CMP Associates Regulation Blog: October 2011

Slow Growth Driven by Reducing Savings, Declining Real Disposable Income, World Financial Turbulence, Global Inflation and World Economic Slowdown

Carlos M. Pelaez

Executive Summary

I Slow Growth Driven by Reducing Savings

II Declining Real Disposable Income

III World Financial Turbulence

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

Executive Summary

In the first three quarters of 2011, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.4 percent in the first quarter of 2011 (IQ2011), 1.3 percent in IIQ2011 and 2.5 percent in IIIQ2011. The annual equivalent rate of growth of GDP for 2011 is 1.39 percent, or 1.4 percent, obtained as follows. Discounting 0.4 percent to one quarter is 0.1 percent (1.004)^1/4; discounting 1.3 percent to one quarter is 0.32 percent; and discounting 2.5 percent to one quarter is 0.62 percent. Real GDP growth in the first three quarters of 2011 accumulated to 1.04 percent {[(1.001 x 1.0032 x 1.0062)-1]100}, which is equal to 1.39 percent for an entire year of four quarters (compounding 1.04 by 4/3) (1.0104)^4/3. The US economy is still close to a standstill especially considering the GDP report in detail, which explains the weakness in labor markets.

Table ES1 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.5 percent of the US economy in the nine quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. Bureau of Economic Analysis data for the three quarters of 2011 show the economy in standstill with annual equivalent growth of 1.4 percent. The expansion of IQ1983 to IV1985 was at the average annual growth rate of 5.7 percent.

Table ES1, 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 IIIQ2011	9	5.6	2.5

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

Chart ES1 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions. Growth rates in the early phase of the recovery were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart ES1, US, Real GDP Percentage Change on Quarter a Year Earlier 1983-1984

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable first nine months of expansion in 2009 and 2011 in Chart ES2 have been mediocre. As a result, growth has not provided the exit from unemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions. In a growth recession the economy grows slowly in contrast with contractions of economic activity in normal recessions.

Chart ES2, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2011

Source: US Bureau of Economic Analysis

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

Growth of 2.5 percent at seasonally-adjusted annual rate (SAAR) of GDP in IIIQ2011 consisted of positive contributions of 1.72 percentage points of personal consumption expenditures (PCE) + 0.52 percentage points of gross domestic investment (GDI) + 0.22 percentage points of net exports (net trade or exports less imports). Families suffered decline of real disposable income, or income after inflation and taxes, of 1.7 percent in IIIQ2011 but still consumed by drawing down savings as percent of personal income from 5.1 in IIQ011 to 4.1 in IIIQ2011. Table ES2 provides the data.

Table ES2, US, Percent Change of Real Disposable Personal Income in Seasonally-Adjusted Annual Rate and Personal Savings as % of Disposable Income

	IVQ2010	IQ2011	IIQ2011	IIIQ2011
Real Disposable Personal Income*	1.5	1.2	0.6	-1.7
Personal Savings As % Disposable Income	5.2	5.0	5.1	4.1

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 quarter one year ago

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_adv.pdf

Table ES3 reveals the weakness of the economy and of family budgets. The column RDPI (real disposable income) shows that after nine months in 2011 in Jan-Sep growth of RDPI has accumulated to minus 0.3 percent, which for a full year is equivalent to minus 0.4 percent. Income after inflation and taxes is contracting. Growth of real personal consumption expenditures accumulated to 1.4 percent in Jan-Sep, which is equivalent to yearly growth of minus 1.9 percent. Inflation creates the illusion that there has been growth of income, when in fact RDPI stagnated, and growth of consumption, which in fact has grown at the mediocre annual rate of 1.9 percent. Growth is the result of drawing down savings instead of growth of income and opportunities. The final two rows of Table ES3 show the much better economy and family income in IVQ2010.

Table ES3, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
Jan-Sep 2011	3.3	3.1	-0.3	3.9	1.4
Jan-Sep 2011 AE	4.5	4.2	-0.4	5.2	1.9
IVQ10	1.1	1.1	0.5	1.4	0.8
IVQ2010 AE	4.5	4.5	2.0	5.7	3.2

Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf

Table ES4 provides the 12 months rates of growth of personal income and personal consumption expenditures. Real disposable personal income grew at 3.2 percent in Dec 2010 relative to Dec 2009 but grew only 0.2 percent in the 12 months ending in Sep 2011 and 0.1 percent in the 12 months ending in Aug 2011. Income after taxes and inflation has stagnated in the 12 months ending in Sep but is contracting at the margin in the annual equivalent of Jan-Sep.

Table ES4, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2011
Sep	0.2	2.2	3.1	6.8	1.8
Aug	0.1	1.9	2.5	5.9	1.7
2010
Dec	3.2	2.8	5.4	10.2	1.6

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf http://www.bea.gov/iTable/index_nipa.cfm

Table ES5 provides the annual equivalent quarterly rate of inflation of personal consumption expenditures (PCE) in Jul-Sep. Headline inflation of personal consumption expenditures in Jul-Sep is equivalent to 4.5 percent per year.

Table ES5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
∆% AE Jul-Sep	4.5	5.7	-2.4	2.0	1.6	6.2	27.3

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

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

Chart ES3 provides 12 months percentage changes of wages and salaries in the private sector from the employment cost index (ECI) of the Bureau of Labor Statistics (BLS) of the US Department of Labor. Rates fell in the first part of the decade and then rose into 2007. Rates of change in 12 months of wages and salaries in the private sector fell during the global contraction to barely above 1 percent and have not rebounded while inflation has returned.

Chart ES3, US, ECI, Wages and Salaries, Private Industry, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart ES4 of the Bureau of Labor Statistics (BLS) of the US Department of Labor provides the 12 months rates of change of the consumer price index of the US. Inflation has risen sharply into 2011 with 3.9 percent in the 12 months ending in Sep while wage and salary increases in the private sector have risen by 1.7 percent in the 12 months ending in Sep.

Chart ES4, US, Consumer Price Index, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The current environment is of high unemployment/underemployment of about 29 million people. Those working face dramatic decline in hiring that limits the opportunities to seek improvement in another job: there is no escape from declining income after inflation and taxes. The economy continues to expand driven by drawing down on savings, which is new way of living beyond your income. There is disincentive to save in the pennies received in interest from thousands of dollars of bank deposits but monetary policy insists that zero interest rates are required to force us into consuming and investing. Social dimensions are worrisome. There are 46.180 million people in poverty in the US or 15.1 percent of the population, one of the highest three percentages since 1996 (see http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). There are 49.985 million people in the US without health insurance. Median household income of $49,445 is the worst since 1996. Households have lost $5.8 trillion of net worth since 2007 and $5.1 trillion in real estate.

I Slow Growth Driven by Reducing Savings. In the first three quarters of 2011, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.4 percent in the first quarter of 2011 (IQ2011), 1.3 percent in IIQ2011 and 2.5 percent in IIIQ2011. The annual equivalent rate of growth of GDP for 2011 is 1.39 percent, or 1.4 percent, obtained as follows. Discounting 0.4 percent to one quarter is 0.1 percent; discounting 1.3 percent to one quarter is 0.32 percent; and discounting 2.5 percent to one quarter is 0.62 percent. Real GDP growth in the first three quarters of 2011 accumulated to 1.04 percent {[(1.001 x 1.0032 x 1.0062)-1]100}, which is equal to 1.39 percent for an entire year of four quarters (compounding 1.04 by 4/3) (1.0104)^4/3. The US economy is still close to a standstill especially considering the GDP report in detail. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thu Oct 27 the estimate of GDP for IIIQ2011 at 2.5 percent seasonally-adjusted annual rate (SAAR). 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 29.3 million people in job stress, consisting of an effective number of unemployed of 18.4 million, 8.4 million employed part-time because they cannot find full employment and 2.5 million marginally attached to the labor force (see Table 3 in http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.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 realized 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, US, 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

Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&Freq=Qtr&FirstYear=2008&LastYear=2010

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 4.8 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 advance estimate of IIIQ2011 released on Oct 27, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_adv.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 nine 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 nine quarters of expansion from IIIQ2009 to IIIQ2011, shown in relief in Table 2, were mediocre: 1.7, 3.8, 3.9, 3.8, 2.5, 2.3, 0.4, 1.3 and 2.5. Asterisks denote the estimates that have been revised by the BEA. During three quarters of a year GDP has been growing at annual equivalent rates of 0.4 percent in IQ2011, 1.3 percent in IIQ2011 and 2.5 percent in IIIQ2011 in what can be considered as a slow growth recession because of the 29.3 million in job stress. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983.

Table 2, US, 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			1.3
III				6.4			2.5
IV				3.1

Source: http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp3q11_adv.pdf

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) define 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

Chart 3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table 2. Growth rates in the early phase of the recovery were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart 3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1984

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable first nine months of expansion in 2009 and 2011 in Chart 4 have been mediocre. As a result, growth has not provided the exit from unemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart 4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2011

Source: US Bureau of Economic Analysis

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 quarters 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 2.5 percent of the US economy in the nine quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the three quarters of 2011 show the economy in standstill with annual equivalent growth of 1.4 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 IIIQ2011	9	5.6	2.5

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

Chart 5 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 5, US, Real GDP, 1980-1989

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

Chart 6 shows the entirely different situation of the real quarterly GDP in the US between 2007 and 2011. The economy has underperformed during the first nine quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy now is in a perilous standstill.

Chart 6, 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 5.6 percent (last row in Table 4). As a result, the level of real GDP in IIQ2011 with the third estimate is only higher by 0.2 percent than the level of real GDP in IVQ2007. Table 5 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth 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 4.0 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 0.33 percent in IIQ2011. The economy grew by 0.6 percent in IIIQ2011. 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 1.6 percent in both IIQ2011 and IIIQ2011. The revision of the seasonally adjusted annual rate in IIQ2011 from 1.0 percent to 1.3 percent merely increases growth in IIQ2011 relative to IQ2011 from 0.25 percent to 0.33 percent. There is stronger quarterly growth in IIIQ2011 of 0.6 percent. Growth in IIQ2011 relative to IIQ2010 and in IIIQ2011 relative to IIIQ2010 remains at the equal mediocre rate of 1.6 percent. 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. Forecasts of various sources continued to maintain high growth in the second half of 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011.

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	13,271.8	-0.4	0.33	1.6
IIIQ2011	13,352.8	0.2	0.6	1.6

Source: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Chart 7 provides the percentage change of GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

Chart 7, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

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

The experience of recovery after 2009 is not as complete as during the 1980s. Chart 8 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak.

Chart 8, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2011

Source: US Bureau of Economic Analysis

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

Chart 9 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

Chart 9, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

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

Chart 10 provides growth rates in a quarter relative to the prior quarter. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart 10, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2011

Source: US Bureau of Economic Analysis

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

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, US, 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 IIIQ2011. Growth of 2.5 percent at seasonally-adjusted annual rate (SAAR) of GDP in IIIQ2011 consisted of positive contributions of 1.72 percentage points of personal consumption expenditures (PCE) + 0.52 percent points of gross domestic investment (GDI) + 0.22 percentage points of net exports (net trade or exports less imports). Families suffered decline of real disposable income of 1.7 percent in IIIQ2011 but still consumed by drawing down savings as percent of personal income from 5.1 in IIQ011 to 4.1 in IIIQ2011.

Table 7, US, 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	1.3	0.49	0.79	-0.28	0.24	-0.18
III	2.5	1.72	0.52	-1.08	0.22	0.00
2010
I	3.9	1.92	3.25	3.10	-0.97	-0.26
II	3.8	2.05	2.92	0.79	-1.94	0.77
III	2.5	1.85	1.14	0.86	-0.68	0.20
IV	2.3	2.48	-0.91	-1.79	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/gdp3q11_adv.pdf

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr

Important aspects of the national accounts are provided in Table 8. The top part of the table identifies sources of change in the rate of growth from one quarter to a future quarter by seasonally-adjusted annual rates (SAAR). The increase in growth in IIIQ2011 relative to the IIQ2011 originated in: (1) increase of personal consumption expenditures by 2.4 percent compared with 0.7 percent of which an increase of consumption of durable goods by 4.1 percent compared with decline by 5.3 percent in IIQ2011; (2) increase in growth of nonresidential fixed investment (NRFI) from 10.1 percent in IIQ2011 to 16.3 percent in IIIQ2011; (3) increase of exports from 3.6 percent in IIQ2011 to 4.0 percent in IIIQ2011; (4) deceleration of decline of state/local government expenditures from minus 2.8 percent in IIQ2011 to minus 1.3 percent in IIIQ2011; and (5) increase in federal government expenditures from 1.9 percent in IIQ2011 to 2.0 percent in IIIQ2011. Negative contributions to acceleration of growth into IIIQ2011 originated in: (1) acceleration of imports from 1.4 percent in IIQ2011 to 1.9 percent in IIIQ2011; and (2) deceleration of residential fixed (RFI) investment from 4.2 percent to 2.4 percent.

Table 8, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IVQ2010	IQ2011	IIQ2011	IIIQ2011
GDP	2.3	0.4	1.3	2.5
PCE	3.6	2.1	0.7	2.4
Durable Goods	17.2	11.7	-5.3	4.1
NRFI	8.7	2.1	10.1	16.3
RFI	2.5	-2.4	4.2	2.4
Exports	7.8	7.9	3.6	4.0
Imports	-2.3	8.3	1.4	1.9
GOV	-2.8	-5.9	-0.9	0.0
Federal GOV	-3.0	-9.4	1.9	2.0
State/Local GOV	-2.7	-3.4	-2.8	-1.3
∆ PI (PP)	-1.79	0.32	-0.28	-1.08
Final Sales of Domestic Product	4.2	0.0	1.6	3.6
Gross Domestic Purchases	0.9	0.7	1.0	2.2
Prices Gross Domestic Purchases	1.4	1.9	2.6	2.9
Prices of GDP	1.6	1.8	2.1	2.4
Prices of GDP Excluding Food and Energy	1.3	1.5	1.8	2.1
Prices of PCE	1.9	3.9	3.3	2.4
Prices of PCE Excluding Food and Energy	0.7	1.6	2.3	2.1
Prices of Market Based PCE	1.8	4.0	3.5	2.6
Prices of Market Based PCE Excluding Food and Energy	0.3	1.3	2.4	2.3
Real Disposable Personal Income*	1.5	1.2	0.6	-1.7
Personal Savings As % Disposable Income	5.2	5.0	5.1	4.1

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/gdp3q11_adv.pdf

Final sales of domestic product rose from 1.6 percent in IIQ2011 to 3.6 percent in IIIQ2011. Price indicators of GDP and gross domestic purchases accelerated into IIIQ2011. Prices of PCE excluding food and energy, which is the inflation indicator of monetary policy, fell from change of 2.3 percent in IIQ2011 to 2.1 percent in IIIQ2011. Similar behavior is observed for the other market-based price indexes. The final two rows of Table 8 show decline in real disposable income by 1.7 percent and of personal savings as percent of disposable income to 4.1 percent. Families interrupted saving and consumed.

Percentage shares of GDP are shown in Table 9. 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 9, 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 10 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 10, US, 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/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf

II Declining Real Disposable Income. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. There are two types of very valuable information on income, consumption and prices in Table 11, showing monthly, and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE.

First, the data in Table 11 reveal the weakness of the economy. The column RDPI (real disposable income) shows that after nine months in 2011 in Jan-Sep growth of RDPI has accumulated to minus 0.3 percent, which for a full year is equivalent to minus 0.4 percent. Growth of real personal consumption expenditures accumulated to 1.4 percent in Jan-Sep, which is equivalent to yearly growth of minus 1.9 percent. Inflation creates the illusion that there has been growth of income, when in fact RDPI stagnated, and growth of consumption, which in fact has grown at the mediocre annual rate of 1.9 percent. Growth is the result of drawing down savings instead of growth of income and opportunities. The growth engine of the US economy has stalled with resulting adverse effects on job creation and opportunities for advancement.

Table 11, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2011
Sep	0.1	0.1	-0.1	0.6	0.5
Aug	-0.1	-0.1	-0.4	0.2	0.0
Jul	0.1	0.0	-0.3	0.9	0.5
Jun	0.2	0.1	0.3	-0.2	-0.1
May	0.3	0.2	0.0	0.2	0.0
Apr	0.4	0.3	0.0	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	1.6	0.1	0.4	0.0
Jan-Sep 2011	3.3	3.1	-0.3	3.9	1.4
Jan-Sep 2011 AE	4.5	4.2	-0.4	5.2	1.9
2010
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ10	1.1	1.1	0.5	1.4	0.8
IVQ2010 AE	4.5	4.5	2.0	5.7	3.2

Percentage change month to month seasonally adjusted

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf

Second, the difference between NDPI and RDPI (NDPI/RDPI) and NPCE and RPCE (NPCE/RPCE) indicates inflation. Let the rate of inflation be π, the percentage change in nominal value NV and the change in real value rv. Then:

(1+π)(1+rv) = (1+NV) (1)

Thus, if we know (1+NV) and (1+rv), simple rearrangement provides (1+π):

(1+π) = (1+NV)/(1+rv) (2)

The growing gap between NDPI/RDPI and NPCE/RPCE is inflation and accelerating from the final quarter of 2010 to the first seven months of 2011 but at slower rate since the drop in commodity prices beginning in May. The gap becomes more evident in the cumulative percentages Jan-Sep 2011 and IVQ2010 and their annual equivalents Jan-Sep 2011 AE and IVQ2010 AE. The annual equivalent gap of NDPI/RDPI in Jan-Sep 2011 in Table 11 is 4.6 percent (1.042/0.996), which is much higher than in IVQ2010 of 2.5 percent (1.045/1.02). The gap NPCE/RPCE in Jan-Sep 2011 in Table 11 is 3.2 percent (1.052/1.019), which is much higher than 2.4 percent (1.057/1.032) in IVQ2010. There is a radical change in the pattern of US growth. RDPI was growing at the annual equivalent rate of 2.0 percent with real PCE growing at 3.2 percent in annual equivalent in IVQ2010. In the first nine months of 2011, RDPI has contracted at the annual equivalent rate of 0.4 percent and real PCE continues to grow at 1.9 percent at the expense of reduction of the savings rate. Inflation in the deflator of personal income and outlays is moving toward 3 percent per year. That is, the government is benefitting from a tax known as the inflation tax. By issuing money through its central bank the government buys goods and services. In a situation of sizeable deficits and inflation, the government gains by purchasing before effects of issuing money that causes increases in prices (see http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-financial.html Pelaez and Pelaez, International Financial Architecture (2005), 201-12). This is a hidden but actually felt contribution of monetary accommodation to financing bloated government expenditures. The new inflation tax argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates.

Further information on income and consumption is provided by Table 12. The 12-month rates of increase of RDPI and RPCE in the first nine months of 2011 show a sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 1.2 to 0.9 percent in May-Jul. In Aug 2011, RDPI rose only 0.1 percent relative to Aug 2010 and RDPI grew 0.2 percent in Sep 2011 relative to Sep 2010. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.2 percent in Jul, 1.8 percent in Aug and 2.2 in Sep. Market participants have been concerned with data in Tables 11 and 12 showing more subdued growth of RPCE. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12 months rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 6.3 to 7.8 percent in the quarter May-Jul and then 5.9 percent in Aug, rebounding to 6.8 percent in Sep. RPECG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.5 to 4.0 percent in the quarter May-Jul and then only 2.5 percent in Aug and 3.1 percent in Sep.

Table 12, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2011
Sep	0.2	2.2	3.1	6.8	1.8
Aug	0.1	1.9	2.5	5.9	1.7
Jul	0.8	2.4	3.9	7.1	1.7
Jun	1.2	2.0	3.4	6.3	1.4
May	1.2	2.2	4.0	7.8	1.4
Apr	1.8	2.5	4.7	9.2	1.4
Mar	2.4	2.6	4.5	9.3	1.7
Feb	2.7	2.9	5.9	12.8	1.4
Jan	2.8	2.9	5.8	12.0	1.5
2010
Dec	3.2	2.8	5.4	10.2	1.6
Nov	3.6	3.2	5.9	10.2	1.9
Oct	3.8	2.9	6.1	12.2	1.3
Sep	3.1	2.7	5.6	10.5	1.4

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf http://www.bea.gov/iTable/index_nipa.cfm

Chart 11 shows US real personal consumption expenditures (RPCE) between 1995 and 2011. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart 11, US, Real Personal Consumption Expenditures 1995-2011

Source: US Bureau of Economic Analysis http://www.bea.gov/national/index.htm#personal

Percent change from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart 12. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart 12 that the average rate of growth of RPCE was higher before the recession than during the past nine quarters of contraction that began in IIIQ2009.

Chart 12, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/national/index.htm#personal

Personal income and its disposition are shown in Table 13. An important adversity is shown in Table 13 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to the contraction by $7.3 billion in Aug relative to Jul. In the same period, growth of wages and salaries fell from $55.4 billion in Jan/Dec to contraction by $11.8 billion in Aug/Jul. In Sep/Aug income recovered 0.1 percent and wages and salaries 0.3 percent for an identical $17.3 billion. The final column of Table 13 shows the decline of the savings rate from 5.2 percent in Dec 2010 to 3.6 percent in Sep 2011. The mediocre recovery of the economy is significantly driven by consuming out of savings with negative growth of real disposable personal income.

Table 13, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Sep	13,029.1	6,699.0	1,416.4	11,612.8	3.6
Aug	13,011.8	6,681.7	1,411.9	11,599.9	4.1
Change Sep/Aug	17.3 ∆% 0.1	17.3 ∆% 0.3	4.5 ∆% 0.3	12.9 ∆% 0.1
Jul	13,025.4	6,690.3	1,412.7	11,612.7	4.5
Change Aug/Jul	-7.3 ∆% –0.1	-11.8 ∆% –0.1	-2.3 ∆% –0.1	-5.0 ∆% -0.1
Jun	13,018.5	6,666.8	1,408.9	11,609.6	5.3
Change Jul/Jun	17.1 ∆% 0.1	22.0 ∆% 0.4	2.7 ∆% 0.3	14.4 ∆% 0.0
May	12,997.2	6,662.3	1,403.3	11,594.2	5.0
Change Jun/ May	21.3 ∆% 0.2	4.5 ∆% 0.1	5.6 ∆% 0.4	15.4 ∆% 0.1
Apr	12,962.2	6,641.6	1,391.5	11,570.8	5.0
Change May/ Apr	35.0 ∆% 0.2	20.7 ∆% 0.3	11.8 ∆% 0.8	23.4 ∆% 0.2
Mar	12,909.7	6,614.8	1,377.7	11,532.1	4.9
Change Apr/ Mar	52.5 ∆% 0.4	26.8 ∆% 0.4	13.8 ∆% 1.0	38.7 ∆% 0.3
Feb	12,850.6	6,582.9	1,367.1	11,483.5	5.0
Change Mar/ Feb	59.1 ∆% 0.5	31.9 ∆% 0.5	10.6 0.8	48.6 ∆% 0.4
Jan	12,780.3	6,536.8	1,352.8	11,427.5	5.2
Change Feb/Jan	70.3 ∆% 0.6	46.1 ∆% 0.7	14.3 ∆% 1.1	56.0 ∆% 0.5
Dec 2010	12,625.0	6,481.4	1,247.6	11,377.3	5.2
Change Jan/ Dec	155.3 ∆% 1.2	55.4 ∆% 0.9	105.2 ∆% 8.4	50.2 ∆% 0.4

Source:

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

Chart 13 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.

Chart 13, US, Personal Income, Billion Dollars, Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

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

A different evolution of personal income is shown in Chart 14. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income has been anemic and has stalled in 2011.

Chart 14, US, Personal Income, Current Billions of Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source:

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

Real or inflation-adjusted disposable personal income is provided in Chart 15 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.

Chart 15, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

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

The stagnation of real disposable income is evident in Chart 16. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. The 12 months rates of growth real disposable income in Aug 2011 of 0.1 percent and Sep 2011 of 0.2 percent are barely positive. In fact, as Table 11 shows, real disposable income in the US contracted by 0.3 percent cumulatively in Jan-Sep 2011 at the annual equivalent rate of minus 0.4 percent.

Chart 16, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

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

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Sep 2011 at the seasonally adjusted annual rate of $13,029.1 billion (http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0911.pdf Table 1, page 6). The major portion of personal income is compensation of employees of $8,313.1 billion, or 63.8 percent of the total. Wage and salary disbursements are $6,699.0 billion, of which $5,508.4 by private industries, and supplements to wages and salaries of employer contributions to pension and insurance funds and Social Security are $1164.1 billion. Chart 17 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.

Chart 17, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989

Source: US Bureau of Economic Analysis

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

Chart 18 shows US wage and salary disbursement of private industries from 2007 to 2011. There is a drop during the contraction followed by initial recovery in 2010 and then the current stagnation in 2011.

Chart 18, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011

Source: US Bureau of Economic Analysis

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

Finer detail is provided by monthly data in Chart 19. Recovery after the contraction has been followed by stagnation of private-sector wages and salaries.

Chart 19, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011

Source: US Bureau of Economic Analysis

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

Chart 20 provides savings as percent of disposable income or the US savings rate. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 the savings rate has been declining as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart 20, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2011

Source: US Bureau of Economic Analysis

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

III World Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 14, updated with every comment in this blog, provides beginning values on Oct 24 and daily values throughout the week ending on Fr Oct 28 of several financial assets. 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 Oct 21 and the percentage change in that prior week below the label of the financial risk asset. The first five asset 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), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), 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 US dollars USD per one euro EUR, USD 1.389/EUR in the first row, first column in the block for currencies in Table 14 for Fri Oct 21, depreciating to USD 1.3921/EUR on Mon Oct 24, or by 0.2 percent. Table 14 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 14 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 1.3921/EUR on Oct 24; 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 Oct 21, to the last business day of the current week, in this case Fri Oct 28, such as depreciation of 1.9 percent for the dollar to USD 1.415/EUR by Oct 28; 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 1.9 percent from the rate of USD 1.389/EUR on Fri Oct 21 to the rate of USD 1.415/EUR on Fri Oct 28 {[(1.1.415/1.389) – 1]100 = 1.9%} and appreciated by 0.3 percent from the rate of USD 1.4190 on Thu Oct 27 to USD 1.415/EUR on Fri Oct 28 {[(1.415/1.4190) -1]100 = -0.3%}. The dollar depreciated during the week because more dollars, $1.415, were required to buy one euro on Fri Oct 28 than $1.389 required to buy one euro on Fri Oct 21. The depreciation of the dollar in the week was caused by diminishing risk aversion with purchases of risk financial investments by reduction of dollar-denominated assets.

Table 14, Weekly Financial Risk Assets Oct 24 to Oct 28, 2011

Fri Oct 21

M 24

Tue 25

W 26

Thu 27

Fr 28

USD
/EUR

1.389

-0.1%

1.3921

-0.2%

1.3908

-0.1%

0.1%

1.3901

-0.1%

0.0%

1.4190

-2.2%

-2.1%

1.415

-1.9%

0.3%

JPY/
USD

76.261

1.2%

76.0605

0.3%

75.9485

0.4%

0.1%

76.2065

0.1%

-0.3%

75.9705

0.4%

0.3%

75.812

0.6%

0.2%

CHF/
USD

0.8825

1.3%

0.8811

0.2%

0.8779

0.5%

0.4%

0.8817

0.1%

-0.4%

0.8600

2.5%

0.8862

-0.4%

-3.0%

CHF/EUR
1.2263

1.0%

1.2265

0.0%

1.2210

0.4%

1.2257

0.0%

-0.4%

1.2203

0.5%

0.4%

1.2207

0.5%

0.0%

USD/
AUD

1.0375

0.9639

0.4%

1.0474

0.9547

0.9%

1.0428

0.9590

0.5%

-0.4%

1.0397

0.9618

0.2%

-0.3%

1.0714

0.9334

3.2%

2.9%

1.0710

0.9337

3.1%

0.0%

10 Year
T Note

2.22

2.23

2.11

2.20

2.38

2.326

2 Year T Note
0.27

0.28

0.24

0.29

0.31

0.293

Germany Bond

2Y 0.66 10Y 2.11

2Y 0.66 10Y 2.12

2Y 0.56 10Y 2.06

2Y 0.52 10Y 2.04

2Y 0.66 10Y 2.21

2Y 0.60 10Y 2.18

DJIA

11808.79

1.4%

0.9%

-0.9%

-1.7%

0.5%

1.4%

3.4%

2.9%

3.6%

0.2%

DJ Global

1846.63

0.1%

1.8%

0.5%

-1.3%

0.9%

0.4%

5.8%

4.8%

6.4%

0.6%

DJ Asia Pacific

1190.40

-0.7%

2.6%

0.1%

2.5%

-0.1%

5.6%

2.9%

7.1%

1.4%

Nikkei
8678.89

-0.8%

1.9%

0.9%

-0.9%

0.8%

-0.2%

2.8%

2.0%

4.3%

1.4%

Shanghai

2317.28

-4.7%

2.3%

3.9%

-1.7%

4.7%

0.7%

5.1%

0.3%

6.7%

1.6%

DAX
5970.96

0.1%

1.4%

1.3%

-0.1%

0.8%

-0.5%

6.1%

5.4%

6.3%

0.1%

DJ UBS Comm.

144.95

-2.2%

1.9%

2.6%

0.6%

1.6%

-1.0%

4.1%

2.5%

4.1%

0.0%

WTI $/B
87.40

0.1%

91.55

4.7%

92.85

6.2%

1.4%

90.79

3.9%

-2.2

93.82

7.3%

3.3%

93.46

6.9%

-0.4%

Brent $/B

109.56

-2.8%

111.30

1.6%

111.17

1.5%

-0.1%

109.28

-0.3%

-1.7%

111.94

2.2%

2.4%

110.01

0.4%

-1.7%

Gold $/OZ

1636.10

-2.8%

1654.7

1.1%

1703.1

4.1%

2.9%

1721.3

5.2%

1.1%

1744.2

6.6%

1.3%

1747.2

6.8%

0.2%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources:

http://www.bloomberg.com/markets/

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

There was again turbulence in financial assets in the expectation of a bank and debt deal to be approved at the meeting of European leaders on Oct 23 that was concluded on Oct 26 and is discussed below. Risk aversion is manifested by strength of the dollar, yen and Swiss franc with investors fleeing risk financial assets for the lower return but safe haven of stronger sovereign risks. Relaxed risk aversion is present in the cumulative depreciation of the dollar by 2.2 percent on Thu Oct 27 that was reversed slightly by appreciation of 0.3 percent on Fri Oct 28 with cumulative depreciation in the week of 1.9 percent. Monetary policy of zero interest rates causes carry trades into risk financial assets when risk appetite dominates. Remaining risk aversion is evident in the appreciation of the yen by 0.6 percent by Fri Oct 28. The yen closed below JPY 76/USD on Fri Dec 21. Continuing strength of the Japanese yen suggests remaining risk aversion. Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc depreciated 0.4 percent relative to the USD but appreciated 0.5 percent relative to the euro also suggesting remaining aversion on European risk. Relaxation of risk aversion is in the appreciation of the Australian dollar by cumulative 3.2 percent on Thu Oct 27 and cumulative for the week of 3.1 percent on Fri Oct 28 also in the euphoria of the euro zone deal. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Relaxation of risk aversion is captured by increase of the yield of the 10-year Treasury note from 2.22 percent on Oct 21 to 2.326 percent on Fri Oct 28. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.9 percent in the 12 months ending in Sep and 0.3 percent in Sep relative to Aug (http://www.bls.gov/cpi/). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with relatively stable yield of 0.293 percent on Oct 28 while the ten-year Treasury yield has risen to 2.326 percent by Oct 28 because of duration risk. Rising yields of longer term securities can cause higher capital losses. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities. A similar risk aversion phenomenon occurs in Europe with low levels of the yield of the 10-year government bond of Germany on Fri Oct 28 at 0.60 percent for the two-year maturity and 2.18 percent for the 10-year maturity while the final estimate of euro zone CPI inflation for Sep is at 3.0 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14102011-BP/EN/2-14102011-BP-EN.PDF). Safety overrides inflation-adjusted yield but there could be duration aversion.

World equity markets traded cautiously during the week in the uncertainty of the final deal of the bank and sovereign debt deal, jumping on the announcement. The DJIA oscillated during the week but ended with jumps of 1.4 percent on Wed Oct 26 and 2.9 percent on Thu Oct 27 and cumulative gain for the week of 3.6 percent. Recession is nowhere in short-term indicators of the overall US economy and companies are supporting earnings with continuing cost restraint. The DJ global gained 6.4 percent in the week because of the jump by 4.8 percent on Thu Oct 27 with strong gains of the DJIA of 2.9 percent and Germany Dax of 5.4 percent. In the oscillating markets Dax gained only 6.3 percent in the week. China’s Shanghai Composite also jumped 6.7 percent in the week as Europe is a major market for Chinese exports. The Nikkei Average also jumped 4.3 percent in the week and the DJ Asia Pacific gained 7.1 percent.

Commodities were also strong in the week. The DJ UBS Commodities index gained 4.1 percent cumulatively in the week. WTI rose 6.9 percent but Brent gained only 0.4 percent in the week. Gold gained 6.8 percent in the week, reflecting ambivalence of investors on the implementation of the European plan.

There are three factors dominating valuations of risk financial assets that are systematically discussed in this blog.

1. Euro zone survival risk. The fundamental issue of sovereign risks in the euro zone is whether the group of countries with euro as common currency and unified monetary policy through the European Central Bank will (i) continue to exist; (ii) downsize to a limited number of countries with the same currency; or (iii) revert to the prior system of individual national currencies.

2. United States Growth, Employment and Fiscal Soundness. Recent posts of this blog analyze the mediocre rate of growth of the US in contrast with V-shaped recovery in all expansions following recessions since World War II, deterioration of social and economic indicators, unemployment and underemployment of 30 million, decline of yearly hiring by 17 million, falling real wages and unsustainable central government or Treasury debt (http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html).

3. World Economic Slowdown. Careful, detailed analysis of the slowdown of the world economy is provided in Section V World Economic Slowdown. Data and analysis are provided for regions and countries that jointly account for about three quarters of world output.

European Union leaders reached an agreement to support debt management of individual members while promoting Europe’s financial stability (European Commission http://ec.europa.eu/news/economy/111027_en.htm 2011Oct26SS, 2011Oct26MRES). The major modifications and broadening of the framework are as follows.

1. Greece. Resolution of Greek debt is envisioned by reduction of debt to 120 percent of GDP by 2020. Total resources add to €130 billion distributed as European Commission 2011Oct 26MRES, 1):

i. Private sector involvement. Private investors in Greek debt would accept a haircut of 50 percent of their debt holdings, which is estimated to be €30 billion

ii. EU-IMF multiannual financing. Toward the end of the year the European Union and the IMF will finalize a program of providing an additional loan of €100 billion with enhanced monitoring of implementation of agreed reforms

2. Leverage of the EFSF. The European Financial Stability Facility (EFSF) consists of the following (http://www.efsf.europa.eu/about/index.htm):

“The European Financial Stability Facility (EFSF) was created by the euro area Member States following the decisions taken on 9 May 2010 within the framework of the Ecofin Council.The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to euro area Member States.EFSF is authorised to use the following instruments linked to appropriate conditionality:

Provide loans to countries in financial difficulties
Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
Act on the basis of a precautionary programme
Finance recapitalisations of financial institutions through loans to governments

To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets.EFSF is backed by guarantee commitments from the euro area Member States for a total of €780 billion and has a lending capacity of €440 billion.

EFSF has been assigned the best possible credit rating; AAA by Standard & Poor’s and Fitch Ratings, Aaa by Moody’s.

EFSF is a Luxembourg-registered company owned by Euro Area Member States.” It is widely believed that the EFSF does not have sufficient resources to meet assistance needs by the larger members of the euro zone. The summit of European leaders agreed to the following (European Commission 2011Oct26MRES, 2): “The significant optimisation of the resources of the EFSF, without extending the guarantees

underpinning the facility. The options agreed will allow the EFSF resources to be leveraged. The leverage effect of both options will vary, depending on their specific features and market

conditions, but could be up to 4 or 5, which is expected to yield around 1 trillion euro (around 1.4 trillion dollar). We call on the Eurogroup to finalise the terms and conditions for the implementation of these modalities in November. In addition, further cooperation with the IMF will be sought to further enhance the EFSF resources.”

3. Banks. The European leaders also addressed the need to maintain stability of banks and financial institutions as a result of the haircut of 50 percent of Greek debt holdings. Indispensable support is provided by the European Banking Authority (EBA), which estimates needs of capital of banks in Europe at €106.4 billion (http://www.eba.europa.eu/News--Communications/Year/2011/The-EBA-details-the-EU-measures-to-restore-confide.aspx). The measures taken by the European leaders are (European Commission 2011Oct26MRES, 2): “A comprehensive set of measures to raise confidence in the banking sector by (i) facilitating access to term-funding through a coordinated approach at EU level and (ii) the increase in the capital position of banks to 9% of Core Tier 1 by the end of June 2012. National supervisors must ensure that banks' recapitalisation plans do not lead to excess deleveraging.”

4. Enforcement of fiscal discipline and reform. The European leaders also emphasized the need for enforcing fiscal discipline and reform (European Commission 2011Oct26MRES, 2): “An unequivocal commitment to ensure fiscal discipline and accelerate structural reforms for growth and employment. Particular efforts are being deployed by Spain. New strong commitments on structural reforms have been made by Italy. Portugal and Ireland will continue their reform programmes with the support of our crisis mechanisms.”

5. Enhanced economic and fiscal coordination and surveillance. Specific measures will be implemented to strengthen economic and fiscal coordination and surveillance.

Even with leverage of the EFSF, the solution turns again to taxpayers in Germany and possibly France with tough dimensions of needs versus feasible availability and political restraints. The economic issue is not whether Germany should, which would be decided in elections, but whether Germany can pay alone for the profligacy of other sovereigns in the European Monetary Union. The Wriston “doctrine” on sovereign lending was predicated on the argument that countries do not bankrupt (Wriston 1982). Another Wriston idea was that the old Citibank should be more valuable dead than alive: if Citibank followed the model of the old Merrill Lynch and sold the individual components or franchises the value would be higher than that of the unbroken Citibank. There was a rise in leveraged buy outs (LBO) in the 1980s that has been extensively analyzed in academic literature (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 159-66). The debt crisis of the 1980s and many other episodes in history actually proved that a country can bankrupt and that many countries can bankrupt simultaneously.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by a few of the other members. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Oct 28, the yield of the 2-year bond of the government of Greece was quoted above 60 percent and the 10-year bond yield traded at over 24 percent. In contrast, the 2-year US Treasury note traded at 0.293 percent and the 10-year at 2.326 percent while the comparable 2-year government bond of Germany traded at 0.6- percent and the 10-year government bond of Germany traded at 2.18 percent (see Table 14). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound or close to the maximum desired by investors.

Much of the analysis and concern over the euro zone centers on the default risk of the debt of a few countries while there is little if any risk of default of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be survival of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with nil default probability. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will (or should) survive without major changes.

The prospects of survival of the euro zone are dire. Table 15 is constructed with IMF World Economic Outlook database released during the prior week for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table 15, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2010 USD Billions	Primary Net Lending Borrowing % GDP 2010	General Government Net Debt % GDP 2010
World	62,911.2
Euro Zone	12,167.8	-3.6	65.9
Portugal	229.2	-6.3	88.7
Ireland	206.9	-28.9	78.0
Greece	305.4	-4.9	142.8
Spain	1,409.9	-7.8	48.8
Major Advanced Economies G7	31,716.9	-6.5	76.5
United States	14,526.6	-8.4	68.3
UK	2,250.2	-7.7	67.7
Germany	3,286.5	-1.2	57.6
France	2,562.7	-4.9	76.5
Japan	5,458.8	-8.1	117.2
Canada	1,577.0	-4.9	32.2
Italy	2,055.1	-0.3	99.4
China	5,878.3	-2.3	33.8*
Cyprus	23.2	-5.3	61.6

*Gross Debt

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The data in Table 15 are used for some very simple calculations in Table 16. The column “Net Debt USD Billions” in Table 16 is generated by applying the percentage in Table 15 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 16. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table 16, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	8,018.6
B Germany	1,893.0		$7385.1 as % of $3286.5 =224.7% $5424.6 as % of $3286.5 =165.1%
C France	1,960.5
B+C	3,853.5	GDP $5849.2 Total Debt $7385.1 Debt/GDP: 126.3%
D Italy	2,042.8
E Spain	688.0
F Portugal	203.3
G Greece	436.1
H Ireland	161.4
Subtotal D+E+F+G+H	3,531.6

Source: calculation with IMF data http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

There is extremely important information in Table 17 for the current sovereign risk crisis in the euro zone. Table 17 provides the structure of regional and country relations of Germany’s exports and imports. German exports to other European Union members are 57.1 percent of total exports in Aug and 59.7 percent in Jan-Aug. Exports to the euro area are 36.9 percent in Aug and 40.1 percent in Jan-Aug. Exports to third countries are only 42.9 percent of the total in Aug and 40.2 percent in Jan-Aug. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy.

Table 17, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Aug 2011 € Billions	12 Months ∆%	Jan-Aug 2011 € Billions	Jan-Aug 2011/ Jan-Jul 2010 ∆%
Total Exports	85.3	14.6	696.8	14.0
A. EU Members	48.7 % 57.1	12.7	415.8 % 59.7	13.3
Euro Area	31.5 % 36.9	11.5	279.5 % 40.1	11.9
Non-euro Area	17.1 % 20.0	15.1	136.3 % 19.6	16.5
B. Third Countries	36.6 % 42.9	17.1	281.0 % 40.3	15.1
Total Imports	73.5	12.6	595.3	16.1
C. EU Members	44.8 % 60.9	12.4	376.4 % 63.2	16.6
Euro Area	31.3 % 42.6	13.0	265.4 % 44.6	15.9
Non-euro Area	13.5	11.0	111.0	18.5
D. Third Countries	28.7 % 39.1	12.8	218.9 % 36.8	15.1

Notes: Total Exports = A+B; Total Imports = C+D

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/10/PE11__373__51,templateId=renderPrint.psml

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 18 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 9 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 18. Data for other countries in Table 18 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table 18, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.6	3.9	6.9	9.1
Japan	-1.1	0.0	2.3	4.2
China	9.1	6.1	6.5
UK	1.8	5.2* RPI 5.6	6.3* output 17.5* input 13.3**	8.1
Euro Zone	1.6	3.0	5.9	10.0
Germany	2.8	2.9	5.4	6.0
France	1.6	2.4	6.3	9.9
Nether-lands	1.5	3.0	7.7	4.4
Finland	2.7	3.5	7.5	7.8
Belgium	2.5	3.4	7.1	6.8
Portugal	-0.9	3.5	5.5	12.3
Ireland	-1.0	1.3	4.7	14.6
Italy	0.8	3.6	4.8	7.9
Greece	-4.8	2.9	7.4	15.1
Spain	0.7	3.0	7.1	21.2

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.ons.gov.uk/ons/dcp171778_233900.pdf

CPI http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/september-2011/index.html

** Excluding food, beverage, tobacco and petroleum

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

There are three waves of inflation of personal consumption expenditures (PCE) in 2011 shown in Table 19. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. The first wave is in Jan-Apr when headline PCE inflation grew at the average annual equivalent rate of 4.6 percent and PCE inflation excluding food and energy at 2.1 percent. The drivers of inflation were increases in food prices at the annual equivalent rate of 8.7 percent and of energy prices at 41.7 percent. This behavior will prevail under zero interest rates and relaxed risk aversion. The second wave occurred in May and Jun when risk aversion from the European sovereign risk crisis interrupted the carry trade. Taking a longer perspective, the annual equivalent rate of PCE headline inflation is 2.4 percent for May-Sep and 2.2 percent for PCE inflation excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep of headline PCE inflation of 4.5 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 27.3 percent.

Table 19, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Sep	0.2	0.3	-0.4	0.1	0.0	0.5	2.1
Aug	0.3	0.4	-0.1	0.2	0.2	0.6	1.2
Jul	0.4	0.7	-0.1	0.2	0.2	0.4	2.8
∆% AE Jul-Sep	4.5	5.7	-2.4	2.0	1.6	6.2	27.3
Jun	-0.1	-0.5	0.2	0.1	0.2	0.1	-4.5
May	0.2	0.0	0.1	0.3	0.3	0.3	-1.2
∆% AE May-Sep	2.4	2.2	-0.7	2.2	2.2	4.7	0.5
Apr	0.3	0.6	0.2	0.2	0.2	0.4	2.3
Mar	0.4	0.8	0.0	0.2	0.1	0.9	3.7
Feb	0.4	0.8	0.2	0.2	0.2	0.8	3.5
Jan	0.4	0.8	0.1	0.2	0.2	0.7	2.3
∆% AE Jan-Apr	4.6	9.4	1.5	2.4	2.1	8.7	41.7
2010
Dec	0.3	0.6	-0.4	0.1	0.0	0.1	4.1
Nov	0.1	0.0	-0.2	0.1	0.1	0.0	0.1
Oct	0.2	0.4	-0.2	0.1	0.1	0.1	2.8
Sep	0.1	0.2	-0.2	0.1	0.0	0.3	1.2
Aug	0.2	0.3	-0.1	0.1	0.1	0.1	1.7
Jul	0.2	0.5	-0.3	0.1	0.0	0.1	3.4
Jun	-0.2	-0.6	-0.3	0.1	0.1	-0.2	-3.6
May	-0.1	-0.6	-0.2	0.2	0.1	0.0	-2.9
Apr	0.0	-0.2	-0.2	0.2	0.1	0.2	-0.5
Mar	0.2	-0.1	0.0	0.3	0.2	0.2	-0.4
Feb	0.1	-0.1	-0.3	0.2	0.1	0.2	-0.2
Jan	0.2	0.5	0.2	0.1	0.1	0.2	2.7

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

The charts of PCE inflation are also instructive. Chart 21 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2001 around 0.2 percent per month.

Chart 21, US, Percentage Change of PCE Price Index from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

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

There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart 22. The exclusion of commodity components eliminates negative changes with one exception. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding two outliers.

Chart 22, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

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

As with all commodity prices, oscillations of the PCE price index of food in Chart 23 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010.

Chart 23, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

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

The band of fluctuation of the PCE price index of energy in Chart 24 is much wider. An interesting feature is the abundance of negative changes.

Chart 24, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2001

Source: US Bureau of Economic Analysis

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

Table 20 provides 12 months rates of PCE inflation. While headline PCE inflation has increased from 1.5 percent in Jan to 2.9 percent in Sep, PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.6 percent in Jan to 1.6 percent in Sep, which is still below the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.

Table 20, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Sep	2.9	4.9	-0.7	2.0	1.6	5.1	20.7
Aug	2.9	4.8	-0.5	1.9	1.7	4.8	19.6
Jul	2.8	4.7	-0.2	1.8	1.6	4.3	20.2
Jun	2.6	4.5	-0.5	1.7	1.4	3.9	20.8
May	2.6	4.4	-1.0	1.7	1.3	3.6	21.9
Apr	2.4	3.9	-1.4	1.6	1.2	3.3	19.8
Mar	2.0	3.0	-1.8	1.5	1.0	3.1	16.5
Feb	1.8	2.1	-1.8	1.6	1.1	2.4	11.9
Jan	1.5	1.2	-2.3	1.6	1.0	1.8	7.9
2010
Dec	1.4	1.0	-2.5	1.5	0.9	1.3	8.3
Nov	1.2	0.4	-2.4	1.5	1.0	1.3	4.1
Oct	1.3	0.6	-2.1	1.6	1.0	1.3	6.3
Sep	1.4	0.4	-1.7	1.9	1.2	1.3	4.1
Aug	1.5	0.4	-1.4	1.9	1.4	0.7	3.8

Source:

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

The headline PCE index is shown in Chart 25 from 1999 to 2011. There is an evident upward trend with the bump of the global recession after IVQ2010.

Chart 25, US, Price Index of Personal Consumption Expenditures 1999-2011

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

A similar upward trend with bumps is shown for the headline consumer price index of the US in Chart 26. There is a definite inflexion in the index in more recent months.

Chart 26, US, Consumer Price Index, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The PCE price index excluding food and energy is shown in Chart 27. There is less pronounced long-term trend with fewer bumps because of the excluding of commodity items.

Chart 27, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2011

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

The core consumer price index, excluding food and energy, is shown in 28. There is also an upward trend but with fluctuations.

Chart 28, US, Consumer Price Index Excluding Food and Energy, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

The PCE price index of food is shown in Chart 29. There is a more pronounced upward trend and sharper fluctuations.

Chart 29, US, Price Index of Personal Consumption Expenditures Food 1999-2011

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

The most pronounced trend of the PCE price indexes is that of energy in Chart 30. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price.

Chart 30, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2011

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

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the quarterly employment cost index (ECI). The ECI is highly useful in several ways including: (1) how costs of employees may affect hiring decisions and thus the overall economy; (2) impact of employment costs on inflation and thus monetary policy; and (3) relation of employee costs to inflation on issues such as welfare of the working population and their ability to consume that could affect economic growth. The BLS estimates total compensation composed of wages and salaries, which are about 70 percent of total compensation, and benefits, which account for the remaining 30 percent (http://www.bls.gov/news.release/pdf/eci.pdf 1). There is vast theoretical and empirical literature on how benefits interact with wage determination. The ECI is considered initially with current data in Table 21 and subsequently with charts of the BLS on evolution over the past decade. The BLS provides data for the entire civilian population, the private sector and state/local government. The data are available quarterly and for the 12 months of the ending month of the quarter. Total compensation 12-month rates of change have moderated for the entire civilian population, the private sector and state and local government. Wages and salaries in the 12 months ending in Sep increased at relatively subdued rates of 1.7 percent for the private sector, 2.0 for the entire civilian population and 1.0 percent for state/local workers. Wages have been losing relative to headline CPI inflation of 3.9 percent in the 12 months ending in Sep (http://www.bls.gov/news.release/pdf/cpi.pdf). Compensation benefits of the private sector increased at 3.4 percent in the 12 months ending in Sep, which is twice as fast as wages and salaries.

Table 21, Employment Cost Index Quarterly and 12 Months Changes %

	IIQ11 SA	IIIQ11 SA	12 M Sep 10 NSA	12 M Dec 10 NSA	12 M Mar 11 NSA	12 M Jun 11 NSA	12 M Sep 11 NSA
Civilian
Comp	0.7	0.3	1.9	2.0	2.0	2.2	2.0
Wages/ Salaries	0.4	0.3	1.5	1.6	1.6	1.6	1.6
Benefits	1.3	0.1	2.8	2.9	3.0	3.6	3.2
Private
Comp	0.8	0.4	2.0	2.1	2.0	2.3	2.1
Wages/ Salaries	0.5	0.4	1.6	1.8	1.6	1.7	1.7
Benefits	1.6	0.1	2.8	2.9	3.0	4.0	3.3
Health Benefits					3.4	3.6	3.4
State local Govt
Comp	0.4	0.0	1.8	1.8	1.8	1.7	1.5
Wages/ Salaries	0.4	-0.2	1.2	1.2	1.2	1.2	1.0
Benefits	0.5	0.3	2.8	2.9	3.3	3.0	2.5

Notes: Civilian includes private industry plus state and local government; SA: seasonally adjusted; NSA: not seasonally adjusted; Comp: compensation; Govt: government

Source: http://www.bls.gov/news.release/eci.toc.htm

A series of charts of the BLS provides evolution of the ECI during the past decade. Percentage changes in 12 months of total civilian compensation in Chart 31 were in a range of around 3 to 4 percent before the global recession, declining to less than 2 percent with the contraction and increasing above 2 percent in the expansion. Rates have fallen recently.

Chart 31, US, ECI, Total Compensation, All Civilian, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 32 provides the 12 months percentage rates of change of wages and salaries for the entire civilian population. The rates collapsed with the global recession and have flattened around 1.5 percent since 2010 while inflation has accelerated.

Chart 32, US, ECI, Wages and Salaries, All Civilian 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Percentage 12 months changes of benefits of the total civilian population in Chart 33 were much higher in the first of the 2000s, surpassing relatively subdued inflation but declined to less than 2 percent with the global recession. After 2010, there is a clear rising trend of benefit above 3 percent with decline in recent months of 2011.

Chart 33, US, ECI, Total Benefits, All Civilian 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

ECI total compensation 12 months percent changes in 2001 to 2011 for the private sector are shown in Chart 34. Behavior is almost identical as for total compensation. Private sector compensation has stabilized somewhat above 2 percent with inflation rising to 3.9 percent in the 12 months ending in Sep.

Chart 34, US, ECI, Total Compensation, Private Industry 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

There is different behavior of 12 months percentage rates of private-sector wages and salaries in Chart 35. Rates fell in the first part of the decade and then rose into 2007. Rates of change in 12 months of wages and salaries in the private sector fell during the global contraction to barely above 1 percent and have not rebounded while inflation has returned.

Chart 35, US, ECI, Wages and Salaries, Private Industry, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 36 provides the 12 months rates of change of the consumer price index of the US. Inflation has risen sharply into 2011 with 3.9 percent in the 12 months ending in Sep while wage and salary increases in the private sector have risen by 1.7 percent in the 12 months ending in Sep.

Chart 36, US, Consumer Price Index, 12 Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

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

Growth of benefits has been more dynamic than total compensation and wages and salaries, as shown in Chart 37. In 2004, the 12 month rate of change exceeded 7 percent. Rates of increase of benefits costs then fell even before the global recession, toughing 1 percent in late 2010, rose sharply above 3 percent in 2011 and have fallen in recent months.

Chart 37, US, ECI, Total Benefits, Private Industry, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Behavior at the margin is provided by rates of change in a quarter relative to the prior quarter, as shown in Chart 38. Quarterly rates of change of total civilian compensation were high in the early 2001, fell sharply with the global recession and collapsed in the recent quarter.

Chart 38, US, Employment Cost Index All Civilian Total Compensation Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Chart 39 provides the quarterly rates of change of wages and salaries of the entire civilian population. The rates of change sank below 0.5 percent per quarter and have remained subdued since the global recession.

Chart 39, US, ECI, Wages and Salaries, All Civilian, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

Quarterly rates of change of benefits of the total civilian population in Chart 40 had declined before the global recession. The rate collapsed in the recent quarter.

Chart 40, US, ECI, Total Benefits, All Civilian, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Quarterly rates of change of total compensation of the private sector in Chart 41 have not returned to the levels before the contraction except with sporadic jump in 2011 followed contraction in the recent quarter.

Chart 41, US, ECI, Total Compensation, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Quarterly rates of change of wages and salaries of the private sector in Chart 42 exhibit significant fluctuation. Quarterly rates of change have fallen below 0.5 percent in the current expansion.

Chart 42, US, ECI, Wages and Salaries, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

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

The 12 months rates of change of benefits of private industry in Chart 43 have fluctuated widely with the only negative change in 2007. The 12 month rate of private-sector benefits fell in the past month.

Chart 43, US, ECI, Total Benefits, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

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

Unconventional monetary policy of zero interest rates and quantitative easing was used in Japan and now also in the US. Table 22 provides the consumer price index of Japan, with inflation of 0.0 percent in Sep relative to Aug and 0.0 percent from Sep 2010 to Sep 2011. There is deflation in most of the 12 months rates in 2011 with the exception of Jul and Aug and stability in Sep. There are eight years of deflation and one of zero inflation in the 12 months rate of inflation in Dec from 1995 to 2010. This experience is entirely different from that of the US (http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html).

Table 22, Japan, Consumer Price Index ∆%

	∆% Month SA	∆% 12 Months NSA
Sep 2011	0.0	0.0
Aug	0.1	0.2
Jul	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
Dec 2009		-1.7
Dec 2008		0.4
Dec 2007		0.7
Dec 2006		0.3
Dec 2005		-0.1
Dec 2004		0.2
Dec 2003		-0.4
Dec 2002		-0.3
Dec 20		-1.2
Dec 2000		-0.2
Dec 1999		-1.1
Dec 1998		0.6
Dec 1997		1.8
Dec 1996		0.6
Dec 1995		-0.3
Dec 1994		0.7
Dec 1993		1.0
Dec 1992		1.2
Dec 1991		2.7
Dec 1990		3.8

Source: http://www.stat.go.jp/english/data/cpi/index.htm

http://www.e-stat.go.jp/SG1/estat/ListE.do?lid=000001083245

More detail on the consumer price index of Japan in Sep is shown in Table 23. Inflation the 12 months ending in Sep has been driven by items rich in commodities such as food, energy and transportation. There is similar behavior in the preliminary estimate for Oct for the Ku Area of Tokyo. Without risk aversion, unconventional monetary policy is successful in inflating the world economy.

Table 23, Japan, Consumer Price Index, ∆%

	Sep/Aug ∆%	Year ∆%
CPI	0.0	0.0
CPI Excluding Fresh Food	0.0	0.2
CPI Excluding Food, Alcoholic Berages and Energy	0.0	-0.4
CPI Goods	0.4	-0.4
CPI Services	-0.3	0.4
CPI Excluding Imputed Rent	0.0	0.0
CPI Fuel, Light, Water Charges	0.3	3.7
CPI Transport Communications	-1.2	1.6
CPI Ku-are Tokyo	0.3	-0.5
Fuel, Light, Water Charges Ku Area Tokyo	1.0	4.8

Note: Ku-area Tokyo CPI data preliminary for Oct

Source:

http://www.stat.go.jp/english/data/cpi/1581.htm

V World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI^™ produced by JP Morgan and Markit in association with ISM and IFPSM finds that growth of the world economy accelerated toward the end of IIIQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8672). The JP Morgan all-industry, manufacturing and services, PMI seasonally adjusted diffusion index is closely associated with the seasonally-adjusted annual equivalent rate of global GDP. The JP Morgan global all-industry output index registered 52.0 in Sep, which is slightly higher than 51.4 in Aug that was the lowest in 25 months. The rate of growth in IIIQ2011 was the weakest since IIIQ2009, falling significantly lower than that in IQ2011, which was close to a five-year high. US growth of all-industry output was the driver of global acceleration with industry reaching a six-month high. Additional dynamism was contributed by China and the UK. While global new business showed an enhanced trend in Sep, the growth rate was lower than at the turn of the year. David Hensley, Director of Global Economics Coordination at JP Morgan finds that in Sep global output and new orders grew at relatively higher rates. The implicit growth rate is still quite weak with manufacturing slowing to standstill and services performing below expectations. The adverse impact of world growth slowdown on labor markets could restrict future growth. The JP Morgan Global Manufacturing PMI^™ fell from 50.2 in Aug to 49.9 in Sep for the first time below the contraction frontier of 50 since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8648). David Hensley, Director of Global Economics Coordination at JP Morgan finds stagnating PMI in the past few months with declining trend of new orders fed by falling flows of international trade. The information in the index suggests declining monthly world industrial production in future months. The table of world manufacturing purchasing managers’ indexes of Real Time Economics the Wall Street Journal (http://blogs.wsj.com/economics/2011/10/03/world-wide-factory-activity-by-country-18/tab/interactive/) shows indexes below 50 for the euro zone (France, Greece, Ireland, Italy, Spain), Netherlands, Australia, Brazil and Taiwan. Most other indexes are slightly above 50.

Short-term indicators of economies accounting for some three-quarters of world output are followed in this blog. The purchasing managers’ indexes are more current and integrated providing the best available world view. There are five conclusions based on the overall information.

1. Recession. There appears to be improvement in output data globally in Jul, Aug and Sep. There is growing consensus that the world economy may not fall in recession but with higher doubts on Europe that manages a sovereign risk crisis with tough political and financial restrictions. Naturally, slower growth brings economies closer to contraction. Data for the US on industrial production confirm growth in Sep and the Business Outlook Index of the Federal Reserve Bank of Philadelphia registered positive change in the overall index and new orders for Oct

2. Inflation. There is evidence of moderation of inflation in recent monthly data. Concern with 12 months is because of wage increases. In a return of risk appetite with zero interest rates, commodity prices would soar again, raising world inflation. There is a good characterization that central banks attempt to inflate the economy in a negatively-sloping short-term Phillips curve that may prove yet another academic myth already disproved by the increase in interest rates by the Fed in 1981. The contributions of Thomas J. Sargent (1982, 1999) are quite relevant. Inflation has accelerated in annual equivalent quarterly rates in the US both for the consumer price index and the producer price index as well as for headline PCE infation

3. Labor Markets. Advanced economies continue to be plagued by fractured labor markets without improving perspectives

4. Output Growth. The world economy and especially advanced economies are struggling with low rates of growth. Advanced economies have accumulated substantial imbalances that may restrict future growth but at some point expectations of inevitable consolidation by taxation and increases in interest rates to end unparalleled accommodation may reduce growth rates

5. Financial Turbulence. There will continue to be sharp fluctuations in valuations of risk financial assets. In recent weeks, volumes have thinned in various financial markets with the possibility of sharper fluctuations by professionals accustomed to reversing exposures to realize profits. This is an essential function of price discovery. European sovereign risks and increasingly the electoral agenda in the US will continue causing turbulence in financial markets

VA United States. Bradley J. Holcomb, chair of the Institute for Supply Management^™ (ISM) Manufacturing Business Committee, summarizes the Manufacturing ISM Report on Business^® (http://www.ism.ws/ISMReport/MfgROB.cfm):

"The PMI registered 51.6 percent, an increase of 1 percentage point from August, indicating expansion in the manufacturing sector for the 26th consecutive month, at a slightly higher rate. The Production Index registered 51.2 percent, indicating a return to growth after contracting in August for the first time since May of 2009. The New Orders Index remained unchanged from August at 49.6 percent, indicating contraction for the third consecutive month. The Backlog of Orders Index decreased 4.5 percentage points to 41.5 percent, contracting for the fourth consecutive month and reaching its lowest level since April 2009, when it registered 40.5 percent. Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products."

The Sep report shows that the manufacturing sector continues producing at 51.2, which is above the contraction frontier of 50. New orders deteriorated marginally with the Sep index at 49.6, which is slight below the contraction frontier of 50 and equal to the Aug index of also 49.6. The backlog of orders contracted 4.5 percentage points to 41.5 percent that indicates contraction and is the lowest number since 2009 when it registered 40.5 points. Important information in the report is the increase in the price segment from 55.6 in Aug to 56.0 in Sep. The export index rose from 50.5 in Aug to 53.5 in Sep. The overall Manufacturing ISM Report on Business^® rose by one percentage point, from 50.6 in Aug to 51.6 in Sep, indicating that manufacturing is growing at a higher rate in 26 months of expansion. Significant improvement for Oct in the Business Outlook Survey of the Federal Reserve Bank of Philadelphia may carry into the ISM manufacturing report to be released on Nov 1. The index of industrial production of the Board of Governors of the Federal Reserve Bank finds growth of manufacturing of 0.4 percent in Sep and 3.9 percent in the 12 months ending in Sep. Manufacturing grew at the annual equivalent rate of 5.7 percent in the quarter from Jul to Sep 2011.

The Sep 2011 Non-manufacturing ISM Report on Business^® registered 53.0 in Sep, which was lower by 0.3 percentage points than 53.3 in Aug, which indicates growth at a slightly slower pace (http://www.ism.ws/ISMReport/NonMfgROB.cfm). This is by far compensated by the increase of 3.7 percentage points in the index of new orders from 52.8 in Aug to 56.5 in Sep. Employment was lower by 2.9 percentage points declining from 53.0 in Aug to 49.5, reversing direction to contraction. Another favorable aspect of the report is the decline in the price segment by 2.3 percentage points from 64.2 in Aug to 61.9, indicating increasing prices at slower pace.

Table USA provides the summary indicators of the US economy and where to locate them in the blog. Indicators released in the week of Oct 28 are discussed after Table USA.

Table USA, US Economic Indicators

Consumer Price Index	Sep 12 months NSA ∆%: 3.9; ex food and energy ∆%: 2.0 Sep month ∆%: 0.3; ex food and energy ∆%: 0.1 Blog 10/23/11
Producer Price Index	Jun 12 months NSA ∆%: 6.9; ex food and energy ∆% 2.5 Sep month SA ∆% 0.8; ex food and energy∆%: 0.2 Blog 10/23/11
PCE Inflation	Jul 12 months NSA ∆%: headline 2.8; ex food and energy ∆% 1.6 Blog 09/04/11
Employment Situation	Household Survey: Aug Unemployment Rate SA 9.1% Blog calculation People in Job Stress Aug: 29.9 million NSA Establishment Survey: Aug Nonfarm Jobs 0 (zero jobs created); Private +17,000 job created Jul 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.3% Blog 09/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Jul 2011 3.985 million lower by 1.393 million than 5.378 million during contraction in Jul 2001 Blog 09/11/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 First semester 2011 AE ∆% 0.8 Blog 09/02/11
Personal Income and Consumption	Jul month ∆% SA Real Disposable Personal Income (RDPI) -0.1 Jul month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 1.2; RPCE ∆%: 1.6 Blog 09/04/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIIQ2011 SA ∆%: 0.3 Sep 12 months ∆%: 2.0 Blog 10/30/11
Industrial Production	Sep month SA ∆%: 0.2 Sep 12 months NSA ∆%: 3.2 Capacity Utilization: 77.4 Blog 10/23/11
Productivity and Costs	Nonfarm Business Productivity IIQ2011∆% SAAE -0.7; IIQ2011/IIQ2010 ∆% minus 0.7; Unit Labor Costs IIQ2011 ∆% 3.3; IIQ2011/IIQ2010 ∆%: 1.9 Blog 09/04/11
New York Fed Manufacturing Index	General Business Conditions From -8.82 Sep to Oct –8.48 New Orders: From -8.0 Sep to 0.16 Oct Blog 10/23/11
Philadelphia Fed Business Outlook Index	General Index from -17.5 Sep to 9.7 Oct New Orders from Sep -11.3 to 7.9 Oct Blog 10/23/11
Manufacturing Shipments and Orders	Jul/Aug New Orders SA ∆%: minus 0.2; ex transport ∆%: minus 0.2 12 months Jan-Aug NSA ∆%: 13.0; ex transport ∆% 13.0 Blog 10/09/11
Durable Goods	Sep New Orders SA ∆%: -0.8; ex transport ∆%: 1.7 Sep 12 months NSA New Orders ∆%: 7.7; ex transport ∆% : 9.4 Blog 10/30/11
Sales of Merchant Wholesalers	Jan-Aug 2011/2010 ∆%: Total 15.1; Durable Goods: 12.3; Nondurable Goods 17.4 Blog 10/09/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Aug 11/Aug 10 NSA ∆%: Total Business 13.7; Manufacturers 13.4 Retailers 9.3; Merchant Wholesalers 18.2 Blog 10/16/11
Sales for Retail and Food Services	Sep 12 months ∆%: Retail and Food Services: 8.1; Retail ∆% 7.6 Blog 10/16/11
Value of Construction Put in Place	Aug SAAR month SA ∆%: 1.4 Aug 12 months NSA: 1.4 Blog 10/09/11
Case-Shiller Home Prices	Aug 2011/Aug 2010 ∆% NSA: 10 Cities minus 3.5; 20 Cities: minus 3.8 ∆% Aug SA: 10 Cities minus 0.2 ; 20 Cities: minus 0.05 Blog 10/30/11
FHFA House Price Index Purchases Only	Aug SA ∆% minus 0.1; 12 month ∆%: minus 4.0 Blog 10/30/11
New House Sales	Sep month SAAR ∆%: 5.7 Jan/Sep 2011/2010 NSA ∆%: minus 7.9 Blog 10/30/11
Housing Starts and Permits	Sep Starts month SA ∆%: 15.0; Permits ∆%: -5.0 Jan/Sep 2011/2010 NSA ∆% Starts -1.5; Permits ∆% –1.5 Blog 10/23/11
Trade Balance	Balance Aug SA -$45,608 million versus Jul -$45,625 million Exports Aug SA ∆%: -0.1 Imports Aug SA ∆%: -0.1 Exports Jan-Aug 2011/2010 NSA ∆%: 18.0 Imports Jan-Aug 2011/2010 NSA ∆%: 17.0 Blog 10/16/11
Export and Import Prices	Sep 12 months NSA ∆%: Imports 13.4; Exports 9.5 Blog 10/16/11
Consumer Credit	Aug ∆% annual rate: 5 minus 4.6% Blog 10/09/11
Net Foreign Purchases of Long-term Treasury Securities	Aug Net Foreign Purchases of Long-term Treasury Securities: $57.9 billion Aug versus Jul $9.1 billion Major Holders of Treasury Securities: China $1137 billion; Japan $936.6 billion Blog 10/23/11
Treasury Budget	Fiscal Year 2011/2010 ∆%: Receipts 6.5; Outlays 4.2; Individual Income Taxes 21.5 Deficit Fiscal Year 2011 $1,298,614 million Blog 10/16/11
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIQ2011 -121B %GDP 3.2 Blog 09/18/11

Links to blog comments in Table USA: 10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

09/05/11 http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html

Durable goods new orders seasonally-adjusted fell 0.8 percent in Sep relative to Aug and shipments fell 0.7 percent, as shown in Table 24. The decline is less worrisome because of strong growth in annual equivalent in the past four months: 8.0 percent for shipments and 6.5 percent for new orders. The data are not adjusted for price changes and include large-value items that cause fluctuations in monthly data. Orders excluding transportation increased 1.7 percent in Sep while shipments fell 0.1 percent. Excluding defense orders fell 1.1 percent in Sep and shipments declined 0.6 percent. There could be cause for concern of the decline in orders excluding transportation and defense. New orders of computers and related products gained 6.0 percent in Sep after increasing 5.3 percent in Aug. Another negative development is the decline of new orders of motor vehicles and parts of 2.7 percent in Sep after falling 9.1 percent in Aug. Financial markets focused on capital goods on the argument that it would suggest investment. New orders of capital goods fell 1.3 percent in Sep after increases of 4.3 percent in Aug and 3.1 percent in Jul. Nondefense new orders of capital goods fell 2.3 percent in Sep after increasing 5.0 percent in Aug and 4.2 percent in Jul. Another favorable development was the increase by 2.4 percent in capital goods new orders excluding aircraft. The volatility of durable goods data is found in nondefense aircraft new orders falling 25.5 percent in Sep after increases of 25.2 percent in Aug and 49.9 percent in Jul and fall of 24.0 percent in Jun.

Table 24, Durable Goods Manufacturers’ Shipments and New Orders, SA, %

	Sep/Aug ∆%	Aug/Jul ∆%	Jul/Jun ∆%	Jun/May ∆%
Total
S	-0.7	0.1	2.1	1.1
NO	-0.8	-0.1	4.2	-1.1
Excluding Transport
S	-0.1	1.7	0.6	1.4
NO	1.7	-0.4	0.8	0.7
Excluding Defense
S	-0.6	-0.1	2.5	1.2
NO	-1.1	-0.3	4.9	-0.8
Computers & Electronic Products
S	-0.9	0.7	1.7	-1.2
NO	1.0	0.9	-3.5	0.9
Computers & Related Products
S	1.6	-0.2	1.4	2.4
NO	6.0	5.3	-6.4	1.7
Transport Equipment
S	-2.7	-4.9	7.0	0.3
NO	-7.5	0.6	15.0	-6.6
Motor Vehicles & Parts
S	-2.5	-9.2	10.0	-0.2
NO	-2.7	-9.1	10.2	0.1
Nondefense Aircraft
S	0.9	3.5	8.8	3.2
NO	-25.5	25.2	49.9	-24.0
Capital Goods
S	-1.0	3.0	0.7	1.7
NO	-1.3	4.3	3.1	-2.4
Nondefense Capital Goods
S	-1.2	3.0	1.4	2.1
NO	-2.3	5.0	4.2	-2.4
Nondefense Capital Goods Excluding Aircraft
S	-0.9	3.1	0.3	2.0
NO	2.4	0.5	-0.3	0.8

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 44 of the US Bureau of the Census shows new orders for durable goods from Sep 2010 to Aug 2011. There is significant volatility in these data that clouds analysis of the trend of growth of output.

Chart 44, US, Durable Goods New Orders 2010-2010, SA, Monthly Percentage Changes

Source: US Bureau of the Census

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

Table 25 shows growth of new orders and shipments of durable goods in the first nine months of 2011 relative to the same period in 2010. Data are not adjusted for seasonality or price changes. New orders rose 9.4 percent in Jan-Sep 2011 relative to the same period a year earlier, 9.0 percent excluding transportation equipment and 10.8 percent excluding defense. The monthly and 12 months rate of growth are consistent with continuing expansion of the US economy. While new orders of the more aggregate component of computers and electronic products fell 1.1 percent relative to a year earlier, the sub-segment of new orders of computers and related products grew 10.8 percent. Transportation equipment new orders rose 10.6 percent and motor vehicles rose 9.9 percent even after disappointing drops of 2.7 percent in Sep relative to Aug and 9.1 percent in Aug relative to Jul. Nondefense aircraft new orders rose 32.1 percent. New orders of total capital goods rose 10.0 percent and nondefense capital goods excluding aircraft rose 11.3 percent.

Table 25, Durable Goods Manufacturers’ Shipments and New Orders, NSA, %

	Jan-Sep 2011/Jan-Sep 2010 ∆%
Total
S	7.7
NO	9.4
Excluding Transport
S	9.0
NO	9.0
Excluding Defense
S	9.5
NO	10.8
Computers & Electronic Products
S	2.2
NO	-1.1
Computers & Related Products
S	11.2
NO	10.8
Transport Equipment
S	3.7
NO	10.6
Motor Vehicles
S	9.5
NO	9.9
Nondefense Aircraft
S	8.3
NO	32.1
Capital Goods
S	5.4
NO	10.0
Nondefense Capital Goods
S	9.4
NO	13.1
Nondefense Capital Goods Excluding Aircraft
S	9.7
NO	11.3

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

Source:

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

New orders and shipments of durable goods are highly cyclical, as shown in Table 26. New orders and shipments fell during the contraction in 2008 and 2009 and also in 2001.

Table 26, US, Percentage Change of Durable Goods Manufacturers’ Shipments and New Orders

Jan/Sep Relative to Earlier Year	Shipments ∆%	New Orders ∆%
2011	7.7	9.4
2010	1.0	7.5
2009	-14.9	-21.7
2008	-0.6	-1.8
2007	0.9	1.3
2006	7.8	9.3
2005	7.9	9.8
2004	0.9	1.7
2003	10.2	11.6

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

Data and other information continue to provide depressed conditions in the US housing market. Table 27 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate. There is good news in the increase of sales of new houses in Sep by 5.7 percent relative to Aug. The cumulative percentage from Jan to Sep is minus 5.4 percent and becomes positive by 9.1 percent when including the 15.3 percent increase in Dec.

Table 27, US, Sales of New Homes at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Sep 2011	313	5.7
Aug	296	-0.3
Jul	297	-1.9
Jun	303	-1.6
May	308	-2.5
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

There is additional information of the report of new house sales in Table 28. The stock of unsold houses stabilized at 6.6 monthly equivalent sales at current sales rates and then dropped to 6.2 in Sep. Median and average house prices oscillate. In Sep, median and average prices of new houses sold without seasonal adjustment fell 3.1 percent and 3.9 percent, respectively. There are only two months with price increases in both median and average house prices: Jun with 8.2 percent in median prices and 3.9 percent in average prices and Apr with 1.9 percent in median prices and 3.1 percent in average prices.

Table 28, US, 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 ∆%
Sep 2011	6.2	204,400	-3.1	243,900	-3.9
Aug	6.6	210,900	-8.7	253,800	-5.7
Jul	6.7	230,900	-3.9	269,200	-1.4
Jun	6.6	240,200	8.2	273,100	3.9
May	6.5	222,000	-1.2	262,700	-2.3
Apr	6.6	224,700	1.9	268,900	3.1
Mar	7.0	220,500	0.2	260,800	-0.8
Feb	7.8	220,100	-8.3	262,800	-4.7
Jan	7.2	240,100	-0.5	275,700	-5.5
Dec 2010	6.9	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

Source: http://www.census.gov/const/newressales.pdf

The depressed level of residential construction and new house sales in the US is evident in Table 29 providing new house sales in the first nine months of various years. Sales of new houses in the first nine months of 2011 are substantially lower than in any year between 1995 and 2011. Sales of new houses in the first nine months of 2011 are lower by 7.9 percent in relation to the same period in 2010 and 18.9 percent below the level in the same period in 2009. The housing boom peaked in 2005 and 2006 when increases in fed funds rates affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in the first nine months of 2011 relative to the same period in 2005 fell 76.5 percent and 71.7 percent relative to the same period in 2006. Similar percentage declines are also observed for the years from 2000 to 2004. Sales of new houses in the first eight nine of 2011 fell 54.8 per cent relative to the same period in 1995.

Table 29, US, Sales of New Homes Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Sep 2011	236
Jan-Sep 2010	256
∆%	-7.9*
Jan-Sep 2009	291
∆% Jan-Sep 2011/ Jan-Sep 2009	-18.9
Jan-Sep 2008	400
∆% Jan-Sep 2011/ Jan-Sep 2008	-41.0
Jan-Sep 2007	629
∆% Jan-Sep 2011/ Jan-Sep 2006	-62.4
Jan-Sep 2006	835
∆% Jan-Sep 2011/Jan-Sep 2006	-71.7
Jan-Sep 2005	1,005
∆% Jan-Sep 2011/Jan-Sep 2005	-76.5
Jan-Sep 2004	935
∆% Jan-Sep 2011/Jan-Sep 2003	-74.8
Jan-Sep 2003	848
∆% Jan-Sep 2011/ Jan-Sep 2003	-72.2
Jan-Sep 2002	753
∆% Jan-Sep 2011/ Jan-Sep 2001	-68.7
Jan-Sep 2001	709
∆% Jan-Sep 2011/ Jan-Sep 2001	-66.7
Jan-Sep 2000	679
∆% Jan-Sep 2011/ Jan-Sep 2000	-65.2
Jan-Sep 1995	522
∆% Jan-Sep 2011/ Jan-Sep 1995	-54.8

*Computed using unrounded data

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

Table 30 provides the entire available series of new house sales from 1963 to 2010. The level of 323 thousand new houses sold in 2010 is the lowest since 1963 in the 47 years of available data. In that period, the population of the US rose from 179 million in 1960 to 309 million in 2010, or 72.6 percent. In fact, there is no year from 1963 to 2010 in Table 30 with sales of new houses below 400 thousand.

Table 30, US, New Houses Sold, NSA Thousands

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

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

Chart 45 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart 45, US, New One-Family Houses Sold in the US, SAAR

Source: US Bureau of the Census

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

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table 31. The percentage change of new house sales from 1963 to 2010 is minus 42.3 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. The rate increased between 1995 and 2005 with increase of 92.4 percent and average yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). The sales of new houses sold in the first nine months of 2011 fell 54.6 percent relative to the same period in 1995.

Table 31, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

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

NA: Not Applicable

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

The available historical data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table 32. On a yearly basis, median and average prices reached a peak in 2007 and the fell substantially.

Table 32, US, Median and Average Prices of New Homes Sold, Annual Data

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

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

Percentage changes of median and average prices of new houses sold in selected years are shown in Table 33. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between Aug 2006 and Aug 2011, median prices of new houses sold fell 14.3 percent and average prices fell 22.5 percent. Between Aug 2010 and Aug 2011, median prices fell 7.7 percent and average prices declined 8.5 percent.

Table 33, US, Percentage Change of New Homes Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% Sep 2000 to Sep 2003	11.9	22.2
∆% Sep 2000 to Sep 2005	40.2	43.8
∆% Sep 2000 to Sep 2011	19.2	17.1
∆% Sep 2005 to Sep 2011	-14.9	-18.6
∆% Sep 2000 to Sep 2006	32.2	42.2
∆% Sep 2006 to Sep 2011	-9.8	-17.7
∆% Sep 2009 to Sep 2011	-5.6	-15.9
∆% Sep 2010 to Sep 2011	-10.4	-9.9

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

Table 34 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 94.5 percent in the 10-city composite of the Case-Shiller home price index and 79.5 percent in the 20-city composite between Aug 2000 and Aug 2005. Prices rose around 100 percent from Aug 2000 to Aug 2006, increasing 104.9 percent for the 10-city composite and almost doubled, increasing by 89.8 percent for the 20-city composite. House prices rose 39.4 percent between Aug 2003 and Aug 2005 for the 10-city composite and 34.9 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC). Similarly, between Aug 2003 and Aug 2006 the 10-city index gained 46.8 percent and the 20-city increased 42.6 percent. House prices have fallen 32.0 percent since 2006 for the 10-city composite and 30.7 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Aug 2011, house prices fell 5.3 percent in the 10-city composite and fell 3.8 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US. The final row in Table 2 shows that house prices increased 29.4 percent between Aug 2000 and Aug 2011 for the 10-city composite and increased 28.9 percent for the 20-city composite.

Table 34, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Aug 2000 to Aug 2003	39.6	33.1
∆% Aug 2000 to Aug 2005	94.5	79.5
∆% Aug 2003 to Aug 2005	39.4	34.9
∆% Aug 2000 to Aug 2006	104.9	89.8
∆% Aug 2003 to Aug 2006	46.8	42.6
∆% Aug 2000 to Aug 2011	42.1	31.5
∆% Aug 2005 to Aug 2011	-26.9	-26.7
∆% Aug 2006 to Aug 2011	-30.7	-30.7
∆% Aug 2009 to Aug 2011	-1.1	-2.2
∆% Aug 2010 to Aug 2011	-3.5	-3.8

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

With the exception of Apr, house prices have declined in every month for both the 10-city and 20-city Case-Shiller composites, as shown in Table 35. In Aug, house prices of the 10-city composite fell 0.2 percent and fell 0.05 percent for the 20-city composite. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table 35, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
Aug 2011	-0.2	-0.05
Jul	-0.2	-0.1
Jun	-0.1	-0.1
May	-0.01	-0.1
Apr	0.3	0.4
Mar	-0.4	-0.7
Feb	-0.4	-0.3
Jan	-0.4	-0.3
Dec 2010	-0.3	-0.3

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae- and Freddie Mac-acquired mortgages” (http://www.fhfa.gov/webfiles/22558/2q2011HPI.pdf). Table 36 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 and 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 36.

Table 36, 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 37. Behavior is not very different than in Table 36 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 37, 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

Monthly and 12 months percentage changes of the FHFA House Price Index are provided in Table 38. In contrast with the Case-Shiller house price index, percentage monthly increases of the FHFA index were positive from Mar to Jun while 12 months percentage changes fell steadily from more than minus 6 percent in Mar to May to minus 4.5 percent in Jun. The FHFA was flat in Jul and fell 0.1 percent in Aug.

Table 38, US, FHFA House Price Index Purchases Only SA. Month and NSA 12 Months ∆%

2011	Month ∆% SA	12 Month ∆% NSA
Aug	-0.1	-4.0
Jul	0.0	-4.1
Jun	0.7	-4.5
May	0.3	-6.1
Apr	0.4	-6.2
Mar	-0.4	-6.1
Feb	-1.6	-5.6
Jan	-1.1	-4.8
Dec 2010		-3.8
Dec 2009		-1.8
Dec 2008		-9.4
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.9
Dec 2004		10.1
Dec 2003		7.9
Dec 2002		7.8
Dec 2001		6.8
Dec 2000		7.1

Source:

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

Chart 46 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IIQ1998 to IIQ2011. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already in IIQ2008 but there was another decline after IIQ2010. The data do not show yet the appreciation from Apr to Jul that is now followed by decline in Aug.

Chart 46, Federal Housing Finance Agency House Price Index Four Quarter Price Change

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

The monthly archive of the NSA house price index of FHFA is used to construct Table 39. The fastest period of price appreciation was from Dec 2000 to Dec 2005 at the extremely high average yearly compound rate of 8.5 percent. Stimulus of housing had already begun in the second half of the 1990s with cumulative appreciation of 27.9 percent and average yearly rate of 5.1 percent. Between 2000 and 2011, the FHFA index increased 29.4 percent at the average yearly rate of 2.4 percent. Appreciation of house prices since 1991, when the FHFA index begins, to 2011, accumulated 83.4 percent for yearly average rate of 3.1 percent.

Table 39, US, FHFA House Price Index NSA ∆% and Average Yearly Growth Rate

	∆%	Yearly Average Growth Rate
Dec 1991 to Dec 2000	42.4	4.0
Dec 1991-Dec 1995	11.3	2.7
Dec 1995-Dec 2000	27.9	5.1
Dec 2000 to Dec 2005	50.3	8.5
Dec 2000 to Dec 2006	54.0	7.5
Aug 2000 to Aug 2011	29.4	2.4
Aug 1991-Aug 2011	83.4	3.1

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

VB Japan. The strong yen and weak world economic growth are beginning to affect manufacturing in Japan. The Markit/JMMA Purchasing Managers’ Index^™ for Sep, released on Sep 30, registered a decline from 51.9 in Aug to 49.3 in Sep, which indicates that the manufacturing sector deteriorates but only marginally (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8595). The marginal contraction interrupts V-shaped recovery from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. For the first time in four months, incoming new business contracted. Weaker demand from China partially explains the fall in demand for new export orders. The survey finds sharp increases in input prices for raw materials and fuels but falling prices for manufacturers’ finished goods. Composite data in the Markit Japan Services PMI^™ shows falling output in the private sector of the Japanese economy in Sep for a seventh consecutive month. Confidence in the service sector fell to the lowest in five months. Companies were forced to reduce their sales prices because of intensive competition. The composite index remained below 50 for the seventh consecutive month, indicating strong reduction in activity of the private sector. Alex Hamilton, economist at Markit, finds that the combination of falling manufacturing production for the first time in five months together with contraction of services indicates contraction of the private sector of the Japanese economy. The all industry activity index of Japan, which approximates GDP, fell 0.5 percent in Aug and was flat in the 12 months ending in Aug.

Table JPY provides the country data table for Japan followed with indicators released in the week of Oct 28.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Sep ∆% 0.0 12 months ∆% 0.0 Blog 10/30/11
Consumer Price Index	Sep SA ∆% 0.0 Sep 12 months NSA ∆% 0.0 Blog 10/30/11
Real GDP Growth	IIQ2011 ∆%: –0.5 on IQ2011; ∆% from quarter a year earlier: –1.1% Blog 09/11/11
Employment Report	Sep Unemployed 2.75 million Change in unemployed since last year: minus 650 thousand Unemployment rate: 4.2% Blog 10/30/11
All Industry Index	Aug month SA ∆% -0.5 12 months NSA ∆% 0.0 Blog 10/23/11
Industrial Production	Sep SA month ∆%: -4.0 12 months NSA ∆% -4.0 Blog 10/30/11
Machine Orders	Total Aug ∆% 6.5 Private Aug ∆%: -3.6 Aug ∆% Excluding Volatile Orders -3.6 Blog 10/16/2011
Tertiary Index	Aug month SA ∆% -0.2 Aug 12 months NSA ∆% 0.2 Blog 10/16/2011
Wholesale and Retail Sales	Sep 12 months: Total ∆%: 0.1 Wholesale ∆%: 0.6 Retail ∆%: -1.2 Blog 10/30/11
Family Income and Expenditure Survey	Sep 12 months ∆% total nominal consumption minus 1.9, real minus 1.9 Blog 10/30/11
Trade Balance	Exports Aug 12 months ∆%: 2.8 Imports Aug 12 months ∆% 19.2 Blog 09/25/11

Links to blog comments in Table JPY: 10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

08/28/11 http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html

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

Japan is experiencing weak internal demand as in most advanced economies. Table 40 provides Japan’s retail and wholesale sales. Retail sales fell 1.2 percent in the 12 months ending in Aug and have not recovered from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Wholesale sales had been driving total sales but grew only 0.6 percent in Sep such that total sales rose only 0.1 percent.

Table 40, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Sep 2011	0.1	0.6	-1.2
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

Source:

http://www.meti.go.jp/english/statistics/index.html

Japan’s industrial production collapsed in Sep with equal monthly and 12 months declines of 4.0 percent. rose 0.8 percent in Aug relative to Jul, as shown in Table 41. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Industrial production was higher in 12 months for the first month in Aug.

Table 41, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Sep 2011	-4.0	-4.0
Aug	0.6	0.4
Jul	0.4	-3.0
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2010		16.7
2009		-21.3
2008		-3.2

Source:

http://www.meti.go.jp/english/statistics/index.html

Chart 47 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2011. The sharp decline in Sep is the best reading in 2011.

Chart 47, Japan, Unemployment Rate 2008-2011

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/roudou/154.htm

The employment report for Japan in Sep in Table 42 is encouraging. The rate of unemployment has fallen to 4.4 percent from 4.6 percent in Jun and then to 4.2 percent in Sep. The number unemployed has declined by 650 thousand, or 19.1 percent, relative to a year earlier.

Table 42, Japan, Employment Report Sep 2011

Unemployed	2.75 million
Change since last year	-650 thousand; ∆% –19.1
Unemployment rate	4.2% SA -0.4 from 4.6% in Jun –0.9 from earlier year
Population ≥ 15 years	110.3 million
Labor Force	65.5 million
Change since last year	-98 thousand ∆% –1.5
Employed	62.8 million
Change since last year	-33 thousand ∆% –0.5
Labor force participation rate	59.4%
Change since last year	-0.8
Employment rate	56.9%
Change since last year	-0.2

Source:

http://www.stat.go.jp/english/data/roudou/154.htm

The survey of household income and consumption of Japan in Table 43 is showing noticeable improvement in Sep relative to earlier months, which can be appreciated in the chart in the link in parentheses (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption fell 1.9 percent in both real and nominal terms in Sep, which is lower than the fall of 3.9 percent in nominal terms and 4.1 percent in real terms in Aug. Almost all items of consumption are still negative in nominal and real terms with the exception of housing, furniture and household utensils, medical care and education. Household income, disposable income and consumption expenditures all fell in nominal and real terms in Sep 2011 relative to a year earlier.

Table 43, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Sep 2011	Nominal	Real
Households of Two or More Persons
Total Consumption	-1.9	-1.9
Excluding Housing, Vehicles & Remittance		-1.6
Food	-1.4	-0.6
Housing	9.7	9.9
Fuel, Light & Water Charges	-6.7	-10.0
Furniture & Household Utensils	0.1	6.5
Clothing & Footwear	-5.0	-5.0
Medical Care	1.6	2.3
Transport and Communications	-9.6	-11.0
Education	26.0	25.7
Culture & Recreation	-5.0	-2.5
Other Consumption Expenditures	-4.3	-4.3*
Workers’ Households
Income	-0.7	-0.7
Disposable Income	-1.4	-1.4
Consumption Expenditures	-2.8	-2.8

*Real: nominal deflated by CPI excluding imputed rent

Source:

http://www.stat.go.jp/english/data/kakei/156.htm

VC China. The HSBC Flash China Manufacturing PMI^™ registered 51.1 in Oct, which is a five month high, while the output index registered a six-month high (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8698). Hongbin Qu, Chief Economist, China & Co-head of Asian Economic Research at HSBC, finds favorable growth in manufacturing together with moderation of prices that dismiss the risk of hard landing for the economy of China. Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Sep 12 months ∆%: 6.5 Jan-Sep ∆%: 7.0 Sep month ∆%: 0.0 Blog 10/16/11
Consumer Price Index	Sep month ∆%: 0.5 Sep 12 month ∆%: 6.1 Jan-Sep ∆%: 5.7 Blog 10/16/11
Value Added of Industry	Sep 12 month ∆%: 13.8 Sep 2011/Sep 2010 ∆%: 13.8 Blog 10/23/11
GDP Growth Rate	Year IIIQ2011 ∆%: 9.1 Quarter IIQ2011 ∆%: 2.2 Blog 10/23/11
Investment in Fixed Assets	Total Jan-Sep ∆%: 24.9 Jan-Sep ∆% real estate development: 32.0 Blog 10/23/11
Retail Sales	Sep month ∆%: 1.3 Sep 12 month ∆%: 17.7 Jan-Sep ∆%: 17.0 Blog 10/23/11
Trade Balance	Sep balance $14.51 billion Exports ∆% 17.1 Imports ∆% 30.9 Blog 10/16/11

Links to blog comments in Table CNY: 10/23 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

VD Euro Area. The Markit Flash Eurozone PMI^® Composite Output Index of Manufacturing and Services, which is closely associated with euro zone GDP, fell further into contraction territory in Oct to 47.2 from 49.1 in Sep for the weakest reading since Jul 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8699). The index has contracted during two consecutive months. Markit calculates core, periphery and individual output indexes. The periphery output index has been falling during five consecutive months. France experienced the first contraction of both manufacturing and services since 2009. Chris Williamson, Chief Economist at Markit, finds increasing risk of a new recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8699). Table EUR provides the regional data table for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IIQ2011 ∆% 0.2; IIQ2011/IIQ2010 ∆% 1.6 Blog 09/11/11
Unemployment	Aug 2011: 10.0% unemployment rate Aug 2011: 15.739 million unemployed Blog 10/02/11
HICP	Sep month ∆%: 0.8 12 months Sep ∆%: 3.0 Blog 010/16/11
Producer Prices	Euro Zone industrial producer prices Aug 12 months ∆%: 5.9 Blog 10/09/11
Industrial Production	Aug month ∆%: 1.2 Aug 12 months ∆%: 5.3 Blog 10/16/11
Industrial New Orders	Jul month ∆%: minus 2.1 Jul 12 months ∆%: 8.5 Blog 09/25/11
Construction Output	Jul month ∆%: 1.4 Jul 12 months ∆%: 1.2 Blog 09/25/11
Retail Sales	Aug month ∆%: minus 0.3 Aug 12 months ∆%: minus 1.0 Blog 10/09/11
Confidence and Economic Sentiment Indicator	Sentiment 94.8 Oct 2011 down from 107 in Dec 2010 Confidence minus 19.9 Oct 2011 down from minus 11 in Dec 2010 Blog 10/30/11
Trade	Jan-Aug 2011/2010 Exports ∆%: 15.2 Imports ∆%: 15.8 Blog 10/16/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR: 10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table 44 with the index falling from 108.0 in Feb to 94.8 in Oct.

Table 44, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Oct 2011	94.8	-6.6	0.2	-19.9	-9.8	-25.3
Sep	95.0	-5.9	0.0	-19.1	-9.8	-26.0
Aug	98.4	-2.7	3.7	-16.5	-8.7	-23.4
Jul	103.0	0.9	7.9	-11.2	-3.6	-24.3
Jun	105.4	3.5	10.1	-9.7	-2.6	-23.5
May	105.5	3.8	9.3	-9.9	-2.4	-24.7
Apr	106.1	5.6	10.3	-11.6	-1.8	-24.3
Mar	107.3	6.6	10.8	-10.6	-1.4	-25.4
Feb	108.0	6.7	11.2	-10.0	-0.2	-24.2
Jan	106.8	6.2	9.9	-11.2	-0.6	-26.0
Dec 2010	107.0	5.3	9.8	-11.0	4.3	-26.7

ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction

Source: European Commission Services

http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm

VE Germany. The Market Flash Germany PMI^® Composite Output Index, which is closely associated with German GDP, rose to a two-month high of 51.2 in Oct from 50.5 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8696). There is divergent behavior of the index with the services component rising and the manufacturing component declining below 50. Tim Moore, Senior Economist at Markit, finds deterioration in orders for exports and the first fall in manufacturing output since the middle of 2009. Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIQ2011 0.1 ∆%; II/Q2011/IIQ2010 ∆% 2.7 Blog 09/11/11
Consumer Price Index	Sep month SA ∆%: 0.1 Aug 12 months ∆%: 2.6 Blog 10/16/11
Producer Price Index	Sep month ∆%: 0.4 12 months NSA ∆%: 5.5 Blog 10/23/11
Industrial Production	Aug month SA ∆%: minus 1.0 12 months NSA: 12.2 Blog 10/09/11
Machine Orders	Aug month ∆%: -2.8 Aug 12 months ∆%: 5.5 Blog 10/09/11
Retail Sales	Jul Month ∆% 0.0 12 Months ∆% minus 1.6 Blog 09/04/11
Employment Report	Employment Accounts: Aug Employed 12 months NSA ∆%: 1.3 Labor Force Survey: Aug Unemployment Rate: 5.9% Blog 10/02/11
Trade Balance	Exports Jul 12 month NSA ∆%: 4.4 (versus ∆% 3.1 Jun and 19.9 May) Imports Jul 12 months NSA ∆%: 9.9 (versus ∆% 6.0 Jun and 15.7 May) Exports Jul month SA ∆%: minus 1.8 percent, versus Jun minus 1.2; Imports Jul month SA minus 0.3∆% versus Jun 0.3 Blog 09/11/11

Links to blog comments in Table DE: 10/30/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

VF France. The Markit Flash France PMI^® Composite Output Index registered the deeper contraction since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8695). Jack Kennedy, Senior Economist at Markit, finds that activity of the sector service fell sharply with output in manufacturing declining for the third consecutive month. The economy could be moving toward contraction. Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Sep month ∆% -0.1 12 months ∆%: 2.2 10/16/11
PPI	Aug month ∆%: 0.0 Aug 12 months ∆%: 6.3 Blog 10/02/11
GDP Growth	IIQ2011/IQ2011 ∆%: 0.0 IIQ2011/IIQ2010 ∆%: 1.6 Blog 10/02/11
Industrial Production	Aug/Jul SA ∆%: Industrial Production 0.5; Manufacturing 0.7 Aug 12 months NSA ∆%: Industrial Production 3.5; Manufacturing 4.2 Blog 10/16/11
Industrial New Orders	Mfg Aug/Jul ∆% 0.6 YOY ∆% 10.7 Blog 10/23/11
Consumer Spending	Sep Manufactured Goods ∆%: minus 0.2 Sep 12 Months Manufactured Goods ∆%: minus 1.0 Blog 10/30/11
Employment	IIQ2011 Unemployed 2.580 million Unemployment Rate: 9.1% Employment Rate: 63.9% Blog 09/04/11
Trade Balance	Aug Exports ∆%: month 6.1, 12 months 10.4 Aug Imports ∆%: month 1.8, 12 months 8.4 Blog 10/09/11
Confidence Indicators	Historical averages 100 Oct: France 95 Mfg Business Climate 97 Retail Trade 94 Services 94 Building 99 Blog 10/23/11

Links to blog comments in Table FR: 10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

The Sep monthly report of household expenditures in consumption goods for France is in Table 45. Total consumption fell 0.5 percent in Sep and consumption of manufactured products fell 0.2 percent in Sep after 0 in Aug and decline of 0.4 percent in Jul. Internal demand is weak throughout most advanced economies.

Table 45, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading Days SA

	Total	Food	Eng. Goods	Energy	Mfg Goods
Sep 2011	-0.5	0.5	0.1	-4.0	-0.2
Aug	0.2	0.2	-0.7	2.8	0.0
Jul	-0.2	-0.5	-0.3	0.1	-0.4
Jun	0.8	-0.4	1.7	1.3	0.9
May	-0.1	-1.4	-1.1	5.7	-1.0
Apr	-1.7	1.5	-2.8	-5.6	-1.1
Mar	-0.9	-0.9	-1.0	-0.6	-0.9
Feb	0.4	0.5	0.7	-0.2	0.6
Jan	-0.4	0.1	-0.1	-2.0	-0.1
Dec 2010	0.3	0.3	0.3	-0.2	0.1

Eng. Goods: Engineered Goods

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20111028

Chart 48 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth.

Chart 48, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20111028

Percentage changes in 12 months of household expenditures in consumption goods in France are provided in Table 46. Performance is weaker in Sep and Aug than in Dec 2010. Consumption of manufactured goods fell 1.0 percent in the 12 months ending in Sep 2011.

Table 46, France, Household Expenditures in Consumption Goods, 12 Month ∆%

	Total	Food	Eng. Goods	Energy	Mfg Goods
Sep 2011	-1.3	0.3	-1.4	-4.4	-1.0
Aug	-0.4	0.0	-0.2	1.0	0.1
Dec 2010	0.8	1.5	0.3	0.6	0.7
Dec 2009	2.2	-0.1	5.9	-2.7	2.8
Dec 2008	-2.2	-0.2	-5.1	1.8	-2.9
Dec 2007	4.1	1.3	6.4	3.7	4.3
Dec 2006	1.6	0.5	4.9	-5.5	2.5
Dec 2005	1.5	0.0	3.3	0.2	1.2
Dec 2004	2.9	1.6	5.1	-0.3	3.2
Dec 2003	2.5	-1.0	3.2	8.9	1.8
Dec 2002	0.3	-0.1	3.3	-7.5	1.0
Dec 2001	3.1	1.8	2.0	9.6	2.4

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20110930

VG Italy. The seasonally adjusted Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® fell from 48.4 in Aug to 45.8 in Sep for the fourth consecutive month of decline (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8670). Phil Smith, economist at Markit, finds that the quarterly average of the index is the lowest in the 13 years of the survey. The impact of the euro zone sovereign crisis and new austerity measures restricted business inflows. Table IT provides the data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Sep month ∆%: 0.0 Sep 12 months ∆%: 3.0 Blog 10/16/11
Producer Price Index	Jul month ∆%: 0.0 Aug 12 months ∆%: 4.5 Blog 10/02/11
GDP Growth	IIQ2011/IIQ2010 SA ∆%: 0.8 IIQ2011/IQ2011 NSA ∆%: 0.3 Blog 09/11/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Aug month ∆%: 4.3 12 months ∆%: 4.7 Blog 10/16/11
Retail Sales	Aug month ∆%: 0.0 Aug 12 months ∆%: minus 0.3 Blog 10/30/11
Business Confidence	Mfg Oct 94.0, Jun 100.1 Construction Sep 78.6, Jun 74.5 Blog 10/30/11
Consumer Confidence	Consumer Confidence Oct 92.9, Jun 102.0 Economy Aug 75.6, Jun 92.3 Blog 10/30/11
Trade Balance	Balance Aug SA -€ 2707 million versus Jul -€ 2440 Exports Aug month SA ∆%: 0.1; Imports Aug month SA ∆%: 0.9 Exports 12 months NSA ∆%: 16.2 Imports 12 months NSA ∆%: 12.5 Blog 10/16/11

Links to blog comments in Table IT:

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

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

10/02/11 http://cmpassocregulationblog.blogspot.com/2011/10/us-growth-standstill-at-08-percent.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

An important part of the analysis of Blanchard (2011WEOSep) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and companies. The restraints consist of low economic growth with high debt/GDP ratio. Table 47 provides retail sales growth for Italy. Besides a zero there are only negative signs in Jul. Retail sales fell 0.3 percent in Aug relative to Jul and declined 0.7 percent in Jan-Aug 2011 relative to Jan-Aug 2010.

Table 47, Italy, Retail Sales ∆%

	Aug 2011/ Jul 2011 SA	Jun-Aug 11/ Mar-May 11 SA	Aug 2011/ Aug 2010 NSA	Jan-Aug 2011/ Jan-Aug 2010
Total	0.0	-0.4	-0.3	-0.7
Food	0.3	0.0	1.6	0.1
Non-food	-0.1	-0.5	-1.2	-1.0

Source: http://www.istat.it/it/archivio/43392

A longer perspective of retail sales in Italy is provided by 12 month rates in 2011 and yearly rates from 2008 to 2010 in Table 48. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010. There is an evident declining trend in 2011.

Table 48, Italy, Retail Sales 12 Months ∆%

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

Source: http://www.istat.it/it/archivio/36712

Chart 49 of the Istituto Nazionale di Statistica provides the 12 months rates of change of retail sales in Italy. Continued deterioration since May was reversed with drop of only 0.3 percent in Aug relative to a year earlier.

Chart 49, Italy, Retail Trade Index

Source: Istituto Nazionale di Statistica

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

Italy’s index of business confidence in manufacturing and construction is provided in Table 49. There has been deterioration below the historical average of 100 since Jun with reading of 94.0 in October. Order books have fallen from minus 21 in Jun to minus 29 in Oct. There is mild improvement in construction with an increase of the index from 74.5 in Jun to 78.6 in Oct.

Table 49, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Oct	Sep	Aug	Jul	Jun
Mfg Con-fidence	94.0	94.5	98.6	98.0	100.1
Order Books	-29	-27	-22	-25	-21
Stocks Finished Products	1	1	1	1	1
Produc- tion Expecta-tion	9	7	5	-1	-1
Construction Confidence		78.6	77.1	75.9	74.5
Order Books		-50	-54	-54	-54
Employment		-18	-17	-19	-22

Mfg: manufacturing

Source: http://www.istat.it/it/archivio/43442

Consumer confidence has been deteriorating continuously in Italy. The index of consumer confidence in Table 50 has declined from 102.0 in Jun to 92.9 in Oct. The decline of the view on the economy from 92.3 in Jun to 75.6 in Oct is quite deep. The view of the future has also fallen sharply from 92.7 in Jun to 81.8 in Oct. The personal and current views have not deteriorated as sharply.

Table 50, Italy, Index of Consumer Confidence 2005=100

	Oct	Sep	Aug	Jul	Jun
Con-fidence	92.9	94.2	96.4	99.9	102.0
Economy	75.6	78.3	81.6	88.1	92.3
Personal	98.6	100.6	101.9	104.3	105.7
Current	101.0	101.2	104.3	109.8	108.7
Future	81.8	85.5	86.1	87.2	92.7

Source: http://www.istat.it/it/archivio/43405

IVH United Kingdom. The Markit/CIPS UK Manufacturing PMI^®rose to 51.1 in Sep away from the contraction level of 49.4 in Aug for the first reading above 50 in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8631). The average reading of the PMI in IIIQ2011 of 50 is substantially lower than 59.4 in IIQ2011, which was close to a record, and 52.7 in IIQ2011. David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply finds improvement after the low of 26 months registered in Aug. The concern is with falling export orders resulting from the weak global economy and especially conditions in the euro zone. The seasonally adjusted Business Activity Index of the Markit/CIPS UK Services PMI^® rose from 51.1 in Aug, which was an eight-month low, to 52.9 in Sep (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8669). There has been growth for nine consecutive months but the average in IIIQ2011 of 53.1 is the weakest quarterly level in 2011. Table UK provides the data table for the United Kingdom.

Table UK, UK Economic Indicators


CPI	Sep month ∆%: 0.6 Sep 12 months ∆%: 5.2 Blog 10/23/11
Output/Input Prices	Output Prices: Sep 12 months NSA ∆%: 6.3; excluding food, petroleum ∆%: 3.8 Input Prices: Sep 12 months NSA ∆%: 17.5 Excluding ∆%: 13.3 Blog 10/09/11
GDP Growth	IIQ2011 prior quarter ∆% 01; year earlier same quarter ∆%: 0.6 Blog 10/09/11
Industrial Production	Aug 2011/Aug 2010 NSA ∆%: Industrial Production -1.0; Manufacturing 1.5 Blog 10/16/11
Retail Sales	Sep month SA ∆%: 0.6 Sep 12 months ∆%: 0.6 Blog 10/23/11
Labor Market	May-Jul Unemployment Rate: 8.1% Blog 10/16/11
Trade Balance	Balance Aug -₤1,877 million Exports Aug ∆%: 0.5 Jun/Aug ∆%: 9.8 Imports Aug ∆%: -0.5 Jun/Aug ∆%: 6.4 Blog 10/16/11

Links to blog comments in Table UK: 10/23/11 http://cmpassocregulationblog.blogspot.com/2011/10/properity-without-inflation-world.html

10/16/11 http://cmpassocregulationblog.blogspot.com/2011/10/odds-of-slowdown-or-recession-united.html

10/09/11 http://cmpassocregulationblog.blogspot.com/2011/10/twenty-nine-million-unemployedunderempl.html

09/25/11 http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html

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

09/11/11 http://cmpassocregulationblog.blogspot.com/2011/09/financial-turbulence-wriston-doctrine.html

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

VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html

Table 51 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 51 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 18.7 percent by Fri Oct 28, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table 51 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 51, 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	10/28 /2011
Rate	1.1423	1.5914	1.192	1.415
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/28 2011
Rate	8.2798	8.2765	6.8211	6.3588
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

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

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

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

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

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

Table 52 extracts four rows of Table 51 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 54 below, the dollar has devalued again to USD 1.415/EUR or by 18.7 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 6.3538/USD on Fri Oct 28, 2011, or by an additional 6.8 percent, for cumulative revaluation of 23.2 percent. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. The rate of CNY 6.3588/USD on Fri Oct 28 amounts to appreciation of 0.4 percent, which could signal continuation of the policy of appreciation. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table 52, 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	10/28 /2011
Rate	1.1423	1.5914	1.192	1.415
CNY/USD	01/03 2000	07/21 2005	7/15 2008	10/28 2011
Rate	8.2798	8.2765	6.8211	6.3588

Source: Table 51.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table 53. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table 53, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

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

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

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

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

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 51 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 54, 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 10/28/11,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets. Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. Recovering risk financial assets in column “∆% Trough to 10/28/11” are in the range from 2.6 percent for the Nikkei Average and 26.3 percent for the DJIA. Michael Mackenzie and Robin Wigglesworth, writing on Oct 21, 2011, on “Us earnings tell story of resilience,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/c44187d4-fb1f-11e0-bebe-00144feab49a.html#axzz1bVlVmY6d), analyze the strong earnings performance of US companies that explains the recovery of the DJIA by 26.3 percent from the trough and of the S&P 500 by 25.7 percent. Mackenzie and Wigglesworth quote S&P Capital IQ that a blended average of actual and forecast earnings on IIIQ2011 relative to IIIQ2010 could show growth of 14.6 percent. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 10/28/11” had double digit gains relative to the trough around Jul 2, 2010. There are now only three valuations with recovery of less than 10 percent from the trough around Jul 2: European stocks index STOXX 50 is now 2.8 percent above the trough on Jul 2, 2010; China’s Shanghai Composite is 3.8 percent above the trough; the NYSE Financial Index is 4.4 percent above the trough on Jul 2, 2010; and Japan’s Nikkei Average is 2.6 percent below the trough on Aug 31, 2010 and 20.6 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9050.47 on Fri Oct 28, which is 11.7 percent below 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. Germany’s DAX is 11.4 percent above the trough on Apr 25, 2010. The dollar depreciated by 18.7 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 10/28/2011” shows gains for all risk financial assets in Table 54. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table 54 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 10/28/11” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Oct 28, 2011. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 10/28/11” but also relative to the peak in column “∆% Peak to 10/28/11.” There are now still only four indexes above the peak: DJIA by 9.2 percent, S&P 500 by 5.6 percent, DJ UBS Commodities Index by 4.0 percent and Germany’s Dax by 0.2 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 16.8 percent, Nikkei Average by 20.6 percent, Shanghai Composite by 21.9 percent, STOXX 50 by 12.9 percent, Dow Global by 5.9 percent and Dow Asia Pacific by 2.5 percent. The factors of risk aversion have adversely affected the performance of risk financial 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. The situation of risk financial assets has worsened.

Table 54, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 10/28 /11	∆% Week 10/ 28/11	∆% Trough to 10/ 28/11
DJIA	4/26/ 10	7/2/10	-13.6	9.2	3.6	26.3
S&P 500	4/23/ 10	7/20/ 10	-16.0	5.6	3.8	25.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	-16.8	7.1	4.4
Dow Global	4/15/ 10	7/2/10	-18.4	-5.9	6.4	15.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.5	7.1	11.3
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-20.6	4.3	2.6
China Shang.	4/15/ 10	7/02 /10	-24.7	-21.9	6.7	3.8
STOXX 50	4/15/10	7/2/10	-15.3	-12.9	3.6	2.8
DAX	4/26/ 10	5/25/ 10	-10.5	0.2	6.3	11.9
Dollar Euro	11/25 2009	6/7 2010	21.2	6.5	-1.9	-18.7
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	4.0	4.1	21.7
10-Year Tre.	4/5/ 10	4/6/10	3.986	2.326

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

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

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 55 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 55 for Oct 28 shows that the S&P 500 is now 6.0 percent above the Apr 26, 2010 level and the DJIA is 9.2 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 55, Percentage Changes of DJIA and S&P 500 in Selected Dates

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

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

Table 56, 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 now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table 56 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 6.6 percent to ZAR 8.028/USD on Oct 28, which is still 30.7 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.9 percent stronger at SGD 1.241/USD on Oct 28 relative to the trough of depreciation but still stronger by 20.1 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43 on Dec 5, 2008 but appreciated to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 2.2 percent relative to the trough to BRL 1.775/USD on Oct 21 but still stronger by 26.9 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The monetary policy committee (COPOM) of the Banco Central do Brasil, Brazil’s central bank, lowered the policy rate by another 50 basis points on Oct 19, 2011 (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.50 percent, without bias. The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of convergence to inflation to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table 56 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table 56, Exchange Rates

	Peak	Trough	∆% P/T	Oct 28, 2011	∆T Oct 28 2011	∆P Oct 28 2011
EUR USD	7/15 2008	6/7 2010		10/28 2011
Rate	1.59	1.192		1.415
∆%			-33.4		15.8	-12.4
JPY USD	8/18 2008	9/15 2010		10/28 2011
Rate	110.19	83.07		75.812
∆%			24.6		8.7	31.2
CHF USD	11/21 2008	12/8 2009		10/28 2011
Rate	1.225	1.025		0.862
∆%			16.3		15.9	29.6
USD GBP	7/15 2008	1/2/ 2009		10/28 2011
Rate	2.006	1.388		1.613
∆%			-44.5		13.9	-24.4
USD AUD	7/15 2008	10/27 2008		10/28 2011
Rate	1.0215	1.6639		1.07
∆%			-62.9		43.8	8.5
ZAR USD	10/22 2008	8/15 2010		10/28 2011
Rate	11.578	7.238		7.714
∆%			37.5		-6.6	33.4
SGD USD	3/3 2009	8/9 2010		10/28 2011
Rate	1.553	1.348		1.241
∆%			13.2		7.9	20.1
HKD USD	8/15 2008	12/14 2009		10/28 2011
Rate	7.813	7.752		7.763
∆%			0.8		-0.1	0.6
BRL USD	12/5 2008	4/30 2010		10/28 2011
Rate	2.43	1.737		1.673
∆%			28.5		3.7	31.1
CZK USD	2/13 2009	8/6 2010		10/28 2011
Rate	22.19	18.693		17.43
∆%			15.7		6.8	21.5
SEK USD	3/4 2009	8/9 2010		10/28 2011
Rate	9.313	7.108		6.385
∆%			23.7		10.2	31.4
CNY USD	7/20 2005	7/15 2008		10/28 2011
Rate	8.2765	6.8211		6.3588
∆%			17.6		6.8	23.2

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

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

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

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

Table 57, 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 57. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 2.326 percent at the close of market on Fr Oct 28, 2011 would be equivalent to price of 102.6540 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 1.4 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 Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table 57 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Oct 26, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2829 billion, or $2.8 trillion, with portfolio of long-term securities of $2607 billion, or $2.6 trillion, consisting of $1582 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $108 billion Federal agency debt securities and $849 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1586 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 III World Financial Turbulence, 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 57, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

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

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

Source:

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

VII Economic Indicators. Crude oil input in refineries fell to 14,678 thousand barrels per day on average in the four weeks ending on Oct 21 from 14,807 thousand barrels per day in the four weeks ending on Oct 14, as shown in Table 58. The rate of capacity utilization in refineries continues at a relatively high level of 85.0 percent on Oct 21, 2011, which is slightly higher than on Oct 22, 2010 at 82.8 percent but slightly lower than 85.7 on Oct 14, 2011. Imports of crude oil fell from 8,816 thousand barrels per day on average to 8,734 thousand barrels per day. Decreasing utilization in refineries with decreasing imports resulted in increase of commercial crude oil stocks by 4.7 million barrels from 332.9 million barrels on Oct 14 to 337.6 million barrels on Oct 21. Gasoline stocks fell 1.4 million barrels and stocks of fuel oil fell 4.2 million barrels. Supply of gasoline fell from 9,013 thousand barrels per day on Oct 22, 2010, to 8,767 thousand barrels per day on Oct 21, 2011, or by 2.7 percent, while fuel oil supply rose 7.5 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 58 also shows increase in the world price of crude oil by 31.3 percent from Oct 15, 2010 to Oct 14, 2011. Gasoline prices rose 37.2 percent from Oct 22, 2010 to Oct 21, 2011. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

Table 58, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	10/21/11	10/14/11	10/22/10
Crude Oil Refineries Input	14,678	14,807	14,044
Refinery Capacity Utilization %	85.0	85.7	82.8
Motor Gasoline Production	9,112	9,198	8,939
Distillate Fuel Oil Production	4,466	4,505	4,256
Crude Oil Imports	8,734	8,816	8,746
Motor Gasoline Supplied	8,767 ∆% 2011/2010= –2.7%	8,883	9,013
Distillate Fuel Oil Supplied	4,150 ∆% 2011/2010 = 7.5%	4,042	3,862
	10/21/11	10/14/11	10/22/10
Crude Oil Stocks Million B	337.6 ∆= 4.7 MB	332.9	366.2
Motor Gasoline Million B	204.9 ∆= –1.4 MB	206.3	214.9
Distillate Fuel Oil Million B	145.5 ∆= -4.2 MB	149.7	168.4
World Crude Oil Price $/B	108.84 ∆% 2011/2010 37.2	106.33	79.35
	10/24/11	10/17/11	10/25/10
Regular Motor Gasoline $/G	3.462 ∆% 2011/2010 22.9	3.476	2.817

B: barrels; G: gallon

Source:

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

Chart 50 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks have trended downwardly in the past few weeks with an increase in the week of Oct 7.

Chart 50, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

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

Chart 51 of the US Energy Information Administration provides closer view of US crude oil stocks since Dec 2009. Crude oil stocks rose in a clear trend throughout 2010 but began to drop on a downward trend since May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower.

Chart 51, Crude Oil Futures

Source: US Energy Information Administration

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

Chart 52 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart 52 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices resulting from the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart 52, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table 59. Seasonally adjusted claims fell 2000 from 404,000 on Oct 15 to 402,000 on Oct 22. Claims not adjusted for seasonality increased 17,007 from 357,224 on Oct 15 to 374,231 on Oct 22. Seasonal adjustment changed increase in initial claims from 17,007 to decrease of 2000.

Table 59, US, Initial Claims for Unemployment Insurance

2011	SA	NSA	4-week MA SA
Oct 22	402,000	374,231	405,500
Oct 15	404.000	357,224	403,750
Change	-2,000	+17,007	+1,750
Oct 8	411,000	405,906	409,750
Prior Year	405,500	408,489	449,750

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

Source:

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

Table 60 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2000 to 2011. Seasonally adjusted claims typically exceed claims not adjusted for seasonality. Claims not seasonally adjusted have decline from 499,374 on Oct 24, 2009 to 374,231 on Oct 15, 2011 but are much higher than 291,372 on October 21, 2006.

Table 60, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Oct 21, 2000	263,445	295,000
Oct 20, 2001	429,542	482,000
Oct 19, 2002	349,927	412,000
Oct 25, 2003	352.117	379,200
Oct 23, 2004	317,573	338,000
Oct 22, 2005	304,733	324,000
Oct 21, 2006	291.372	313,000
Oct 20 2007	307,675	336,000
Oct 25, 2008	449,429	481,000
Oct 24, 2009	499,374	531,000
Oct 23, 2010	408,489	435,000
Oct 22, 2011	374,231	402,000

Source

http://workforcesecurity.doleta.gov/unemploy/finance.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 61 provides inflation of the CPI. In Jan-Sep 2011, CPI inflation for all items seasonally adjusted was 4.1 percent in annual equivalent, that is, compounding inflation in the first nine months and assuming it would be repeated during the remainder of 2011. In the 12 months ending in Sep, CPI inflation of all items not seasonally adjusted was 3.9 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.4 percent annual equivalent in Jan-Sep and 2.0 percent in 12 months. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.00 percent for three months or virtually zero, 0.06 percent for six months, 0.11 percent for 12 months, 0.29 percent for two years, 0.49 percent for three years, 1.13 percent for five years, 1.74 percent for seven years, 2.32 percent for ten years and 3.38 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 61. 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 61, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Sep 2011/Aug 2010 NSA	∆% Annual Equivalent Jan-Sep 2011 SA
CPI All Items	3.9	4.1
CPI ex Food and Energy	2.0	2.4

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

VII Conclusion. The US economy is in growth standstill at an annual equivalent rate in the first three quarters of 1.4 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 29 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. The crucial issue of “let’s twist again “monetary policy is if lowering the yields of long-term Treasury securities would have any impact on investment and consumption or aggregate demand. The decline of long-term yields of Treasury securities would have to cause decline of yields of asset-backed securities used to securitize loans for investment by firms and purchase of durable goods by consumers. The decline in costs of investment and consumption of durable goods would ultimately have to result in higher investment and consumption. It is possible that the decline in yields captured by event studies is ephemeral. The decline in yields just after “let’s twist again” monetary policy was caused by the flight out of risk financial assets into Treasury securities, which is the opposite of the desired effect of encouraging risk-taking in asset-backed securities and lending. The yield curve has edged upwardly in spite of “let’s twist again monetary policy” (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

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

References

Batini, Nicoletta and Edward Nelson. 2002. The lag from monetary policy actions to inflation: Friedman revisited. London, Bank of England, External MPC Unit Discussion Paper No. 6, Jan.

Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html

Blanchard, Olivier. 2011WEOSep. Foreword to IMF 2011WEOSep: XIII-XIV.

Cochrane, John H. 2011Jan. Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review 55 (1, Jan): 2-30.

Cochrane, John H. 2011Sep28. Last chance to save the euro. Wall Street Journal, Sep 28 http://professional.wsj.com/article/SB10001424052970204422404576594971418554358.html?mod=WSJ_hps_sections_opinion

Culbertson, J. M. 1961. The lag in effect of monetary policy: reply. Journal of Political Economy 69 (5, Oct): 467-77.

De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.

European Commission. 2011Oct26SS. Euro summit statement. Brussels, European Commission, Oct 26 http://ec.europa.eu/news/economy/111027_en.htm

European Commission. 2011Oct26MRES. Main results of Euro Summit. Brussels, European Commission, Oct 26 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/125645.pdf

Friedman, Milton. 1961. The lag in effect of monetary policy. Journal of Political Economy 69 (5, Oct): 447-66.

IMF. 2011WEOSep. World economic outlook Sep 11: slowing growth, rising risks. Washington, DC, IMF Sep http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf

Meltzer, Allan H. 2005. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review 87 (2, Part 2, Mar/Apr): 145-72.

Meltzer, Allan H. 2010a. A history of the Federal Reserve, Volume 2, Book 1, 1951-1969. Chicago: University of Chicago Press.

Meltzer, Allan H. 2010b. A history of the Federal Reserve, Volume 2, Book 2, 1970-1986. Chicago: University of Chicago Press.

Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos Manuel. 1986. O Cruzado e o Austral. São Paulo: Editora Atlas.

Reinhart, Carmen M. and Kenneth Rogoff. 2010GTD. Growth in a time of debt. American Economic Review 100 (2): 1-9.

Robinson, Joan. 1947. Beggar-my-neighbour remedies for unemployment. In Joan Robinson, Essays in the Theory of Employment, Oxford, Basil Blackwell, 1947.

Romer, Christina D. and David H. Romer. 2004. A new measure of monetary shocks: derivation and implications. American Economic Review 94 (4, Sep): 1055-84.

Samuelson, Paul A. 1952. The transfer problem and transport costs: the terms of trade when impediments are absent. Economic Journal 62 (246, Jun): 278-304.

Samuelson, Paul A. 1974. Lessons from the current economic expansion. American Economic Review 64 (2, May): 75-7.

Sargent, Thomas J. 1982. The ends of four big inflations. In Robert E. Hall, ed. Inflation: causes and effects. Chicago: Chicago University Press.

Sargent, Thomas J. 1999. The conquest of American inflation. Princeton: Princeton University Press.

Taylor, John B. 1997. Comment. In Christina Romer and David Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.

Tobin, James. 1974. Monetary policy in 1974 and beyond. Brookings Papers on Economic Activity 1 (1974): 219-32.

Wriston, Walter B. 1982. Banking against disaster. New York Times, Sep 14.

Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf

Appendix I. The Great Inflation

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

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

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

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

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

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

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

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

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

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

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

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

CMP Associates Regulation Blog

Followers

Blog Archive

About Me

Sunday, October 30, 2011

Slow Growth Driven by Reducing Savings, Declining Real Disposable Income, World Financial Turbulence, Global Inflation and World Economic Slowdown