG United Kingdom. Economic indicators of the UK are provided in Table UK. GDP grew 0.2 percent in IIQ2011 relative to the prior quarter and 0.7 percent relative to a year earlier. Retail sales stagnated in Jul 2011 relative to Jul 2010. The UK GDP report is analyzed in detail below.
Table UK, UK Economic Indicators
| CPI | Jul month ∆%: 0.0 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IIQ2011 prior quarter ∆% 02; year earlier same quarter ∆%: 0.7 |
| Industrial Production | Jun 2011/Jun 2010 NSA ∆%: Industrial Production -0.3; Manufacturing 2.1 |
| Retail Sales | Jul month SA ∆%: 0.2 |
| Labor Market | Apr-Jun Unemployment Rate: 7.9% |
| Trade Balance | Balance Jun -₤4,496 billion |
Links to blog comments in Table UK:
08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html
08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html
07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html
07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html
The rate of GDP growth of the UK fell from 0.5 percent in IQ2011 and 1.6 percent relative to a year earlier to 0.2 percent in IIQ2011 and 0.7 percent relative to a year earlier. This is still good recovery from the drop of 0.5 percent in IVQ2010. Table 38 shows strong impact of the global recession on the economy of the UK with high quarter on quarter drops in GDP.
Table 38, UK GDP Growth ∆%
| Quarter/Prior Quarter | Quarter/Quarter Prior Year | |
| IIQ2011 | 0.2 | 0.7 |
| IQ2011 | 0.5 | 1.6 |
| IVQ2010 | -0.5 | 1.5 |
| IIIQ2010 | 0.6 | 2.4 |
| IIQ2010 | 1.1 | 1.6 |
| IQ2010 | 0.4 | -0.2 |
| IVQ2009 | 0.5 | -2.9 |
| IIIQ2009 | -0.3 | -5.3 |
| IIQ2009 | -0.8 | -5.9 |
| IQ2009 | -2.2 | -5.4 |
Source:http://www.statistics.gov.uk/pdfdir/gdp0711.pdf
Table 39 provides UK GDP percentage change from the prior quarter. Performance during the recovery in 2010 and 2011 is weaker than in 2006 and 2007.
Table 39, UK, Percentage Change of GDP from Prior Quarter, ∆%
| IQ | IIQ | IIIQ | IV | |
| 2011 | 0.5 | 0.2 | ||
| 2010 | 0.4 | 1.1 | 0.6 | -0.5 |
| 2009 | -2.1 | -0.7 | -0.3 | 0.6 |
| 2008 | 0.5 | -0.4 | -1.1 | -2.1 |
| 2007 | 1.0 | 0.6 | 0.6 | 0.3 |
| 2006 | 1.3 | 0.4 | 0.5 | 0.8 |
Source: http://www.statistics.gov.uk/statbase/TSDdownload1.asp
UK GDP growth in the current quarter relative to the same quarter a year earlier is provided in Table 40. Performance is here again shown to be weaker in the expansion in 2010 and 2011 than in 2007 and 2006.
Table 40, UK, Percentage Change of GDP from Same Quarter a Year Earlier, ∆%
| IQ | IIQ | IIIQ | IV | |
| 2011 | 1.7 | 0.7 | ||
| 2010 | 0.0 | 1.9 | 2.8 | 1.6 |
| 2009 | -5.6 | -5.9 | -5.1 | -2.5 |
| 2008 | 2.0 | 1.1 | -0.7 | -3.0 |
| 2007 | 2.7 | 2.9 | 3.1 | 2.5 |
| 2006 | 3.4 | 3.1 | 3.0 | 3.0 |
Source: http://www.statistics.gov.uk/statbase/TSDdownload1.asp
Weakness in the recovery of UK GDP is even clearer in Chart 10. Four quarter growth rates recovered after IIQ2009 but peak in IIIQ2010 and then declined toward zero. Rates of GDP growth of a quarter on the prior quarter have registered two declines.
Chart 10, UK, GDP Growth
Source: http://www.statistics.gov.uk/cci/nugget.asp?id=192
UK GDP growth by gross value added is provided in Table 41. Growth in IIQ2011 on a four quarter basis is weaker than in 2010 relative to 2009. While manufacturing grew 3.6 percent in 2010 relative to 2009, four quarter growth in II2011 was much lower at 2.1 percent. Growth of services of 0.5 percent in IIQ2011/IQ2011 prevented contraction in the quarter
Table 41, UK, GDP Growth by Gross Value Added
| IIQ2011/ IQ2011 | IIQ2011/ IIQ2010 | 2010/2009 | |
| GDP | 0.2 | 0.7 | 1.3 |
| Agriculture | -1.4 | -0.6 | -3.5 |
| Industrial Production | -1.6 | -0.8 | 2.2 |
| Manu- facturing | -0.5 | 2.1 | 3.6 |
| Services | 0.5 | 1.2 | 1.1 |
Source: http://www.statistics.gov.uk/pdfdir/oie0811.pdf
Percentage point contributions to growth of IIQ2011 UK GDP and weights of sectors are shown in Table 42. While production industries with a weight of 17.2 percent contributed minus 0.2 percentage points, various categories of services contributed 0.4 percentage points for net growth of 0.2 percent. The report of the UK GDP provides analysis of special factors in the performance of IIQ2011 (http://www.statistics.gov.uk/pdfdir/oie0811.pdf).
Table 42, UK, Contributions by Sectors to GDP Growth in IIQ2011
| Weight % | Percentage Points Contributions | |
| GDP | 100 | |
| Agriculture, Forestry and Fishing | 0.7 | 0.0 |
| Production Industries | 17.2 | -0.2 |
| Construction | 6.3 | 0.0 |
| Distribution, Hotels and Restaurants | 14.4 | 0.1 |
| Transport, Storage and Communication | 7.1 | 0.1 |
| Business Services and Finance | 31 | 0.2 |
| Government and Other Services | 23.4 | 0.0 |
Source: http://www.statistics.gov.uk/pdfdir/oie0811.pdf
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 43 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 trade 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 43 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 21.6 percent by Fri Aug 26, 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. The last row of Table 43 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 43, 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 | 08/26 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.450 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 08/26 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3875 |
| 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://online.wsj.com/mdc/page/marketsdata.html
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 44 extracts four rows of Table 43 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 46 below, the dollar has devalued again to USD 1.450/EUR or by 21.6 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 until it revalued 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 6.3875/USD on Fri Aug 26, 2011, or by an additional 6.3 percent, for cumulative revaluation of 22.8 percent.
Table 44, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 08/26 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.450 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 08/26 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3875 |
Source: Table 43.
Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) at 3.2 percent of GDP in 2011 and also in 2012, as shown in Table 45. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.7 percent of GDP in 2011 to 6.3 percent of GDP in 2012.
Table 45, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP $B | FD %GDP 2011 | CAD %GDP 2011 | Debt %GDP 2011 | FD%GDP 2012 | CAD%GDP 2012 | Debt %GDP 2012 | |
| US | 15227 | -10.6 | -3.2 | 64.8 | -10.8 | -3.2 | 72.4 |
| Japan | 5821 | -9.9 | 2.3 | 127.8 | -8.4 | 2.3 | 135.1 |
| UK | 2471 | -8.6 | -2.4 | 75.1 | -6.9 | -1.9 | 78.6 |
| Euro | 12939 | -4.4 | 0.03 | 66.9 | -3.6 | 0.05 | 68.2 |
| Ger | 3519 | -2.3 | 5.1 | 54.7 | -1.5 | 4.6 | 54.7 |
| France | 2751 | -6.0 | -2.8 | 77.9 | -5.0 | -2.7 | 79.9 |
| Italy | 2181 | -4.3 | -3.4 | 100.6 | -3.5 | -2.9 | 100.4 |
| Can | 1737 | -4.6 | -2.8 | 35.1 | -2.8 | -2.6 | 36.3 |
| China | 6516 | -1.6 | 5.7 | 17.1 | -0.9 | 6.3 | 16.3 |
| Brazil | 2090 | -2.4 | -2.6 | 39.9 | -2.6 | -2.9 | 39.4 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
Source: http://www.imf.org/external/pubs/ft/weo/2011/01/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 43 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 46, 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 08/26/11,” which is now stalling or reversing amidst profound risk aversion. Recovering risk financial assets are in the range from 7.9 percent for the Dow Global and 29.9 percent for the DJ UBS Commodity Index. Before the current round of risk aversion, all assets in the column “∆% Trough to 08/26/11” had double digit gains relative to the trough around Jul 2, 2010. There are now several valuations lower than those at the trough around Jul 2: European stocks index STOXX 50 is now 6.8 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 3.7 percent below the trough on Jul 2, 2010; Germany DAX index is 2.3 percent below; and Japan’s Nikkei is 0.3 percent below the trough on Aug 31, 2010 and 22.8 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8797.78 on Fri Aug 26, which is 14.2 percent below 10,254.43 on Mar 11 on the date of the earthquake. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 21.6 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 08/26/2011” shows positive performance of all financial assets led by gains of 4.3 percent for the DJIA and 4.7 percent for the S&P500. There are still high uncertainties on European sovereign risks, US debt/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 46 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 8/26/11” that provides the percentage from the peak in Apr 2010 before the sovereign risk event to Jul 29. Most financial risk assets had gained not only relative to the trough as shown in column “∆% Trough to 8/26/11” but also relative to the peak in column “∆% Peak to 8/26/11.” Only two indexes are now above the peak, DJ UBS Commodity Index by 11.1 percent and DJIA by 0.7 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 23.3 percent, Nikkei Average by 22.8 percent, Shanghai Composite by 17.5 percent and STOXX 50 by 21.1 percent. The factors of risk aversion have adversely affected the performance of financial risk assets. The performance relative to the peak in Apr 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.
Table 46, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 8/ 26/11 | ∆% Week 8/ | ∆% Trough to 8/ | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 0.7 | 4.3 | 16.5 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | -3.3 | 4.7 | 15.1 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -23.3 | 3.4 | -3.7 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -11.9 | 2.8 | 7.9 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -5.2 | 0.4 | 8.3 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -22.8 | 0.9 | -0.3 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -17.5 | 3.1 | 9.6 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -21.1 | 0.9 | -6.8 |
| DAX | 4/26/ | 5/25/ | -10.5 | -12.5 | 1.0 | -2.3 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 4.2 | 0.8 | -21.6 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | 11.1 | 1.3 | 29.9 |
| 10-Year Tre. | 4/5/ | 4/6/10 | 3.986 | 2.202 |
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://online.wsj.com/mdc/page/marketsdata.html.
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 47 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 47 for Aug 26 shows that the S&P 500 is now 2.9 percent below the Apr 26, 2010 level and the DJIA is only 0.7 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.
Table 47, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from earlier date | ∆% DJIA from | ∆% S&P 500 from earlier date | ∆% S&P 500 from |
| 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 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004
Table 48, 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, the large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and zero interest rates indefinitely but with interruptions caused by risk aversion events.
Table 48, Exchange Rates
| Peak | Trough | ∆% P/T | Aug 26, 2011 | ∆T Aug 26 2011 | ∆P Aug 26 2011 | |
| EUR USD | 7/15 | 6/7 2010 | 8/26 2011 | |||
| Rate | 1.59 | 1.192 | 1.450 | |||
| ∆% | -33.4 | 17.8 | -9.7 | |||
| JPY USD | 8/18 | 9/15 | 8/26 2011 | |||
| Rate | 110.19 | 83.07 | 76.65 | |||
| ∆% | 24.6 | 7.7 | 30.4 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 8/26 2011 | |||
| Rate | 1.225 | 1.025 | 0.811 | |||
| ∆% | 16.3 | 20.9 | 33.8 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 8/26 2011 | |||
| Rate | 2.006 | 1.388 | 1.637 | |||
| ∆% | -44.5 | 15.2 | -22.5 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 8/26 | |||
| Rate | 1.0215 | 1.6639 | 1.057 | |||
| ∆% | -62.9 | 43.1 | 7.4 | |||
| ZAR USD | 10/22 2008 | 8/15 | 8/26 2011 | |||
| Rate | 11.578 | 7.238 | 7.134 | |||
| ∆% | 37.5 | 1.4 | 38.4 | |||
| SGD USD | 3/3 | 8/9 | 8/26 | |||
| Rate | 1.553 | 1.348 | 1.202 | |||
| ∆% | 13.2 | 10.8 | 22.6 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 8/26 | |||
| Rate | 7.813 | 7.752 | 7.795 | |||
| ∆% | 0.8 | -0.6 | 0.2 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 8/26 2011 | |||
| Rate | 2.43 | 1.737 | 1.604 | |||
| ∆% | 28.5 | 7.7 | 33.9 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 8/26 | |||
| Rate | 22.19 | 18.693 | 16.577 | |||
| ∆% | 15.7 | 11.3 | 25.3 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 8/26 2011 | |||
| Rate | 9.313 | 7.108 | 6.297 | |||
| ∆% | 23.7 | 11.4 | 32.4 | |||
| CNY USD | 7/20 2005 | 7/15 | 8/26 | |||
| Rate | 8.2765 | 6.8211 | 6.3875 | |||
| ∆% | 17.6 | 6.3 | 22.8 |
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://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Table 49, 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 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 49. 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. The Fed 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 earthquake and tsunami in Japan and now again by the sovereign risk doubts in Europe and the growth recession in the US. The yield of 2.202 percent at the close of market on Fr Aug 26, 2011, would be equivalent to price of 103.7781 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 2.5 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. 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 earthquake and tsunami affecting Japan and recurring fears on European sovereign credit issues. The realization of a growth standstill recession is also influencing yields. Important causes of the rise in yields shown in Table 49 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (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 Aug 24, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2843 billion, or $2.8 trillion, with portfolio of long-term securities of $2623 billion, or $2.6 trillion, consisting of $1555 billion Treasury nominal notes and bonds, $66 billion of notes and bonds inflation-indexed, $110 billion Federal agency debt securities and $892 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1608 billion or $1.6 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 I, has been affecting financial markets for several weeks. 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 49, 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 |
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://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020
VII Economic Indicators. Crude oil input in refineries rose to 15,549 thousand barrels per day on average in the four weeks ending on Aug 19 from 15,473 thousand barrels per day in the four weeks ending on Aug 12, as shown in Table 50. The rate of capacity utilization in refineries continues at a high level close to 90 percent. Imports of crude oil fell from 9,305 thousand barrels per day on average to 9,047 thousand barrels per day. Increasing utilization with decreasing imports resulted in decrease of commercial crude oil stocks by 2.2 million barrels from 354.0 million on Aug 12 to 351.8 million on Aug 19. Gasoline stocks fell 1.3 million barrels and stocks of fuel oil fell 1.7 million barrels. The most worrisome fact is that supply of gasoline fell from 9,387 thousand barrels per day on Aug 20, 2010, to 9,336 thousand barrels per day on Aug 19, 2011, or by 2.4 percent, while fuel oil supply rose 8.3 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 50 also shows increase in the world oil price by 42.9 percent from Aug 23, 2010 to Aug 22, 2011. Gasoline prices rose by 32.4 percent from Aug 23, 2010 to Aug 22, 2011.
Table 50, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 08/19/11 | 08/12/11 | 08/20/10 |
| Crude Oil Refineries Input | 15,549 | 15,473 | 15,192 |
| Refinery Capacity Utilization % | 89.7 | 89.1 | 89.2 |
| Motor Gasoline Production | 9,336 | 9,298 | 9,443 |
| Distillate Fuel Oil Production | 4,595 | 4,565 | 4,333 |
| Crude Oil Imports | 9,047 | 9,305 | 9,596 |
| Motor Gasoline Supplied | 9,166 ∆% 2011/2010= –2.4% | 9,163 | 9,387 |
| Distillate Fuel Oil Supplied | 3,837 ∆% 2011/2010 = 8.3% | 3,739 | 3,542 |
| 08/19/11 | 08/12/11 | 08/20/10 | |
| Crude Oil Stocks Million B | 351.8 ∆= –2.2 MB | 354.0 | 358.3 |
| Motor Gasoline Million B | 211.4 ∆= 1.3 MB | 210.1 | 225.6 |
| Distillate Fuel Oil Million B | 155.7 ∆= 1.7 MB | 154.0 | 176.0 |
| World Crude Oil Price $/B | 105.48 ∆% 2011/2010 42.9 | 102.34 | 73.81 |
| 08/22/11 | 08/15/11 | 08/23/10 | |
| Regular Motor Gasoline $/G | 3.581 ∆% 2011/2010 | 3.604 | 2.704 |
B: barrels; G: gallon
Initial claims for unemployment insurance seasonally adjusted increased 5,000 to reach 417,000 in the week of Aug 20 from 412,000 in the week of Aug13, as shown in Table 51. Claims not seasonally adjusted, or the actual estimate, fell 4,536 to reach 341,436 in the week of Aug 20 from 345,972 in the week of Aug13.
Table 51, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Aug 20 | 417,000 | 341,436 | 407,500 |
| Aug 13 | 412,000 | 345,972 | 403,500 |
| Change | +5,000 | -4,536 | +4,000 |
| Aug 6 | 399,000 | 354,408 | 406,000 |
| Prior Year | 469,000 | 384,955 | 477,250 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
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 52 provides inflation of the CPI. In Jan-Jul 2011, CPI inflation for all items seasonally adjusted was 4.1 percent in annual equivalent, that is, compounding inflation in the first seven months and assuming it would be repeated during the remainder of 2011. In the 12 months ending in Jul, CPI inflation of all items not seasonally adjusted was 3.6 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.6 percent annual equivalent in Jan-Jun and 1.8 percent in 12 months. Bloomberg provides the yield curve of US Treasury securities at 12:39AM New York time Aug 29 (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is -0.02 percent for three months or zero, 0.01 percent for six months, 0.08 percent for 12 months, 0.20 percent for two years, 0.34 percent for three years, 0.96 percent for five years, 1.56 percent for seven years, 2.21 percent for ten years and 3.55 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 52. 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 52, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| ∆% 12 Months Jul 2011/Jul | ∆% Annual Equivalent Jan-Jul 2011 SA | |
| CPI All Items | 3.6 | 4.1 |
| CPI ex Food and Energy | 1.8 | 2.6 |
Source: http://www.bls.gov/news.release/pdf/cpi.pdf
IX Conclusion. Growth recession does not necessarily lead to another contraction. The US economy is in perilous standstill that could lead to continuing slow growth or even contraction. There is more evidence of deceleration in Europe than in the US and Asia. Financial turbulence may continue because of the shocks of risk aversion resulting from the lack of a definitive resolution of European sovereign risks. Monetary policy should move toward conventional impulses
(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.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
© Carlos M. Pelaez, 2010, 2011
