reality is only those delusions that we have in common...

Saturday, October 2, 2010

week ending Oct 2

US Fed balance sheet shrinks on fewer MBS - The U.S. Federal Reserve's balance sheet shrank in the latest week on a sharp reduction in the central bank's holdings of mortgage-backed securities, Fed data released on Thursday showed. The balance sheet fell to $2.281 trillion in the week ended Sept 29 from $2.290 trillion the previous week.  Last week, the U.S. central bank hinted it is open to expand its balance sheet if the economy warrants more policy easing. Analysts predict the Fed may add up to $1 trillion in Treasuries on its balance sheet.  The central bank's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac  and the Government National Mortgage Association (Ginnie Mae) fell to $1.079 trillion from $1.092 trillion in the prior week. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system were little changed for a second week at $154.11 billion.The central bank's holding of U.S. government securities totaled $811.67 billion on Wednesday, up from $805.11 billion last week. For balance sheet graphic:

US Fed Total Discount Window Borrowings Wed $49.77 Billion - The U.S. Federal Reserve's balance sheet contracted slightly in the latest week as the central bank boosted its holdings of U.S. Treasury securities. The Fed's asset holdings in the week ended Sept. 29 was $2.302 trillion, compared with $2.310 trillion a week earlier, the Fed said in a weekly report released Thursday. In the latest week, the Fed's holdings of U.S. Treasury securities rose to $ 811.67 billion on Wednesday from $805.11 billion a week earlier. Holdings of mortgage-backed securities decreased to $1.079 trillion Wednesday from $1.092 trillion in the previous week. Meanwhile, total borrowing from the Fed's discount lending window slid to $ 49.77 billion Wednesday from $51.26 billion a week earlier. Borrowing by commercial banks jumped to $99 million Wednesday from $78 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts increased to $3.238 trillion, from $3.229 trillion in the previous week.

Fed Offering $5 Billion In 28-Day Term Deposits - The Federal Reserve plans to offer $5.0 billion in 28-day term deposits Monday, using a tool to soak up cash from the financial system. Settlement is Oct. 7, 2010. The term deposits mature Nov. 4, 2010. Auction results will be published on the Fed's website Tuesday. Under the Fed's facility, participating institutions can submit up to three competitive bids. The minimum amount per bid is $10,000, as is the minimum award. The maximum bid amount per institution is $1.25 billion. The maximum award is $1.25 billion. The maximum bid rate will be 0.75%. Banks can submit noncompetitive bids as well for the offering. The minimum amount for a noncompetitive bid is $10,000. The maximum amount is $5 million and should be submitted in increments of $10,000.

Fed's Plosser: Repeats Must Return Bal-Sheet To Tsy Only- Philadelphia Federal Reserve President Charles Plosser Friday repeated his concern over "unconstrained" flexibility that new monetary policy tools give to the central bank, stressing the need to return the composition of the Fed's balance sheet to Treasuries only and reducing its size to pre-crisis levels.  When there is too much flexibility policies tend to have an "inflation bias," posing risks to their credibility.  So he favors, he said, the creation of "a new Fed-Treasury Accord that requires the Fed to hold only U.S. Treasury securities and discount window loans on its balance sheet" as a way to separate fiscal from monetary policy policy in particular.  "My preferred choice of an operating regime is the one that imposes some constraint on the size of the balance sheet to give the central bank a mechanism for saying no to fiscal authorities who may want to use the central bank's balance sheet to achieve other objectives," he said.

How Much Has the Fed Lost? - The Federal Reserve has spent over one trillion dollars buying mortgage backed securities, so-called toxic assets.  How much are these assets worth?  It's a simple question but one that is exceedingly difficult to answer not the least because the Fed has resisted being audited in defense of its so-called independence. One might say the Fed's actions have been hidden behind a veil of independence.   We do know that the Fed purchased many of its mortgage securities from the GSEs, especially Fannie Mae and Freddie Mac.  We also know that these GSEs have cost the taxpayers at least $148 billion so far and may end up costing $400 billion in one "worst case" scenario.  How much larger would the GSE losses have been if the Fed had not taken these mortgages off their books?  The Fed also bought toxic securities from the banks and one imagines that the Fed got the short end of that stick.  How much larger would bank losses have been without these purchases?

WSJ: Fed Weighs new QE Approach - From the WSJ: Fed Weighs New Tactics to Bolster Recovery Rather than announcing massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds. Although QE2 isn't a done deal, I think it is very likely. This article suggests two approaches: 1) a large scale purchase program ( longer-term Treasury securities), or 2) a smaller-scale program with the amounts set at each FOMC meeting. In Fed Chairman Ben Bernanke's speech at Jackson Hole on Aug 27th, he seemed to favor the first approach:  The channels through which the Fed's purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel

Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame - One of the main open questions on QE2, is how large the Fed's next monetization episode will be. This year's most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke's next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a Fed that is known for "forceful" action. Others, such as Bank of America's Priya Misra, have loftier expectations: "We expect the size of QE2 to be at least as much as QE1 in terms of duration demand." As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities. It is thus safe to assume that the Fed's QE2 will likely amount to roughly $1.5 trillion in outright security purchases. However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

In Comments, Fed Officials Signal New Economic Push - Momentum within the Federal Reserve this week continued to build toward resuming purchases of huge amounts of government debt to help the flagging economic recovery.  The president of the Federal Reserve Bank of New York, the most powerful of the 12 Fed regional presidents, made a significant argument for the strategy Friday, joining similar expressions of cautious support this week by his counterparts in Boston and Chicago. Their statements helped solidify a belief on Wall Street that the central bank was likely to resume large-scale purchases of Treasury securities after the Nov. 2 elections.  The Fed has kept short-term interest rates, its main policy tool, near zero since December 2008. The theory behind the new debt-buying strategy is that the central bank can free up credit by creating money to buy long-term assets and therefore make the cost of long-run borrowing, already low, even cheaper.

Fed officials voice differences on QE - FT - Divisions within the Federal Reserve about the merits of using more quantitative easing to boost the economy have been laid bare in divergent speeches by the presidents of three regional Federal Reserve banks.Eric Rosengren of Boston, Narayana Kocherlakota of Minneapolis and Charles Plosser of the Philadelphia Fed took different positions on everything from the inflation outlook to the effectiveness of quantitative easing – which means pushing cash into the economy by buying long-term assets – in boosting economic growth. At its September meeting the Fed’s rate-setting Open Market Committee signalled that it was looking at taking further action because inflation was below its comfort zone and the economy was not growing fast enough to bring down a 9.6 per cent unemployment rate.Differing views in the FOMC will shape the size and format of any new programme of quantitative easing but they do not mean the committee is likely to be deadlocked. The FOMC is likely to support Ben Bernanke, Federal Reserve chairman, if he judges that further QE is necessary at the Fed’s next meeting in November.

Three Fed Officials, Three Divergent Views -Three Federal Reserve officials are out today with divergent views on the economy and on whether the Fed should buy more Treasury bonds (which is known to some as quantitative easing) to push down long-term interest rates and stimulate growth.Two officials, the Minneapolis Fed’s Narayana Kocherlakota and the Boston Fed’s Eric Rosengren, had gloomy assessments of the economic outlook. Mr. Kocherlakota said he’s revising down his growth forecasts, which could be a leading indicator of the way the rest of the Fed is going. One official, the Philadelphia Fed’s Charles Plosser, wasn’t totally downbeat about the economy, but was hardly encouraging.All three came out differently on whether the Fed should do more to support growth. Mr. Kocherlakota’s discussion is especially intriguing. He’s been skeptical of doing more, but his gloomy forecast clearly has him looking intently at the Fed’s options.Here they are in digestible categories:

Bernanke on Fed Disagreements, Group Decision Making - Federal Reserve Chairman Ben Bernanke acknowledged deep divisions at the central bank about how to handle today’s complex economic problems. But he also welcomed the dissent and said it might actually lead the Fed to better decisions. “There is disagreement, but ultimately the committee finds a consensus and we work together to figure out what the right thing is for the country,” Bernanke said in reference to the Federal Open Market Committee, the Fed’s policy-making body which consists of its board of governors in Washington and 12 regional Fed bank presidents.

The Case for More Central Bank Action - The market has been seized by this all-encompassing notion that Ben Bernanke and his merry hipsters at the Fed are going to finally live up to his infamous nickname and start almost literally throwing money out of helicopters. You can see it everywhere: gold is surging, the dollar is plunging, stocks are rising, Treasurys are rallying.I almost feel bad for Bernanke. I’m sure that when he made the now-infamous helicopter speech in 2002, it was somewhat tongue-in-cheek (economist humor, as you may imagine, is rather subtle (search the speech for “printing press,” you’ll get the idea.)) But as the economy teeters between recovery and a tumble back into the muck, the Fed is being backed into a corner, by the state of the economy, gridlock in Washington, and pressure from the markets. Deflation looms overhead, fangs dripping with saliva. Somebody needs to step up here, but nobody is. I don’t think that the Fed thinks that there’s really much more it can do here; they’ve made noise to that effect. But make no mistake, if forced, the central bank will do something.

More Quantitative Easing on the Way? - In remarks Mr. Dudley said: Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation. I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomesThat certainly seems a clear statement that Mr. Dudley believes more asset purchases are necessary, should trends continue. As economic researchers at Goldman Sachs wrote in a client note, “In other words, in President Dudley’s view, the onus is on the economy to improve and to do so quickly; otherwise further easing measures from the Fed are warranted.”

Fed’s Dudley: Further Action Is ‘Likely’- A top Federal Reserve official said Friday the central bank is almost certain to have to offer fresh support to ensure that already tepid economic growth does not further falter, although he stopped short of saying what type of stimulus he prefers. “The current situation is wholly unsatisfactory” and “both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Federal Reserve Bank of New York President William Dudley said in a prepared text. “We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley said. “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,”

A Perspective on the Future of U.S. Monetary Policy - Chicago Fed President Charles Evans: The modern economic theory of liquidity traps indicates that the optimal policy response at zero-bound is to lower the real interest rate, almost surely by employing unconventional policy tools. Theory also indicates that, in the absence of such policy stimulus, the factors that generate high risk aversion could very well stifle a meaningful recovery, keep unemployment high and reinforce disinflationary pressures – clearly an undesirable equilibrium. So, in the coming weeks and months, as I assess the incoming data, update my forecast and deliberate on the best monetary policy approach, I will be pondering two key issues: How much more should monetary policy do to reduce the shortfalls in meeting our dual mandate responsibilities for employment and price stability; and what tools should we use.

The consequences of central bank action - Monetary economist Adam Posen's speech (pdf) counseling more aggressive action from central banks is worth reading in full, but people should pay particular attention to this part: Periods of persistently sub-potential growth and underemployed resources erode political moderation and the liberal governments we also must pass on to future generations. Let us not forget that it was sustained high employment and austerity, the sense that governments were unresponsive to average people’s dire economic conditions, which led to the rise of extremist intolerant parties in pre-war Europe. As we have seen sparks of late, thankfully limited, it can also lead to less liberal economic relations between nations, or even trade wars. Posen is speaking to a European audience, but let's talk about America.

The Fed and the Corner It’s Being Painted Into -The debate within the Federal Reserve continues, with Eric Rosengren worrying about an “anemic” recovery, and Charles Plosser arguing that the Fed has done enough.My vote for most important speech of the week goes to Adam Posen’s remarks in London on Tuesday. Mr. Posen is an American economist serving as an adviser to the Bank of England. He’s worried that the global economy remains too weak and needs more help. You can read the whole speech here. By e-mail, I asked if he would elaborate, and he did. Here are his further thoughts: My basic argument is that the current macro policy discussion is mostly missing the point. Our situation (in the U.K., the U.S., and arguably in most of the major Western economies) is one where policy makers face a long uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver recovery on its own. Insufficient monetary action risks turning sustained low growth and near deflation into a self-fulfilling prophecy. This happened in Japan in the 1990s, and in U.S. and Europe in the 1930s. I don’t think things will be “that bad” in the sense of an outright depression, but we face a real risk of long-term stagnation with some distracting upward blips and slowly eroding capacity

Fed Will Boost Balance Sheet by $500 Billion: Survey - The Federal Reserve will boost its balance sheet by about half a trillion dollars over a six-month period beginning in November and keep it inflated for up to a year, according to a survey of leading markets participants by CNBC. About 70 percent of the 67 respondents, which include economists, strategists and fund managers, believe the Fed will begin quantitative easing again.  Of those, 80 percent believe the Fed will start before the end of this year. November is seen as the most likely month for the Fed to restart asset purchases by 38 percent of those who took the survey, but December was a close second with 32 percent. “The trigger for the resumption of quantitative easing late this year will be an increase in unemployment back into double-digits,” wrote Mark Zandi, of Moody’s Economy.Com. He thinks the Fed will act in December and ultimately purchase an additional $1 trillion in assets.

Fed Mulls New Bond Approach - Federal Reserve officials are considering new tactics for the purchase of long-term U.S. Treasury securities to bolster a disappointingly slow recovery.   Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.  The Fed hasn't yet committed to stepping up its bond purchases, and members haven't settled on an approach. After its meeting last week, the Fed's policy committee said it was "prepared" to take new steps if needed.

Fed's Lockhart: The Approaching Monetary Policy Decision Dilemma - From Atlanta Fed President Dennis Lockhart: The Approaching Monetary Policy Decision Dilemma In the coming weeks monetary policymakers must come to grips with the question of whether there is anything they can do to improve the situation in the economy and, if so, what that action should be. The circumstances of weak recovery, persistent unemployment, dangerously low inflation, and the policy interest rate (the primary tool of modern monetary policy) at the zero lower bound present a tough analytical challenge. If action is taken by the Fed, a clear option is to grow the size of the balance sheet since the policy interest rate, for all practical purposes, cannot go any lower. Growth of the balance sheet would be accomplished by a second round of asset purchases (probably Treasury bills and notes) paid for by newly created money. The technical term for this policy is "quantitative easing," and the prospect of more of this approach is being referred to as QE2.

The Approaching Monetary Policy Decision Dilemma - Atlanta Fed - Lockhart - Although the pace of economic expansion has slowed, Lockhart believes the slowdown will likely prove temporary. He expects a gradual improvement in economic growth and employment.  The risk of deflation cannot be dismissed, but Lockhart does not expect outright deflation to take hold.  Lockhart said that one possible explanation of slow growth and low inflation in the United States is an elevated state of uncertainty, which is affecting consumer and business behavior. Business contacts tell him that the uncertainty is related to the path of the economy and the direction of fiscal, regulatory, and tax policies, as well as the sovereign debt situation in Europe and the outcome of upcoming U.S. elections.  A monetary policy dilemma is taking shape about causes of the slowdown in the U.S. economic expansion and the low measured rate of inflation, whether the Fed can do more to improve the situation, and, if so, the appropriate policy prescription. If it is determined the Fed should do more, Lockhart said the Fed has scope for further action to influence the course of recovery. According to him, the Fed has the will to act—or not—as demanded by economic conditions.

Posen: Central Banks Should Do A Lot More - Adam Posen, an American who sits on the Bank of England’s Monetary Policy Committee, is no on-the-one-hand-this/on-the-other-hand-that economist. In a speech at the Chamber of Commerce in Hull today, Posen made the case that the world’s central banks — not only in the U.K. — urgently need to pursue more aggressive bond-buying to rescue the world economy from stagnation that clouds the future as well as the present. Along the way, he adds a few new metaphors to the debate over central banking: “Fear of looking ineffective should not be a deterrent to doing the right thing, he said. “When facing a worsening situation, you work with the tools you have, whether you’re a central bank in the aftermath of a financial crisis, or someone stranded on the road with a car problem when night is falling. And you try to get help.”

Fed's Rosengren: Fed must respond "vigorously, creatively, thoughtfully, and persistently" - Boston Fed president Eric Rosengren is currently a voting member of the FOMC ... From Rosengren: How Should Monetary Policy Respond to a Slow Recovery?  My answer to that question is: vigorously, creatively, thoughtfully, and persistently, as long as we have options at our disposal. And we do have options, despite having pushed short-term rates to the zero lower bound. On unemployment:  [T]he most recent recession is far less a reflection of dislocation in a few industries but rather reflects a general decline in almost all industries. ... in this recession there has been a peak to trough loss of employment of 5 percent or greater in construction, manufacturing, retail trade, wholesale trade, transportation, information technology, financial activities, and professional and business services. To me, this does not suggest that the driver is structural change in the economy increasing job mismatches – although no doubt some of that exists – but instead I see here a widespread decline in demand across most industries.

Is That An Inflation Target In Your Pocket . . .Eric Rosengren winks at the 4% Club. The FOMC member devotes most of his speech to credit easing but notes While lower long-term rates are likely the primary channel through which asset purchases would influence the economy, purchases of Treasury or mortgage-backed securities also expand the Federal Reserve’s balance sheet and increase the amount of reserves in the financial system.  This expansion of reserves might serve as an effective signal that highlights the determination of the Federal Reserve to reduce disinflationary pressures.  Note he didn’t say deflationary pressures. He said disinflationary pressures. Disinflation refers to reductions in the rate of inflation. Rosengren is telling us that the Fed is determined to fight reductions in the rate of inflation and that it has the balance sheet to prove it. America, however, is a wounded lover. She knows you love her but she needs to hear you tell her that you love her. She needs your words. Is the Fed going after an inflation target? Why does that matter? It matters because an explicit statement by the Fed produces credible expectations.  Some people are confused by this. They think actions should count louder than words. Words are just promises.

Plosser: Central Bank Commitment and Interest on Reserves - Charlie Plosser made a speech last week to at the Swiss National Bank Monetary Policy Conference that looks at some recent monetary policy issues. Much of the speech deals with commitment, and for the most part I agree with those ideas. Plosser argues that the unusual credit programs put in place in fall 2008 by the Fed, which were subsequently unwound, create the potential for moral hazard; Further the Fed's purchases of mortgage-backed securities (MBS), to the tune of more than $1 trillion, potentially creates the demand for future interventions by the Fed in particular sectors of the economy. If the housing sector is today's problem, to which the Fed should respond by purchasing mortgage-related assets, why shouldn't the Fed respond to perceived problems, for example in the auto sector, by purchasing the debt of Ford, General Motors, and Chrysler? Plosser proposes a new Accord between the Fed and the Treasury, which would limit the normal range of monetary policy interventions to standard discount window lending and purchases of Treasury securities.

Unserious Central Bankers - Paul Krugman - These days there seem to be two types of thinkers in the world of central banking. On one side there are serious people – people who believe that we should raise interest rates in the face of high unemployment and falling inflation, because, well, that’s what serious people do. On the other side there are unserious people, who believe that central banks should fight deflation as well as inflation, and try to prevent the current slump from turning into a quasi-permanent state of depression. How ridiculous can you get?In Sweden, my former colleague Lars Svensson, now at the Riksbank, is concerned about the desire of his colleagues to raise interest rates in the face of inflation far below target and an economy that is a long way from having fully recovered. But what does he know? He’s just one of the world’s leading monetary economists, having spent a great deal of time studying problems of monetary policy at the zero lower bound. In Britain, Adam Posen, on the Monetary Policy Committee, urges more action:But what does he know? He’s just the leading English-speaking expert on Japan’s lost decade.

Regulatory Reform Implementation - Bernanke - A final element of the Federal Reserve's efforts to implement the Dodd-Frank Act relates to the transparency of our balance sheet and liquidity programs. Well before enactment, we were providing a great deal of relevant information on our website, in statistical releases, and in regular reports to the Congress. Under a framework established by the act, the Federal Reserve will, by December 1, provide detailed information regarding individual transactions conducted across a range of credit and liquidity programs over the period from December 1, 2007, to July 20, 2010. This information will include the names of counterparties, the date and dollar value of individual transactions, the terms of repayment, and other relevant information. On an ongoing basis, subject to lags specified by the Congress to protect the efficacy of the programs, the Federal Reserve also will routinely provide information regarding the identities of counterparties, amounts financed or purchased and collateral pledged for transactions under the discount window, open market operations, and emergency lending facilities.

Federal Reserve Board Nominations Confirmed - Brad DeLong reports: Finally..., At least one year late and many dollars short: Nominations Confirmed: September 29: These nominees were confirmed by Voice Vote: Sarah Bloom Raskin, of Maryland, to be a Member of the Board of Governors of the Federal Reserve System for the unexpired term of fourteen years from February 1, 2002 Janet L. Yellen, of California, to be a Member of the Board of Governors of the Federal Reserve System for a term of fourteen years from February 1, 2010 Janet L. Yellen, of California, to be Vice Chairman of the Board of Governors of the Federal Reserve System for a term of four years. We need a very different senate.

Low Interest Rate Led To Yield Search -New empirical research establishes a strong relationship between very low interest rates set by the Fed, as in the period 2002-2005, and a risk-taking search for yield. This policy-induced lessening of risk aversion has been emphasized by Raghu Rajan and others as a key factor bringing on the financial crisis. The new empirical support for this view is reported in the working paper “Risk, Uncertainty and Monetary Policy” by Geert Bekaert, Marie Hoerova, and Marco Lo Duca. The basic evidence is the pattern of correlations over time which can found by looking carefully through the following bar graphs and table drawn from the paper.

The End of Finance? The monetisation of everything. What is the End of Finance? Where is it inevitably leading? I think it is leading towards the monetisation of everything. The First Underlying Driving Force behind the monetisation of everything is that people want their assets to be monetary, other things equal. If two assets had the same expected return, and risk, but one could be used as money and the other couldn't, people would prefer to hold the asset that could be used as money. In equilibrium, assets that cannot be used as money need to yield a premium over assets that can be used as money. Here's the Second Underlying Driving Force. Cows yield milk. Cows can also be used as money. But using cows as money does not mean they stop yielding milk. In principle, using an asset as money need not detract from its non-monetary yield. It's a bonus, that comes over and above the non-monetary yield. The supply price of this monetary bonus is zero. And it's a bonus that people want, and are prepared to pay for. Here's the Third Underlying Driving Force. Money is an asset that is used as a medium of exchange; and one of the things that is peculiar about money is that a promise to pay a medium of exchange can itself sometimes serve as a medium of exchange. A coat keeps you warm and dry; but a promise to pay a coat does not keep you warm and dry. A promise to pay a coat is not a coat. A promise to pay money can, however, sometimes be money.

The money quandary – Rebecca Wilder - The Federal Reserve, the Bank of England, and the Bank of Japan are considering further quantitative easing. It's an explicit statement, as with the Federal Reserve and the Bank of England, or implied by the fact that the foreign exchange intervention will eventually be sterilized if the policy rule is not changed, as with the Bank of Japan. Why more easing? In response to this question, BCA Research presented a version of the quantity theory of money. They looked at the simple linear relationship between the average rate of money supply growth (M2) and nominal GDP growth (P*Y).The chart is a reproduction of that in the BCA paper, but with a sample back to 1959 The relationship illustrates the 5-yr compounded annual growth rate of money (M2) against that of nominal GDP, and has an R2 equal to 50% - okay, but not perfect. Nevertheless, the implication is pretty simple: the current annual growth rate of M2, 2.8% in August 2010, corresponds to an average annual income growth just shy of 4%. Sitting beneath a behemoth pile of debt relative to income, 4% nominal GDP growth is unlikely provide sufficient nominal gains for households to deleverage quickly or "safely".

Contrary To Popular Belief Money Supply Is Still Fairly Tight - Ever since the David Tepper interview last week on CNBC we have heard a lot about how money supply is finally expanding.  Yes, M2 has been rising the last several weeks, but before the hyper inflation crowd gets out of control we thought it would be a good idea to look at the actual numbers.Looking at a plain chart of M2 you can see that yes it has broken to new highs but it really only declined for about six weeks back in March and April of 2010.  During this time and since then we have seen bond yields drop lower and lower indicating that inflation is essentially non-existent.  So this rising M2 is really nothing new.To get a better picture of the money supply we can look at M3 data.  In the chart below we have M3 with the 12-month ROC overlaid.  As you can see not only has M3 been headed slowly but continually lower but the 12-month ROC has not exactly rocketed higher.  Yes, it has improved but marginally at best.

Like A Thief In The Night - To date, the crime syndicate has struck 3,800 times. At the bottom of this article you will find a partial list of the mob hits that have been made by the organized crime syndicate many refer to as: La Cosa Nos(Cen)tra(l) Banksters. The families of the deceased are large - entire nations. They made the unfortunate and common mistake of trusting their late, and once rich Uncle Currency with safeguarding the value stored in their life savings. Those that didn’t take out a life insurance plan suffered. Many, like the little children of Argentina, actually starved to death. The modus operandi is identical in every case. The loot is taken first, the heist ends with a rub on the mark.

Pushing on a String - The Fed issued the usual statement at the end of their meeting this week, and Fed watchers poured over the words, looking carefully for any sign of change in Fed policy. The consensus seems to be that the most important change was the statement concerning inflation, the first such change in over a year. “Measures of inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”The next (and only other real) change was: “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if neededto support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” (my emphasis) Translation: inflation may be getting too low, but don’t worry, we are on the job.

Beyond Stimulus - I don’t doubt that there are economists out there who are arguing against the structural hypothesis because they support more stimulus. I am not one of them. If you want to search this blog you can read some of my old takes on stimulus. However, I am not particularly interested in even having that debate. You don’t like stimulus. Fine. I don’t care why. I am not interested in why. I am interested in whether or not you support efforts to raise the level of inflation in the United States. Economists of all political stripes have long noted what former George W. Bush Advisor Greg Mankiw has called “The Inexorable And Mysterious Tradeoff Between Inflation And Unemployment” Determining whether or not the millions of unemployed Americans are without jobs for structural or cyclical reasons  is not a partisan issue. It is not cudgel with which to beat up the other side. This is a question of whether or not we are going to exploit a long established trade-off to end the suffering of millions of our countrymen or whether like the Bank of Japan we are going twiddle our thumbs while our economy lies in ruin.

Targeting the stickiest price - Suppose the price of apples is sticky, but the price of everything else adjusts instantly to its equilibrium value. There is then an old, and strong, argument that monetary policy should target the price of apples. The economy performs best when all prices are at equilibrium. If the price of apples won't move (quickly) to equilibrium, then use monetary policy to move the equilibrium price to where the actual price is. The price of apples doesn't want to change, so don't make it have to change. Don't wait years for the price of apples to move to where it should be; move where it should be to where it is. Mahommed, mountain.The Bank of Canada's 2% inflation target comes up for renewal in 2011. And Scott Sumner has written a persuasive case for targeting nominal GDP rather than inflation. David Beckworth adds his support to NGDP targeting. It's persuasive, but I'm not fully convinced, in large part because Scott ignores the argument that we should target the stickiest price. (Karl Smith has also put forward a (to me) quite novel and interesting argument against NGDP targeting, based on the idea that prices respond with a longer lag than real GDP to monetary policy, so keeping NGDP stable might cause instability in both the price level and real GDP).

Procrustrean Economics (Wonkish)- Krugman  - Brad DeLong manfully takes on the efforts of various commentators to define away the paradox of thrift and redefine our current problems as somehow wholly monetary. As I see it, this is all a desperate attempt to cut and stretch things into a quasi-monetarist framework, for no good reason.  The point is that we have perfectly good models for thinking about the state we’re in — models in which we can describe what all the agents are doing and why, models that have done a very good job in terms of predicting how events have proceeded. Moving back and forth between simple new Keynesian models and their IS-LM translations, it was straightforward to show that a huge expansion in the monetary base could and would go along with continuing disinflation, that massive government borrowing would not cause an interest rate spike, and so on. So what’s wrong with my “one model to rule them all”? Well, it doesn’t easily translate into anything that looks like monetarism

We Are All Quasi-Monetarists - Paul Krugman weighs in on the debate stirred up by my post on the excess demand for money: Brad DeLong manfully takes on the efforts of various commentators to define away the paradox of thrift and redefine our current problems as somehow wholly monetary. As I see it, this is all a desperate attempt to cut and stretch things into a quasi-monetarist framework, for no good reason.  So those of us who believe that all along the Fed could have done more, should have done more, and still should be doing more are now "quasi-monetarists." Fine, but addressing the above list of  Fed shortcomings was the  ultimate point of  my post.  I was just attempting to take a deeper look at the AD problem from a monetary perspective.  DeLong really didn't disagree with my assessment, he just questioned how the Fed could address the excess money demand problem in practice.   The fact is we really aren't all that different on this issue.  Even Krugman at some level is a quasi-monetarist--he has to be given we live in monetary economy.  This point is forcefully made by both Nick Rowe and Scott Sumner in their replies to Krugman.

Chicago Fed: Economic activity weakened in August - This is a composite index based on a number of economic releases.  From the Chicago Fed: Index shows economic activity weakened in August Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index decreased to –0.53 in August from –0.11 in July. None of the four broad categories of indicators that make up the index made a positive contribution in August. The index’s three-month moving average, CFNAI-MA3, declined to –0.42 in August from –0.27 in July. August’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:  A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

St. Louis Fed’s Financial Stress Index - One excellent index which attempts to capture a broad range of components of financial stress is the St. Louis Fed’s Financial Stress Index, henceforth to be known here as the STLFSI. The index constituents are highlighted below and include an interest rate group, a yield spread group and an third uncategorized group of additional indicators in which the VIX is one of five components.

Roubini Sees High Risk of a U.S. Recession, Says Japan `Anemic' (Bloomberg) -- New York University Professor Nouriel Roubini said there’s a high probability of another recession in the U.S., with Japan’s outlook “anemic,” underscoring risks to the global recovery.  China, the world’s fastest-growing major economy, may face greater headwinds should there be weak growth in the U.S. and Europe, Roubini said in Kuala Lumpur today, where he is attending a conference. Second-quarter gross domestic product figures for the U.S. are likely to be revised lower after “awful” June real-estate numbers, he also said.  Austerity measures to cut debt in advanced nations are hurting consumer and business confidence, and households in some of the largest economies are holding back spending. Emerging economies may have to get used to relying on domestic demand in a period of subdued growth for developed countries, Roubini said.

A Graphic Peek into our Economic Future - As you probably know, I’ve written extensively on the Consumer Metrics Institute and its graphs and data. The CMI is, in my eyes, very useful, and different from others, in that it tracks the behavior and spending habits of consumers, who make up 70% of US GDP, today, and updates its data on a daily basis.  By comparison, the US Bureau of Economic Analysis, which reports on "official" GDP numbers, publishes its findings once a quarter, and then only one full month after a quarter has already expired. In other words: we won’t know what GDP did in the first two weeks of July until early November. This makes CMI a leading indicator vs the lagging BEA. In late August, I showed what this implies, in the following graph, based on Doug Short’s great graphs, which are in turn based on CMI data. The idea behind it is that if you let the GDP data where they are in a graph, you can shift the CMI ones forward by roughly a quarter.

Dollar Is `One Step Nearer' to Crisis on Burgeoning Debt Burden, Yu Says - The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank. Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today. “Such a huge amount of debt is terrible,” Yu said. “The situation will be worsening day by day. I think we are one step nearer to a U.S.-dollar crisis.” Yu also said China is worried about the safety of its foreign-exchange reserves including those invested in U.S. Treasuries as the U.S. currency weakens, reiterating his earlier views on the dollar assets. The U.S. will record a $1.3 trillion budget deficit for the fiscal year ending Sept. 30

Frank Warnock on Two Myths about the Dollar - Frank Warnock, an expert on US capital flows and stocks, has just written a piece for CFR entitled Two Myths About the U.S. Dollar. In it, he examines "two factors that could substantially alter the long-run value of the U.S. dollar: the dollar's reserve status and the sustainability of U.S. international debt."The paper is chock full of statistics and graphs. I like in particular Figure 3, which provides insights into China's holdins of US Treasury securities, and reminds us of the pitfalls in using TIC data to infer holdings.

Does a Weaker Currency Equal Default? Not in the Real World - Here we go again: the dollar appears to be under sustained attack in the foreign exchange market. To judge from its latest FOMC statement, the Federal Reserve appears to be actively encouraging inflation: “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate” Is this tantamount to default, as many are now alleging? The crux of the “devaluation default” argument is that our “creditors” who “fund” our deficits will be paid back in increasingly worthless paper, and that this is tantamount to a default. If you, or I, or any financial institution, were to buy credit default swaps on US government debt, we wouldn’t be able to collect on the grounds that the Fed has succeeded in generating inflation or devaluing the greenback. Default is defined as the inability for a government to meet its financial obligations. In other words, the checks begin to bounce.

Why It's Foolish to Weaken the Dollar to Create Jobs - Robert Reich - Here’s the theory. As the dollar falls relative to foreign currencies, everything we export becomes less expensive to foreign consumers. So they buy more of our stuff, creating more jobs in the U.S. At the same time, everything they make costs us more. So we buy less from them and more from each other. Again, more jobs here at home. Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.) How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money (“quantitative easing” in Fed speak) the dollar takes another dive. But using a weak dollar to create American jobs is foolish, for two reasons. First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.Here’s the other problem. Even if we succeed, a weak dollar makes us poorer.

$10,000 Gold? - Kenneth Rogoff - Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here? One answer, of course, is a complete collapse of the US dollar. With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. And if you are really worried about that, gold might indeed be the most reliable hedge.

Jealous of Iceland – c martenson -Yes, I am jealous of Iceland.  You see, they are facing their reality, and, while unpleasant, at least they are getting on with the necessary adjustments.  What had been an unsustainable accumulation of debt just stopped.  Suddenly and irrevocably.  One day the story all made perfect sense, and the next day it did not.  One day Iceland was the fifth on the global list of per-capita wealth; the next it was headed somewhere lower, although how far it will go is yet to be determined. Such is the way of bubbles.Here is an entire nation of people who are ready to accept that they were living too far beyond their means and conclude that it was time to face the music.  While still mid-journey and in the throes of discomfort (40-70 year-old Icelandic males are presently recorded as being "very angry" by researchers), they are getting on with it.  There are no calls to double down on new national indebtedness to 'get things back to how they were.'  They are not overrun with economists explaining how it would make sense for their central bank to simply flood the world with more Icelandic kronur.

Prediction: Things Will Unravel Faster Than You Think - c martenson - By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future.  Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future.  When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.   My work centers on figuring out which macro trends are in play and then helping people to adjust accordingly.  We happen to live in a non-linear world; a core concept of the Crash Course.  But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way.  In other words, linearly.  The world does not always cooperate, and my concern rests on the observation that we still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living.

Long Term US Budget Scenarios - I'm interested in the question of what the risks are, going forward, to the federal budget deficit and US public debt levels.  In particular, I am wondering if the government is relying on much more rosy forecasts of future economic growth than I would make (given deleveraging from recent asset bubbles and peak oil).  So I'd like to investigate  how sensitive the outcome is to those kinds of assumptions. Making any such analysis requires understanding the details of the US budget better than I do at present.  I began by working through the Congressional Budget Office report The Long Term Budget Outlook from June 2010 (with corrections in August).  In the interests of time, all I want to do today is present a couple of graphs summarizing the report.  The first is above, which shows the federal debt held by the public as a fraction of US GDP over time under two scenarios.

Senate Passes $1.25 Trillion Bill To Fund Federal Government Through Dec. 3 - The U.S. Senate on Wednesday voted to ensure there is funding in place to keep the federal government running until after the mid-term elections, allowing lawmakers to leave town to hit the campaign trail. The roughly $1.25 trillion measure will fund the various departments and agencies of the federal government until Dec. 3, by which time lawmakers will have had to reach a longer term funding solution.The measure was necessary because Congress failed to approve any of the 12 bills required to be passed each year to fund the federal government's operations.

Republicans On Obama Debt Commission Push For Corporate And Capital Gains Tax Cuts - Republicans on President Obama's fiscal commission, which is tasked with coming up with ways to reduce the deficit, have privately argued in official meetings that the panel should recommend further corporate and capital gains tax cuts as part of its mandate. The panel has been charged with raising revenues and cutting spending, to bring the federal budget into greater balance. But if Republican members are successful, their advocacy would result in either an unbalanced report, dedicated wholly to spending and benefit cuts -- or to gridlock and, thus, no recommendations at all.  At a tax reform working group meeting last week, Republicans argued against every possible tax increase. According to one source familiar with the deliberations, Republicans were even opposed to eliminating loopholes, exemptions, credits and other so-called "tax expenditures" unless the associated revenue increase could be used to lower capital gains and corporate income rates.

Women Confront Deficit Commission Over Social Security - Last month Former Senator and Deficit Commission co-chair Alan Simpson said this about Social Security, and by extension about government itself, "We’ve reached a point now where it’s like a milk cow with 310 million tits!" Nice. We work and pay into Social Security all our lives, we pay our taxes, but when it comes time to retire our leaders say we're nothing more than freeloaders sucking off the tits of the "milk cow." The Deficit Commission is meeting today and the National Organization for Women showed up and delivered 1,500 nipples to Simpson's commission. They called it "1500 Tits for an Ass."

Deficit Pipe Dreams: Social Security Cuts Would Increase Inequity and Keep Deficits, er, High - Get this: Republicans on the Deficit Commission aren't just refusing to consider any tax increases. Now they're proposing tax decreases designed to help the rich, while taking benefits from everyone else. Dealing with people like that is like negotiating with somebody who's high on drugs.  Most members of the Commission seem to want a deal - any deal - so they've decided not to address the real causes of current and future deficits: health costs, tax cuts, war spending, runaway bankers, and the growing inequality between rich and poor. Instead they're going after something that doesn't affect the deficit: Social Security retirement benefits. Why? Apparently, because they can.

Tax cuts are pledged why?? - We do know from Mike Kimel's Presimetrics that the political message that tax cuts raise revenue is false. In particular, here are two looks at the topic from data from the last decade. It does appear that many want to continue what was done during this last decade... David Cay Johnston at notes: Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars: Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels.  Bruce Bartlett at Fiscal Times notes: The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor. Contrary to Ronald Reagan’s 1981 tax cut, which was a simple across-the-board marginal tax rate reduction, the Bush plan was a hodge-podge of tax gimmicks designed more to win the support of various voting blocs than stimulate growth.

Pledge to America: Short-term Fiscal Restraint and Long-term Fiscal Folly - Michael Ettlinger and Michael Linden focus on the fiscal folly part of the Pledge: The “Pledge to America” budget would mean $11.1 trillion in deficits over the next 10 years. By 2020, the federal budget deficit would be 6.3 percent of gross domestic product, the federal debt would exceed 93 percent of GDP, and interest payments on the debt would be more than $1 trillion a year. The budget deficit would be about $200 billion larger in 2020 under the “Pledge to America” plan than it would be under President Barack Obama’s budget, and over the next 10 years deficits would be $1.5 trillion higher than under the president’s budget.  Also take a look at their chart which shows how the deficit would be larger under the Pledge after 2012 but smaller over the next couple of years. In other words, the Pledge has fiscal policy all backwards. We need more short-term fiscal stimulus in the short-run with fiscal restraint after we get back to full employment. Which is why the Pledge’s promise to create new jobs is just stupid from an economic perspective!

Republican Congressmen Pledge to Repeal the Laws of Arithmetic --The National Journal asks what would happen if the Pledge to America, proposed last week by congressional Republicans, were fully implemented.  As I understand it, the authors of the “Pledge to America” want not just to renew permanently all Bush-era tax cuts, but also to balance the budget while exempting social security, Medicare, and military spending. To ask what would be the effects if the Republicans put this pledge into law is to ask what would be the effects if they repeal the laws of arithmetic.   It can’t be done, because all the money is in the parts of the budget they are putting off limits.  (That is what we all assume they mean by “common sense exceptions for seniors, veterans and troops” when cutting spending.  Admittedly, it is hard to tell what they are really proposing, due to the usual lack of specifics in the 21-page document.)    We have been through all this before.  Two experiments are most memorable.  First, Ronald Reagan was elected on his pledge of balancing the budget while cutting taxes, which soon produced what were at the time the biggest budget deficits in history.

Why Should The GOP Wait To Shut Down The Government? - Most of us who follow the budget process have been assuming up to now that the showdown would happen next year. The most common scenario has been that Congress will pass a continuing resolution this week that would last until around Thanksgiving and then extend the CR in the lame duck session until around the middle of February. That would give either the new Republican-controlled House and/or Senate or the larger Republican minority in both houses the ability to deal with the expiring appropriations. The theory has been that a shutdown would be threatened or allowed to happen at that point when the Republicans have more leverage. But...The GOP could have that same leverage when the first CR has to be enacted by midnight this Thursday or federal departments and agencies will turn into a pumpkin as fiscal 2011 begins.  Senate Republicans could easily force the same type of showdown with congressional Democrats and the White House we have been thinking wouldn't happen until next year if they are willing to filibuster the CR.

What cutting the federal budget entails - The Center for American Progress released a report earlier this month on ways to shrink the federal budget deficit with spending cuts. A Thousand Cuts, by Michael Linden and Michael Ettinger, lays out specific program cuts of $255 billion per year by 2015 (about 7% of total federal spending), and is a valuable contribution to the discussion of the coming fiscal adjustment. In this column, I highlight three areas where I don't believe the report has identified as many cuts as it could have: Medicare, military employee compensation, and tax expenditures. At the end, I will also discuss whether balancing the federal budget is "simple." Two caveats should be noted to the report's presentation of a "spending cuts only" program. One is that it starts from a baseline of President Obama's proposed budget, meaning that the expiration of part of the Bush tax cuts is baked into the proposal. The other is that it treats the elimination of tax expenditures (credits and deductions offered through the tax code) as the deletion of spending items, a view that I endorse but will be controversial with some people.

We can only cut debt by borrowing - “You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.Before leaping to that conclusion, however, let us approach the issue of de-leveraging - or debt reduction - analytically.

One reason why fiscal reform is difficult - Joblessness and the accompanying loss of health benefits drove an additional 3.7 million people into the Medicaid program last year, the largest single-year increase since the early days of the government insurance plan, according to an annual survey by the Kaiser Family Foundation.  Enrollment in the program, which provides comprehensive coverage to the low-income uninsured, grew by 8.2 percent from December 2008 to December 2009, the second-largest rate of increase in the 10 years that Kaiser has conducted the survey. There were 48.5 million people on Medicaid at the end of 2009, or about one of every six Americans.  The article is here.  The dilemma is simple: variations in Medicaid coverage account for a lot of the variation in the health of state government finances.  Yet if states cut back on Medicaid in some manner, there will be more people on the more expensive subsidized exchanges, come the full onset of the Obama health plan.

Martin Wolf, the Paradox of Thrift, and the Excess Demand for Money - Martin Wolf reminds us why good macroeconomic analysis is not always intuitive:Analysis of the economy is not the same thing as analysing a single household. What is true of the latter is not true of the former. The unwillingness to recognise this truth will lead to serious policy mistakes.The policy mistake to which Martin Wolf is referencing is the call for more economic austerity.  He notes that though increased austerity may be a good idea for a given household it is not necessarily true for the entire economy. He is alluding here to the Paradox of Thrift, the idea that if everyone tries to save--which makes sense individually--during a recession, then aggregate spending will fall.  In turn, this will lower both aggregate income and total saving (i.e. there would be less income from which to save). As a result, the economy will tank even more making it harder to service the existing debt.  Thus, Martin Wolf concludes more borrowing may be just what the economy currently needs. 

Congressional Budget Office - The Economic Outlook and Fiscal Policy Choices… This testimony reviews the Congressional Budget Office's (CBO's) recent analyses of the economic outlook and the potential impact on the economy of various fiscal policy options. It also adds to those analyses by quantifying the economic impact of extending some or all of the 2001 and 2003 tax cuts that are scheduled to expire in three months. CBO expects—as do most private forecasters—that the economic recovery will proceed at a modest pace during the next few years. In its projections released in August, CBO forecast that, under current laws governing federal spending and revenues, real (inflation-adjusted) gross domestic product (GDP) would increase by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010 and by 2.0 percent between the fourth quarters of 2010 and 2011. With economic growth so slow, the unemployment rate would remain above 8 percent until 2012 and above 6 percent until 2014. Since CBO completed that forecast, the economic data released have been weaker than the agency had expected, so if CBO was redoing the forecast today, it would project slightly slower growth in the near term.  Text-only. The full version of the summary may include tables, charts, and footnotes.

This one is interesting (pun intended) - Recent federal budget projections I’ve posted have excluded debt interest payments. It’s not my fault. CBO didn’t include interest payments in the graphs that accompany their most recent budget outlook (why?). Interest payments are large. In the relatively near term, think of them as another Medicaid. By the mid-century, think of them as another Medicaid+Medicare. By late-century, think of them as another entire U.S. federal budget. Here’s a helpful chart from Wikipedia. The data are a few years old. I’d love a more recent one, but I haven’t found the time series for it because, as I said, CBO didn’t produce it (why? Oh, I asked that already.)

Here's Where All That Government Spending Is REALLY Going - The Congressional Budget Office is basically projecting $1-trillion dollar annual Federal budget deficits for as far as the eye can see. This will require the country to pile another $1 trillion of debt on top of our existing $13.5 trillion debt load each year, which will quickly drive our national debt-to-GDP ratio over 100% (Greece-like).So, naturally, people are concerned about all that government spending. So where's it going, really? It's basically going to three things:

    • 1. Entitlement programs (Social Security, Medicare, Medicaid) -- +~$1.2 Trillion, or 60% of the increase
    • 2. Interest on our debt -- +~$750 billion, or 37.5% of the increase
    • 3. Everything else -- $50 billion, or 2.5% of the increase

Ross Douthat Claims That “Everybody Knows” Something That Is Not True - That's right NYT columnist Ross Douthat told readers today that: "And as everybody knows, the only way to really bring the budget into balance is to reform (i.e., cut) Medicare and Social Security." Of course everybody who knows anything about the budget knows full well that this is not true. The budget problem is almost entirely a story of a broken health care system. If the United States had the same per person health care costs as any of the countries which enjoy longer life expectancies than the United States than it would be facing long-term budget surpluses, not deficits.  Everybody also knows that Social Security does not contribute to the deficit. It is financed by a separate designated tax. The most recent projections from the Congressional Budget Office show that this tax will be sufficient to fully fund benefits through the year 2039 with no changes whatsoever.

How The Other Half Thinks - Krugman - Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or even use models at all. Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been. So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we’re seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications. You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks...

The dumbest attack on Paul Krugman, ever -The first thing wrong with the blog post that Gonzalo Lira posted at Henry Blodget's Business Insider Tuesday morning was the title: "Is Krugman Actually Suggesting War As A Fiscal Solution?" Lira, a Chilean-American filmmaker seeking a second life as bomb-throwing econoblogger, wasn't asking the question -- he was asserting the premise as fact. It's Krugman's disturbing, nihilist inference, which he makes over and over, tucked away in his articles, but always there, like a nasty aftertaste of a drink laced with a roofie: So maybe another total war might not be such a bad idea now, so as to get us out of this new Global Depression.Uh, no. The notion that World War II put an end to the Great Depression is certainly not controversial. But the accusation that Krugman is proposing that the U.S. go to war today in order to fix the economy is, and I don't write these words lightly, possibly the most ridiculous and reprehensible thing that any econoblogger has uttered since the outset of the Great Recession.

Economics Is Not A Morality Play - Paul Krugman - Brad DeLong catches someone wondering if I am actually advocating war as a solution to our problems. Against stupidity, the gods themselves …To be fair, though, I understand from the Times that whenever I mention in my column that WWII ended the Great Depression, the paper gets a lot of mail accusing me of being a warmonger. Amazing. But maybe this is an opportunity to reiterate a point I try to make now and then: economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well.

Congress Delays Spending Decisions. Again. In what has become a routine move over the last decade, Congress once again failed to complete the year’s appropriations bills by the September 30 deadline, and instead had to enact yet another continuing resolution (CR) in order to prevent a government shut down. As the summer dragged on – and amid increasing public ire over government spending – few reasonably expected Congress to complete work on the spending bills before the election. However, instead of enacting a brief extension in spending in order to continue diligently working to pass the bills as quickly as possible, the latest CR funds the government until December 3, giving law makers a pass on increasing spending until after the November 2 election, and time to go home and campaign. The lengthy extension leaves the door open to completing the spending bills during a lame duck session – both chambers are scheduled to return November 15 after the elections – or to enacting yet another continuing resolution that could last still longer until the new Congress is seated in February

The Senate Democrats’ Disappointing Final Act - In the few days remaining before the Senate recesses for the election, the Democrats have decided to pull off a bad policy twofer: They'll fight for one policy that doesn't make sense, and in doing, make success less likely on a policy that does make sense. They're doing this because they think the politics of it are better -- but are they? The policies they're fighting for is the Creating American Jobs and Ending Offshoring Act. The policy they may be sacrificing is the expiration of the Bush tax cuts for the wealthy. The former will slightly increase the deficit and create no jobs. The latter will massively increase the deficit, create few jobs, and increase the already yawning gap between the rich and the poor.  The politics of the offshoring bill are obvious: Offshoring is unpopular, and this bill will help Democrats tell voters they're doing something about it. But will it actually do something about it? Well, no.

U.S.’s Fiscal Picture Remains Grim - Happy New Year! Not. The federal fiscal year that begins today promises to be about as grim as the one that ended Thursday. For what it’s worth, the Congressional Budget Office currently estimates the fiscal 2011 deficit will come in at about $1.07 trillion, down from the projected $1.3 trillion for 2010. But the 2011 figure is artificially low, because CBO is required by law to assume that all the Bush tax cuts, set to expire at the end of calendar 2010, actually will expire. That appears pretty unlikely. The price tag of extending the expiring tax breaks is about $200 billion to $400 billion, according to CBO (depending on whether some alternative-minimum tax relief and corporate breaks also are extended). That would leave the government in approximately the same hole for 2011 as in 2010. But we won’t know exactly which tax breaks Congress will maintain until after the November election, when lawmakers return for a lame duck session.

The Way Out of the Fiscal Hole: An Economist Mom’s Perspective - The paper I was invited to write for a spring conference at the Naval War College has been published.  (Right after attending the conference I had written only about what I learned about defense/national security spending.)  The entire monograph can be found here, and my paper appears on pages 81-88.  Some of my favorite parts (leaving aside my never-ending rants about the Bush/Obama tax cuts): As parents, many of us baby boomers make “investing” in our kids a priority in our household budgets. We pay for our kids’ music and dance lessons, team sports, and after-school academic enrichment and health-promoting (fitness) programs. We make sure they go to the doctor and dentist regularly, and we even pay to give them perfectly straight teeth as a warm-up to paying for college. And we pay for tutoring and test-preparation classes and encourage them to do their best with their studies in the hopes that they will get into a good college that we can manage to pay for and will turn out to be a “good investment.” What makes all of our parental efforts worthwhile isn’t always measured in purely monetary terms, but all of us certainly hope that we help set our kids on a path to a high “quality of life.”

Someone Please Tell John Boehner That Cutting Earmarks Doesn't Reduce Spending - House Majority Leader John Boehner (R-OH) yesterday made one of those statements on the federal budget that is nonsensical both in substance and style.  As reported by Steven Dennis in Roll Call, Boehner said "the GOP would 'end earmarking as we know it' if Republicans take the majority in November.   First, as I've written a number of times before (here and here, for example), eliminating earmarks does not reduce spending, it merely shifts the responsibility for allocating how an appropriation is spent from Congress to the executive branch.  The irony here is unmistakable: The impact of what Boehner and Cantor are saying will be to transfer power from Congress to the White House at the precise time they could be leading the majority in the House of Representatives.  Does anyone really think they will cede that power at the precise moment they get to exercise it?

Your Government, Held Hostage - High school civics textbooks teach kids that there are three branches of government: The executive, the legislative, and the judiciary. Now it turns out there is a fourth: Jim DeMint.On Tuesday, word got out that the Republican senator from South Carolina intends to block all Senate business until after the November elections. How can DeMint do this? The short, simple version is that each individual senator has the ability to slow down debates to the point where the Senate basically ceases to function. In the past, senators usually hesitated from using that power or were stopped by party leaders when they tried. Lately, though, something has changed. Republicans have exploited this power to block President Obama at every turn--to thwart his legislative initiatives, to keep him from staffing the government, and now to prevent his party from conducting mundane, everyday business. Obstructionism has become the norm. And it’s doing serious damage to the country’s well-being.

Built to break, by Ryan Avent: ...Congress is lame. Why is it so difficult to pass decent policy? South Carolina Sen. Jim DeMint warned Monday evening that he would block all legislation that has not been cleared by his office in the final days of the pre-election session. Bret Bernhardt, DeMint's chief of staff, said in an e-mail to GOP aides that his boss would place a hold on all legislation that has not been cleared by both parties by the end of the day Tuesday. Any senator can place a hold to block legislation - and overcoming that would require the Senate to take time-consuming steps to invoke cloture, which would require 60 votes. This is a stupid rule. Why would the Senate adopt it? Well, as with most of today's procedural obstacles, it was put in place for a sensible reason—to pause the passage of legislation while senators from states directly affected had time to review the bill—but has come to be abused for partisan tactical purposes. The Senate is full of rules like this that can be used to bring business to a complete halt.

Extend the Obama Tax Cuts - Majority Whip James E Clyburn proposed extending the Obama tax cuts. Some assert that he means the Bush tax cuts on income under $250,000. I sure hope he means that Obama tax cuts.I have been arguing for some time that the Democrats should propose permenent extension of the Bush cuts on income under $250,000 (which implies tax cuts of around $6,000 next year for each rich family) and additional temporary tax cuts which equal for everyone (I like $500 per family). But now I think that it would be better politics to propose making Bush tax cuts on family income under $250,000 permanent and extending the Obama tax cuts one year (that is 400 per individual taxpayer or $800 per family for all but the richest few percent of working families). Like the Bush tax cuts, the Obama tax cuts are scheduled to expire (the cuts apply to 2009 and 2010 income and were enacted as part of the stimulus bill).  A key advantage of such a debate for the Democrats is that it would force Republicans to admit and journalists to report that there are Obama tax cuts that might be extended. In the last poll only 8% of US adults knew that Obama and the Democrats have cut taxes for most US families.

CBO's case against "Obama's middle-class tax cuts" Alert readers will have noticed something odd in the CBO's graph of the harm that different tax cut policies will do to the economy. On the one hand, the harm comes from increasing the amount that we borrow. On the other hand, the extension of all tax cuts -- as opposed to those just for income under $250,000 -- actually does less damage to the economy, at least under one scenario. People can -- and will -- take issue with the CBO's model here. For instance, it holds demand-side effects constant, so the fact that lower-income folks spend while higher-income folks save isn't included. CBO says those effects tend to disappear over time. But the bottom line is that both the full and partial indefinite extension of the Bush tax cuts are bad ideas that hurt the economy (the table atop this post shows the CBO's various estimates in detail). And though the Obama administration's proposal to extend the tax cuts for income under $250,000 seemed slightly less irresponsible than the Republicans' proposal to extend all the cuts, it's also worse at generating growth. The takeaway? Both plans are fundamentally irresponsible. The tax cuts need to be canceled. If not now, due to the temporary weakness in the economy, then three years from now. Josh Barro has some further thoughts worth reading.

Let's be real folks..marginal tax cuts don't motivate - From the LA Times op-ed page comes this piece by an entrepreneur: I'm a venture capitalist and an entrepreneur. Over the past three decades, I've made both good and bad investments. I've created successful companies and ones that didn't do so well. Overall, I'm proud that my investments have created jobs and led to some interesting innovations. And I've done well financially; I'm one of the fortunate few who are in the top echelon of American earners. For nearly the last decade, I've paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn't affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax. As history demonstrates, modest changes in the tax rate for wealthy taxpayers don't make much of a difference if the goal is to build new companies, drive technological development and stimulate new industries.

Tax cuts paid for? With job creation? Can't get there from here. This is a simple little exercise that frankly I wonder why no one with a pulpit (that would be you congress critters, executive office and MSM) has done it. It is for those who think simplistically. Thinking like:  wealthy people create jobs with their extra money and not the non-wealthy people's demand for stuff that makes them feel wealthy. Let's say that tax cuts create jobs.  770,000 jobs  for what is it, $4 trillion over 10 years? The obvious question is: How many jobs do we really need for that money to break even? Median household income for 2009 is $49,777. 5% less than the peak of 1999 by the way. Full time working men it was $47,127, women $36,278. Per capita income was $26,530. These numbers are from here.   Using the household income number just because, in 10 years, you would need 80,358,389 jobs created to equal the tax cut.. Eighty plus million jobs. Of course, that we created these jobs does not mean all that money is paying for the $4trillion in lost tax collections. Only a percentage of the income is collected by We the People as income tax.

Extending the tax cuts for the wealthy--the discussion continues - The New York Times asked me for my views of Robert Samuelson's recent argument in the Washington Post that extending the tax cuts for the wealthy made sense because they would otherwise cut back their spending, tax cuts for them will create jobs (770,000, he claims) and not extending the tax cuts would raise taxes on "small" businesses and thus "discourage hiring and expansion." The discussion appears in theNew York Times "Room for Debate" forum on the trickle down argument, at Hey Big Spenders: The Trickle-Down Argument, Sept. 27, 2010. Here at ataxingmatter I'll add some introductory context, which is somewhat harsher on Samuelson and his claim to question "the ritual of sound-bite economics" than the short form posted at the New York Times.

Enough Is Enough on Tax Cuts for Wealthy, by Chuck Marr, CBPP: In yesterday’s New York Times, Richard Thaler ... neatly refuted the arguments for borrowing tens of billions of dollars each year to keep President Bush’s tax cuts flowing to the most affluent 2 percent of people in the country. He then posed a central question: “whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living.” As I’ve noted before, over the last three decades a stunning shift in income has taken place in this country, from the middle class to those few at the very top of the income scale. Back in 1979, the middle 20 percent of Americans had more than twice as large a share of the nation’s total after-tax income as the top 1 percent. But by 2007, the top 1 percent’s slice of the economic pie had more than doubled and in fact exceeded the middle class’s slice, which had shrunk.

In Tax Cut Plan, Debate Over the Definition of Rich - NYTimes - President Obama has proposed preserving the cuts for middle-class Americans and letting them expire for the top 2.5 percent of taxpayers — individuals who make more than $200,000 a year and families whose income exceeds $250,000. But others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000. The Senate will not vote on the matter until after the midterm elections, and some Democrats are pushing for a compromise that would leave the cuts in place for those higher up the income scale. One proposal being discussed is a millionaires’ tax, which would create one or two additional tax brackets for the wealthiest Americans and eliminate the Bush tax cuts only for those who earn more than seven-figure incomes.

"Why the rich are angry, and why you should worry about it" - Makes some fine points including this one: For there to be an economic recovery in this country, some people are going to have to create businesses that grow and create jobs. If those businesses grow enough because customers want what they are selling, the entrepreneurs who created them become rich, just like Apple's Steve Jobs or Google's Sergey Brin. The President or the press can insult those people or try to jack up their taxes and give their money away to other people. But if we want recovery and growth rather than redistribution and recrimination, a better approach would be to stop treating rich people as though they are the cause of America's problems and start concentrating instead on what can be done to create more of them.

What the Rich Don’t Need - Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.  I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush... President Obama has proposed retaining the current rates on incomes up to $200,000 for individuals and $250,000 for couples.  Republican leadership has drawn a line in the sand, saying it will oppose Mr. Obama’s bill unless all taxpayers remain at current rates. Although it wouldn’t put it this way, the Republican position is, in effect, that if the rich can’t share in the bounty, rates should rise for everyone.

"Big red eggs" - WHATEVER one's opinion on the tax cuts for high earners, you have to agree that Austan Goolsbee is one unpretentious, disarming fellow. Like if someone took Larry Summers and said, ok, we need the exact opposite of this. UPDATE: Yes, the video is now working

Where Does the Laffer Curve Bend - A while back, Dylan Matthews asked where the Laffer Curve bends. A few numbers were thrown out. I would tend to estimate something around 70%. However, I want to talk Laffer Curve Theory for a minute. So leaving behind for a moment the important issues of avoidance and evasion it’s key to remember that there is no particular reason to think taxes in and of themselves have any impact on people’s incentives. What matters is the net of tax return to the activity, working, saving, etc. So suppose that for whatever macro-economic reasons the return to being a hedge fund manager has increased 2 fold over the last 10 years. Now suppose that I raise that hedge fund manager’s total marginal tax rate from 44% (including state and local) to 72%, so that her take home ratio falls from 56% to 28%. Even though I have radically increased her taxes, her return to work is essentially the same as it was a decade ago. If a decade ago it made sense to become a hedge fund manager and work 90 hours a week, it will still make sense today.

High Class Problems - If you haven't read Bill Maher's righteous rant about the whining rich, it's a corker. This excerpt is just the conclusion. The rest is just as good: Another of my favorites, Congresswoman Michele Bachmann said, "I don't know where they're going to get all this money, because we're running out of rich people in this country." Actually, we have more billionaires here in the U.S. than all the other countries in the top ten combined, and their wealth grew 27% in the last year. Did yours? Truth is, there are only two things that the United States is not running out of: Rich people and bullshit. Here's the truth: When you raise taxes slightly on the wealthy, it obviously doesn't destroy the economy -- we know this, because we just did it -- remember the '90's? It wasn't that long ago. You were probably listening to grunge music, or dabbling in witchcraft. Clinton moved the top marginal rate from 36 to 39% -- and far from tanking, the economy did so well he had time to get his dick washed.  Even 39% isn't high by historical standards. Under Eisenhower, the top tax rate was 91%. Under Nixon, it was 70%. Obama just wants to kick it back to 39 -- just three more points for the very rich. Not back to 91, or 70.

Bill Maher: When Will Obscenely Rich A**holes Stop Crying About Taxes? - New Rule: The next rich person who publicly complains about being vilified by the Obama administration must be publicly vilified by the Obama administration. It's so hard for one person to tell another person what constitutes being "rich", or what tax rate is "too much." But I've done some math that indicates that, considering the hole this country is in, if you are earning more than a million dollars a year and are complaining about a 3.6% tax increase, then you are by definition a greedy asshole. And let's be clear: that's 3.6% only on income above 250 grand -- your first 250, that's still on the house.

No Estate Tax, But 2010 Still May Not Be So Great for Heirs - No joke: The other day a financial planner told me about a client who asked if he could rework his father’s end-of-life advance directive to take into account the ever-changing estate tax. In other words, could he pull the plug on the old man if it looked like he was going to die before January 1, but keep him going if he lived into next year?   To his credit, the planner told his client to buzz off. But if this loving son thought he’d stand to cash in if his father died this year, he might be in for an unpleasant surprise. It is true that, thanks to Senate gridlock, the estate tax has been repealed for 2010. But that gift came accompanied by a lump of coal: Some heirs may find themselves owing lots more capital gains tax when they sell inherited assets.

IRS May Probe Forgiven Mortgage Debt - The Internal Revenue Service could collect more taxes from forgiven mortgage debt by expanding its information reporting and revising some of its forms, according to a new study from the General Accountability Office. “IRS estimates suggest the dollar amount of forgiven mortgage debt excluded from income could be significant,” said the report.  IRS Statistics of Income officials estimate that for tax year 2008, the most current tax year for which data is available, about 126,000 to 169,000 returns included a Form 982, excluding a total of about $15.2 billion to $24.6 billion of forgiven debt from taxable income. The IRS estimates suggest that for about 61,000 to 93,000 of the returns with a Form 982, forgiven debt for a qualified principal residence was the only type of forgiven debt, and taxpayers excluded about $6.4 billion to $11.8 billion from taxable income.

Dodd-Frank Moves Forward - Under persistent questioning from Sen. Bob Corker (R., Tenn.), Treasury Department Deputy Secretary Neal Wolin said Elizabeth Warren likely wouldn’t have broad powers to write rules for a new Bureau of Consumer Financial Protection because she isn’t the Senate-confirmed “director” of this agency.  [Treasury’s powers are] quite limited there. Mr. Wolin said Treasury would “in very short order be publishing a transparency policy” similar to other agencies. He said it will make “clear that people can know who… senior officials at Treasury have met with.” This sounds similar to what the Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission, and Commodity Futures Trading Commission are doing. Mr. Wolin said the Financial Stability Oversight Council, set to meet on Friday for the first time, would have several items on its near-term agenda. He said it will consider draft bylaws, seek comment on the “criteria to designate large interconnected nonbank financial companies,” and consider seeking comments for how to implement the “Volcker Rule.” CFTC Chairman Gary Gensler said the number of companies that would be designated as “major swap participants” tied to derivatives trading would be “very small.”

Consumer Advocate Seeks to Reassure Banks About Protection Agency - Elizabeth Warren, who is overseeing the creation of a federal agency charged with protecting consumers from abusive financial products, told Wall Street executives on Wednesday evening that her relationship with them need not be antagonistic, or even adversarial.  In her first major speech since President Obama named her to get the Consumer Financial Protection Bureau up and running, Ms. Warren struck a conciliatory tone toward bankers with whom she has often been on frosty terms.  She was the speaker at a private leadership dinner sponsored by the Financial Services Roundtable, which had expressed reservations about the creation of the bureau. Ms. Warren this month was named an assistant to Mr. Obama rather than director of the bureau, a job that requires Senate confirmation.

Elizabeth Warren Extends Olive Branch, Borrows Idea From Lenders In First Major Speech - In her first major speech as a member of the Obama administration, middle-class advocate Elizabeth Warren reached out to the heads of the nation's biggest financial institutions, borrowing one of their ideas in an effort to usher in a cooperative relationship that could protect consumers as well as foster competitive markets. Warren, a champion of consumers and a darling of progressives, spoke to a gathering of executives Wednesday whose companies form the Financial Services Roundtable, a Washington trade group representing firms like Bank of America, JPMorgan Chase, BlackRock and State Farm. The speech didn't shy away from reminding lenders that their core constituency -- their customers -- are fed up with the pages of fine print and hidden fees that are often forced upon them. But Warren also asked the lenders to work with her to create a new system of regulation designed to protect consumers -- one that relies on lenders to be proactive when offering products, rather than reactive when it comes to complying with regulation.

What’s Eating Todd Zywicki? - It's no secret that there's no love lost between Todd Zywicki and Elizabeth Warren.   But Todd's latest salvo in this feud is simply filled with inaccuracies.  Todd goes after Elizabeth for (1) her medical bankruptcy research, (2) the Two-Income Trap, and (3) the treatment of strategic defaults in Congressional Oversight Panel reports.  Todd's charges in (1) and (2) are just rewarmings of his past critiques of Elizabeth's work and of Meghan McArdle's botched hatchet job of Elizabeth in the Atlantic for which she was taken to the woodshed by numerous observers (see also here and here, for example).  But what about the Congressional Oversight Panel's treatment of strategic defaults? Here, Todd's claim is demonstrably false.

Limits Emerge for a New Bureau Without a Director - The Obama administration is starting to set up the new Consumer Financial Protection Bureau, but relief for consumers befuddled by the complex disclosures that accompany credit cards, auto loans and mortgages will not come about right away.  Under questioning from senators on Thursday, the deputy Treasury secretary, Neal S. Wolin, acknowledged that regulators would not have substantive power to write rules governing a vast array of consumer loans until a permanent director of the bureau is in place and until July 21, 2011, when responsibilities from seven other federal agencies are transferred to the new bureau.  On Sept. 17, President Obama named Elizabeth Warren, the Harvard legal scholar, as a White House assistant and gave her the task of getting the bureau up and running. But Mr. Obama stopped short of appointing her director, a five-year position that requires Senate confirmation.

Democrats agree to block Obama nominees - In a stunning alliance between Senate Democrats and Senate Republicans, Senate Democratic leadership quietly agreed Wednesday evening to block President Barack Obama from making recess appointments while senators return home to campaign for midterm elections, according to a Congressional newspaper.The move involves Senate leadership holding "pro-forma" sessions of the Senate every Monday and Friday to prevent Obama from filling vacant senior federal positions. By holding sessions every few days, Obama can't slip his nominees through.  Recess appointments are valid through the end of a Congressional session, and typically must be reconfirmed in the next calendar year. They're often used to appoint nominees that have been held up by the Senate.

Wallace Turbeville: Report from the Frontlines – Mission Not Accomplished on Derivatives Reform - It is now obvious that when President Bush made his victory speech on the aircraft carrier in front of the now-famous “Mission Accomplished” banner, he was a bit premature in his assessments. We should not make the same miscalculation with financial reform. Dozens of fights over these reforms, large and small, continue in Washington, New York and elsewhere. The struggle has moved from the halls of congress to the bureaucracies. At issue is the implementation of 850 pages of legislation concerning financial systems and practices that are difficult for even the most experienced financiers to understand, subjects which are far less appealing to the media. The SEC and the CFTC (Commodity Futures Trading Commission), which are jointly responsible for regulation, understand that their task is enormous and that their resources are stretched. My interest is primarily in the area of derivatives, and this piece is intended as a “report from the front” in that theatre of conflict.

Shadow Banks Pose Major Threat to Financial Stability - The recent Dodd-Frank financial reform legislation takes important steps toward stabilizing the financial sector, but it may have created a false sense of security. There is a large and worrisome vulnerability to bank runs that the legislation did not address, and we are not as safe as we could be from another financial panic.  The problem is not the traditional type of bank runs your grandparents might have told you about. Rather, modern bank runs occur in the shadow banking system. The shadow banking system includes major investment banks, money market mutual funds such as Fidelity, Vanguard and Schwab, and securities dealers such as those that can be found at JP Morgan, Bank of America and Citigroup.  These banks, which control trillions of dollars in assets – money market mutual funds alone were worth $3.8 trillion in 2008 — serve as intermediaries between borrowers and lenders, and hence function like traditional banks, but they are not subject to the regulations that exist in the traditional sector to protect against problems such as bank runs.

All Of This New Regulation Is Going To Make Banks Leave The U.S. And Europe - Over the course of the past two years, a lot of tomatoes have been thrown in the direction of Wall Street. Some of it was deserved. Much of it wasn't.  It was uninformed populist anger.  It's really easy to blame a bunch of egotistical rich guys in Brioni suits for problems that were caused elsewhere.   This anger has given rise to dual hyper regulation of both sides of the Atlantic.  In Europe, regulators have come down hard on the investment banks.  Many politicos have advocated a trading tax.  The United States is not any different.  Barney Frank and Chris Dodd combined to pass one of the most damaging bills ever to the US financial system.   The Financial Regulation Law that President Obama signed last summer is yet to be filled in. The terms are so broad that they have sent a chill up the spine of bankers. 

Bank execs on reform: What, me worry? - To hear the politicians tell it, new financial regulations - whether the Dodd-Frank bill in the U.S. or the banking rules crafted in Basel, Switzerland - represent historic change that will deeply alter how financial companies are run. But an upcoming study from IBM suggests the whole thing is landing with a bit of a shoulder shrug among industry executives. Researchers at an IBM think tank, the Institute of Business Value, interviewed 54 top financial industry executives around the world and a full half said the new regulations would prompt little or no change in how the industry functions, while another 7 percent saw only "moderate" change in the offing. The remaining 43 percent agreed there would be "significant change." Perhaps more telling: a whopping 87 percent feel the new regulations will do little to hurt industry returns, with 50 percent saying the slew of new rules will hit the bottom line by only a "small amount," 31 percent expecting returns to stay the same, and 6 percent expecting to earn more under the new regime. There is, they said, no obvious incentive to do things much differently.

Parsing Volcker - Paul Volcker should carry Damian Paletta around with him wherever he goes. Volcker’s speech to the Chicago Fed on Thursday, delivered, as Yves Smith says, “in a moderate, occasionally perplexed tone” was not exactly gripping stuff. But Paletta saw something blistering there and well done to him for doing so. Paletta’s Volcker might be a bit more forthright than the real-world Tall Paul, but that just means that we’ve now created the best critic yet of the national and international financial architecture: the natural authority of Volcker, distilled by Paletta into its purest and most powerful form of critique. By which I mean, a numbered list! So, to take the items in order.

Why Does Barack Obama Love the Establishment So Much? - The four horsemen of the establishment look like they are leaving the White House. Peter Orszag, who apparently was the most conservative of them all (and who just lobbied for more tax cuts for the rich), has left his position as head of the Office of Management and Budget. Larry Summers is leaving his position as director of National Economic Council. Rahm Emanuel might be out by October. And Tim Geithner is also rumored to be leaving after the election. There are hardly four Democrats in the whole country who were more pro-establishment, anti-change, pro-corporate power, pro-Wall Street than those four. I'm being literal. Bob Rubin might break into the top four, maybe Evan Bayh, maybe Harold Ford, Jr. But the four that are leaving the White House are undoubtedly in the top ten most corporate friendly Democrats in the country. So, that leads to the question of why did Obama pick them in the first place? Why did the guy who promised to change the whole system bring in the guys who are most wedded to the system? Why does Barack Obama love the establishment so much?

The Bernanke View - Ben Bernanke says, Market illiquidity also interacted with financial panic in dangerous ways. Notably, a vicious circle sometimes developed in which investor concerns about the solvency of financial firms led to runs: To obtain critically needed liquidity, firms were forced to sell assets quickly, but these "fire sales" drove down asset prices and reinforced investor concerns about the solvency of the firms.  Read the whole thing. What I take away is that Bernanke still holds to the "insider" view of the financial crisis. It was mostly a big, unnecessary panic. I wonder what the evidence is on this. Did the prices of mortgage-backed securities that fell in the fall of 2008 subsequently rise substantially? An NPR story suggests otherwise. When we bought Toxie , in January of this year, she seemed like a great deal. We paid $1,000. That was 99 percent less than she cost during the housing boom.  The NPR experience was that an asset that was once thought to be worth $100,000 only was worth $449. Perhaps their experience was not representative. However, it raises doubts about Bernanke's view of the crisis.

Two Cheers for the New Bank Capital Standards - On Sept. 12 the heads of the world's major central banks and bank-supervisory agencies met to bless what is called "Basel III," the latest international agreement on bank capital requirements. Should we be applauding or frowning upon this agreement? A little of each. The first big achievement, and it is a big achievement, is that 27 countries, each with its own disparate views and parochial interests, were able to agree at all—just 18 months after many of them were still fighting the last acute phase of the financial crisis. But what about the substance of the agreement?

Grading Basel III - If you haven’t seen it yet, it’s worth taking a look at Alan Blinder’s WSJ op-ed on Basel III. We’ll get to his conclusions in a minute, but whatever you think of those, he’s done us a great service in clearly laying out the big problems with Basel II that the Basel III needed to address:

  1. Capital requirements were too low;
  2. There was too much reliance on credit ratings;
  3. Banks could use internal models to measure risk;
  4. Banks could get around the rules by setting up off-balance-sheet entities like SIVs;
  5. It lacked any kind of liquidity requirements.

Most of the emphasis and commentary about Basel III has, properly, concentrated on the first of these. Blinder doesn’t like the delayed implementation of the new levels, but that doesn’t bother me so much: as I’ve said before, these ratios are in place already, on a de facto basis.

Sen. Mark Warner on The Black Magic of Finance - Sen. Mark Warner (D., Va.), who was a venture capitalist and a telecomm executive before going into politics and now describes himself as the Senate Democrats’ outreach person for business, has little doubt who is to blame for the wrenching financial crisis: The financial engineers. “Good venture capitalists in the late 90s got so much money they become private-equity firms and nobody was doing real early-stage investing in innovative companies,” he told a Brookings Institution forum Thursday. And that produced what he calls “a lost decade” that clouds the economic horizon and contributed to the global financial crisis. “All of us in politics say jobs are created by small business, but the jobs come from the gazelles, small innovative companies…not your dry cleaners.”  But financing such enterprises took a beat seat to “fee generation and financial engineering,” he said. The result was “an economy propped up by overheated real estate and new financial instruments.”

“Revolving door” lobbyists: The value of political connections in Washington, Vox EU: Lobbyists – paid advocates who aim to influence the decisions of legislators or government officials – play an increasingly important role in the political system of the US and other democracies. In 2008, for example, $3.97 billion was spent on lobbying US federal officials – more than twice the amount spent ten years earlier.The recent US debates on healthcare and financial reform have been marked by sharp criticisms of the role of staffers-turned-lobbyists in watering down the bills. The movement of political staffers from roles in the government to lucrative jobs in the lobbying industry is often described as a “revolving door”. This flow of money and staffers towards Washington’s lobbying firms has led to concerns that corporations and other organizations are able to buy influence and acquire privileged access to serving politicians. Furthermore, ex-staffers gain private benefits in such transactions, and this may have a negative impact on their incentives before leaving Congress.

America’s Deepening Moral Crisis - Much of America is in a nasty mood, and the language of compassion has more or less been abandoned. Both political parties serve their rich campaign contributors, while proclaiming that they defend the middle class. Neither party even mentions the poor. America today presents the paradox of a rich country falling apart because of the collapse of its core values, the country is in the throes of an ugly moral crisis. Income inequality is at historic highs, but the rich claim that they have no responsibility to the rest of society. They refuse to come to the aid of the destitute, and defend tax cuts at every opportunity. Almost everybody complains, almost everybody aggressively defends their own narrow and short-term interests, and almost everybody abandons any pretense of looking ahead or addressing the needs of others.The result of all of this is likely to be a long-term decline of US power and prosperity, because Americans no longer invest collectively in their common future. America will remain a rich society for a long time to come, but one that is increasingly divided and unstable. Fear and propaganda may lead to more US-led international wars, as in the past decade.

Where's the moral outrage on Wall Street? -Lewitt is the soft-spoken president of an investment advisory firm called Harch Capital Management in Boca Raton, Fla. His standing as a sophisticated player in financial markets, leavened by his outsider perspective on Wall Street, makes Lewitt's blistering indictment of American finance the most illuminating and sobering account we're likely to see.   Lewitt's great theme is that modern finance's diversion of money and talent into speculation at the expense of productive investment has enriched a small class of Wall Street elites while doing next to nothing for societal well-being. The moral language with which he makes this case is jarring because it's not what you'd expect from a money manager. "The enemies of reform are not just enemies of reform," Lewitt thunders. "They are enemies of a more just and fair society in which the rewards of capital are shared, not slopped up by a small elite like pigs feeding at a trough."

The Corruption of the Rating Agencies: Is AAA Junk? - Another problem is that certain biases had crept into the credit rating business dating from the 1930s, when the SEC essentially gave the force of law to credit ratings by decreeing that banks could not buy bonds with a rating less than BBB. Moreover, the SEC said that the only acceptable ratings were from “recognized” rating agencies, of which there were only four. (At the time, Standard and Poor’s were two different companies; they merged in 1941.) Thus the SEC created a de facto cartel that continues to operate to the present day.

TARP Is Gone – But May Soon Be Back – Simon Johnson - The Troubled Asset Relief Program, or TARP, is over – more specifically, its legal authority expires on Sunday, so it cannot be used for new “bailout” activities (although legacy programs, with money already disbursed, could last 5 to 10 years.) The first draft of its history, looking back over the past two years, may be this: TARP was an essential piece of a necessary evil – that is, it saved the American financial system from collapse — but it was implemented in a way that was excessively favorable to the very bankers who had presided over the collapse. And this sets up exactly the wrong incentives as we head into the next credit cycle. Where do we stand today, with the Financial Stability Oversight Council meeting for the first time tomorrow? In a devastating speech last week, Mr. Volcker hit all the nails on the head – our financial system is badly broken. This will lead another runaway mania and another awful collapse.

The TARP is Dead! Long Live the TARP. Simon Johnson at Baseline Scenario has written some excellent pieces, in particular his great exposition of the US as banana republic in the Atlantic. But lately he seems to be auditioning for an administration slot, or a Smugman-type Party-line columnist gig. Thus we have this piece, “The TARP is Gone”, which is basically echoing the corporate line even as it clucks its tongue about some of the ongoing, oh so unfortunate “abuses” of the Bailout and the rackets it rescued. TARP was an essential piece of a necessary evil – that is, it saved the American financial system from collapse.  I agree with every word of this except “necessary”, except from the point of view of the finance tyrants.  People who are opposed to bailouts of any kind like to argue that TARP was not really necessary. Banks could have been allowed to fail and the economic fallout around the world would not have been so dramatic.   I love the elitist populist-bashing condescension of “like to argue..”

The NYT Could Not Find Any Critics of the TARP - Apparently, the NYT doesn't know any TARP critics. If they did, and they talked to them for their article on the end of the TARP, the critics likely would have told the NYT that the TARP preserved Wall Street as we know it. Had the market been allowed to do its magic, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America, and many other fine institutions would have been bankrupt. This would have redistributed more than a trillion dollars of wealth from the shareowners, the creditors, and the top executives to the rest of the country. By providing them with loans at below market interest rates, the TARP and the much larger Fed and FDIC bailouts, allowed the banks to survive the crisis created by their own recklessness. This was like giving away food during a famine. The banks have repaid the food with interest now that the harvest has come in, but to pretend that we did not do them an enormous favor at enormous cost to taxpayers (we could have rescued others with these loans) is absurd.

A second look at the AIG deal - Well done to Kid Dynamite for doing the math on the way that we taxpayers are swapping our AIG debt for equity in the company. There are three big problems here:

  1. The fact that we’re doing this conversion in the first place. The preferred stock we currently own pays a regular coupon, while the equity we’re swapping it for was described as worthless by AIG itself not so long ago.
  2. The fact that as part of the deal we’re giving current AIG shareholders free warrants to buy stock at $45 per share. Which is very generous of us, but what have they done to deserve this?
  3. Most importantly, the fact that the stock we’re swapping into is worth less, at current valuations, than the preferred stock we’re swapping out of. To the tune of about $6.6 billion.

Where Are All the Prosecutions From the Crisis? - A consistent question since the financial crisis in 2008 is why has the federal government not prosecuted any senior executives for their roles in the collapse of firms like Lehman Brothers and Bear Stearns or the risky investments that led to bailouts of onetime financial giants like the American International Group, Fannie Mae and Freddie Mac. How can companies worth billions of dollars just a few months earlier suddenly collapse in 2008 without someone being held responsible? At a hearing before the Senate Judiciary Committee last week, Senator Ted Kaufman of Delaware summed up the frustration on Capitol Hill with the lack of any identifiable villains for the financial troubles of the last two years. “We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” Mr. Kaufman said. “Why is that?”

US Treasury stumbles selling Citi shares - The US government is in danger of missing its deadline of divesting all of its Citigroup shares by the year-end after a fall in stock market trading volumes prompted authorities to slow down sales in July and August.  The lull could prompt the US Treasury, which has a stake of about 17 per cent in Citi, to consider a share offering instead of selling the stock in small quantities in the market, according to bankers and analysts. “The sales of Citigroup stock have slowed way down in July and August ... The US Treasury will not finish its share sale by ... the end of the year,”  “The only option for the Treasury if it wants to exit Citigroup before the year-end seems to be to conduct a large secondary offering of the stake.”The government only seeks to sell shares equivalent to a small percentage of the overall trading volume in Citi to avoid depressing the price.

Financial Firms Hoist on ZIRP Petard -- Yves Smith - Initially, continued low rates seemed like an obvious idea if you thought on conventional lines: low rates mean low borrowing costs, surely that will spur economic activity. But banks have been making terms more stringent on consumer loans, and have actually increased interest rates despite lower funding costs. On the business side, credit to small businesses is reported by many to be tight, but the bigger impediment is that most business aren’t terribly keen to borrow given the not-so-hot economic outlook. But low rates initially operated as a big subsidy to the banks, a way for them to rebuild their balance sheets on the sly. The low rates were accompanied by a steep yield curve, meaning a larger than normal gap between their funding costs (short term) and their lending returns (pegged off of longer dated reference rates, which are normally higher to being with, but in the early post crisis era, the gap was particularly large). This was one of the big drivers of supersized bank profits in 2009.But the Fed has made it clear that it isn’t giving up on low rates any time soon. As a result, the yield curve has flattened, reducing this source of easy bank earnings. In addition, low rates wreak havoc with certain products like mutual funds, where the expenses associated with the product now exceed investment yields. Since the industry is committed to a $1 net asset value per share policy, that means many money market mutual funds lose money. It is also causing trouble with bread and butter investment products like annuities.

Banks Trade Below Liquidation Value With Smallest Gain (Bloomberg) -- Two years after the collapse of Lehman Brothers Holdings Inc., investors still aren’t willing to pay more than liquidation value for banks in developed nations.  The KBW Bank Index trades at 95 percent of book value, a level never seen before 2008, while stocks of lenders in Europe and Japan are also lower than their assets minus liabilities. Financial firms in the Standard & Poor’s 500 Index have risen 6 percent this quarter, the smallest gain for any industry and about half the return for the gauge of American equity.  Bears say the combination of slowing economic growth, the weak U.S. housing market and increasing regulation mean bank profits will be limited and bad loans may increase.

Credit Unions Bailed Out - Two years after the peak of the financial crisis, the federal government swooped in to stabilize a crucial part of the credit-union sector battered by losses on subprime mortgages. Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more. Wholesale credit unions don't deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to shoulder the losses through special assessments over the next decade. Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.

Inequality and Moral Hazard Rents in the Financial Sector - A recent study by Kaplan and Rauh confirms what a lot of us suspected anyway: the dominance of Wall Street (bankers, hedge fund managers etc) at the very top end of the income distribution. The presence of bankers at the top end of the income distribution is not surprising – A large portion of this blog has been devoted to the subject of how banks extract significant rents from the implicit and explicit support provided to them by the central bank. It is not surprising then that a significant proportion of these rents flows directly to bank employees. But as Megan McArdle notes, this does not explain the significant presence of hedge fund managers in this list. After all, hedge fund managers do not directly benefit from any state guarantees, implicit or explicit. It is clearly possible that there are many “superstars” in the hedge fund universe who generate genuine alpha and deserve their fat paychecks. But then the question arises as to why the prevalence of such superstars has increased so dramatically in recent times. One explanation may be the increased completeness of markets in the last quarter century which enables hedge fund managers to express a much more diverse range of market views in an efficient and low-cost manner. But this must surely be negated by the reduced supply of easy arbitrage opportunities and the increased competition amongst hedge funds.

The Left Right Paradigm is Over: Its You vs. Corporations - Every generation or so, a major secular shift takes place that shakes up the existing paradigm. It happens in industry, finance, literature, sports, manufacturing, technology, entertainment, travel, communication, etc. I would like to discuss the paradigm shift that is occurring in politics. For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual. These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.

For US Corporations the Whole of the Law Shall Be ‘Do What Thou Wilt’ - The US court system has discovered that 'organizations' are incapable of committing misdeed heninous enough to rise to the level of international crimes.  You know, like crimes against humanity.  This does fit with a disturbing trend in the US whereby more power and wealth is being concentrated in corporations who can act with increasing advantage and anonymity vis-à-vis the individual. Barry Ritholz has framed it quite well in his piece: The Left Right Paradigm Is Over.   How can the courts find that judicial constructs like corporations have the protections and privileges of the Bill of Right, but become strict constructionalistic and literal in allowing that they can engage policies and actions supporting and provoking the commission of heinous crimes such as murder and torture without any collective liability?  This was not the decision of some rogue sadist, but the cold and calculated corporate business decision in the pursuit of profit.

FT Alphaville » The problem of excess savings - What to make of the excess savings (aka boatloads of cash) that remain on US corporate balance sheets? In trying to answer this question, economist Rebecca Wilder has used data from the Fed’s latest flow of funds report to update the following graph, originally taken from JP Morgan research:The total corporate financial balance (TCFB) remains well above historical levels. And although it’s been falling in the past year, it seems the decline is coming entirely from the financial sector:That is, non-financials continue to spend less on capital and (especially) labour than their balance sheets would suggest they could — choosing instead to keep their retained earnings in cash.Wilder cites IMF and OECD research for what traditionally accounts for such a rise in corporate savings, and among the problems now is the leverage overhang that remains from the credit binge of the mid-2000s

A Broke FDIC Expands Checking Account Insurance From $250,000 To Infinity - A few days ago, the FDIC, broke as ever, with a Deposit Insurance Fund that was well south of zero at last check, announced, with delightful irony, that it was expanding its insurance on non-interest bearing checking accounts from the current $250,000 to, well, infinity. As in there is no upper limit on how much the FDIC would insure - the fact that it has no money at the FDIC to begin with being completely irrelevant. That's right, the broke FDIC basically said that it would guarantee up to $480 billion currently sitting in US checking accounts between December 31, 2010 and December 31, 2012. Yet is this nothing less than another Volcker-inspired plan to get capital out of multi-trillion money market industry and into consumer hands via easily accessible transaction accounts, and to encourage spending on useless trinkets like iPads? This could very well be the case.

Tracking Bank Failures - As a follow up to our weekly FDIC bank closing charts, the WSJ has an article with accompanying interactive graphic (below) showing the progress of bank closings over the past 2 years. They note that since WaMu fell, 279 lenders have collapsed; where the closings are concentrated was somewhat unexpected: click for interactive graphic.This is a static version that also shows the distribution of failures: click for larger map

New Proof Wall Street Knew Its Mortgage Securities Were Subpar: Clayton Execs Testify - During a little-noticed hearing this week in Sacramento, Calif., a firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along. Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages. The revelations give a better picture of what many have likely known for years: Wall Street firms knew they were buying lead yet passed it off as gold to investors who had no knowledge of the alchemy behind the scenes.

Reviving Securitization Has an Upside -There is much handwringing in Washington over the continued domination of the mortgage market by Fannie and Freddie, and a major issue in the next Congress will be dealing with that. The Obama administration promises a proposal early next year.  It is possible that a major part of the problem — albeit not one that politicians are likely to mention — is that Fannie and Freddie are simply pricing mortgages too low. They will lend money for less than the private market requires. Higher mortgage rates would not help the housing market or the broader economy. Making securitizations seem like less of a sure thing is needed to prevent a recurrence of the crisis, but it also removes one of the stimulative features of securitization

New Bill Calls for Refinancing of 30 Million GSE Mortgages - Legislation to stabilize the foreclosure crisis through the federal government’s conservatorship of Fannie Mae and Freddie Mac was introduced in the U.S. House of Representatives Tuesday by Congressman Dennis Cardoza (D-California). The Housing Opportunity and Mortgage Equity (HOME) Act would require Fannie and Freddie to allow borrowers to refinance their mortgages by locking in today’s record-low interest rates for longer fixed-term loans. The legislation would affect up to 30 million mortgages held or backed by the two GSEs. To fund the program, Fannie and Freddie would issue new mortgage-backed securities (MBS) to fund the refinanced mortgages and use the proceeds to pay off the existing mortgages. Fannie and Freddie would receive the same cash flow to cover default risk that they do now, passing along the reductions in financing costs to borrowers. Borrowers that qualify for the program would be able to refinance without facing penalty fees

Higher Loan Limits Extended: Necessary Evil? -There wasn't much fanfare, and it literally happened in the cover of night, but sometime after midnight Thursday morning, the U.S. Congress passed an extension of the increased Fannie/Freddie/FHA loan limits for high cost housing markets to a maximum $729,750. Big deal, right? Well, yes.The higher loan limits for high-priced housing markets were instituted back in 2008, when President George W. Bush signed the Housing and Economic Recovery Act. At the time, the mortgage market had crashed entirely, and the only games left in town were Fannie, Freddie, and FHA.They each had a loan limit of $417,000, which knocked an awful lot of potential borrowers out of the game. The move was designed to moderate the credit crunch and promote borrowing and buying.

Home Prices in U.S. Cooled in July After Tax Credit Expired (Bloomberg) -- Home prices in 20 U.S. cities rose at a slower pace in July from a year earlier as the end of a government tax credit hurt sales. The S&P/Case-Shiller index of property values increased 3.2 percent from July 2009, the smallest year-over-year gain since March, the group said today in New York. The gauge is a three- month average, which means the July data are still being influenced by transactions in May and June that may have benefitted from the incentive.  Unemployment close to a 26-year high and mounting foreclosures will probably weigh on the housing market for the rest of the year. With joblessness projected to average more than 9 percent through 2011, some households will continue to have trouble making mortgage payments, indicating foreclosures will remain a hurdle for property values.

Case-Shiller: "Home Prices Stable in July" - S&P/Case-Shiller released the monthly Home Price Indices for July (actually a 3 month average of May, June and July). This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: Case-Shiller reports NSA, I use the SA data. From S&P: Home Prices Remain Stable Around Recent Lows According to the S&P/Case-Shiller Home Price Indices. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 29.0% from the peak, and flat in July (SA). The Composite 20 index is off 28.6% from the peak, and down 0.1% in July (SA).The second graph shows the Year over year change in both indices.The Composite 10 is up 4.0% compared to July 2009.The Composite 20 is up 3.1% compared to July 2009. The year-over-year changes appear to be rolling over - and will probably be negative later this year.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Walking away with less - A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs.  That kind of deal is called a short sale, and it's sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what's owed on the mortgage.  Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic. The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.  Distressed homeowners are being drawn to short sales in large part because they can help protect a borrower's credit rating and thus the chance of buying another home later on.

New Home Sales: Lowest Median Price since 2003 - As part of the new home sales report, the Census Bureau reported that the median price for new homes fell to the lowest level since 2003. This graph shows the median and average new home price.  Some analysts pointed to the slight recovery in the median and average new home prices last year and into 2010 as evidence of the beginning of a recovery.  However in August, new home prices fell to the lowest level since 2003.The second graph shows the percent of new home sales by price. Over 52% of all home sales were under $200K in August - the highest percentage since 2003. (update: nemo notes the the median is over $200K in the first graph - this is an issue with rounding). And 82.6% of new home sales were under $300K - the highest percentage under $300K since August 2002. Only 17.4% of new homes sales were over $300K in August.

Number of the Week: 41.7 Million Spend Too Much on Housing - 41.7 million: U.S. households who face excessive housing costs. In the conventional narrative of the recession and recovery, one bright spot has been the speed with which U.S. households are shedding their debts and getting their finances back in order. The latest data from the Census Bureau, though, offer a less encouraging picture: Even as the average household debt burden improves, an increasing number of households are finding themselves financially stretched. As of 2009, some 41.7 million U.S. households, or 36.7% of the total, faced housing costs that exceeded 30% of their pretax income — a level typically defined as the threshold of affordability. That’s an increase of 1.5 million from 2007, despite a sharp drop in house prices and policy makers’ extraordinary efforts to bring down mortgage payments.

Third Of Americans Can't Get Mortgages As Interest Rates Hit Record Lows: Zillow - Even as a glut of unsold inventory keeps the housing market from recovering, nearly a third of Americans can't qualify for home mortgages, according to new data from online real estate search company Zillow. Would-be homeowners with credit scores below 620 points were largely unable to take out 30-year mortgages in the first half of September, even if they offered down payments as high as 25 percent, Zillow found after analyzing more than 25,000 loan quotes and purchase requests on its website. A full 29.3 percent of Americans have a credit score that low, Zillow says, citing data from myFICO. Mortgage interest rates, meanwhile, are at a low not seen in at least 40 years. According to data compiled by the St. Louis Fed, the average interest rate on a 30-year mortgage was 4.37 percent as of September 16. The St. Louis Fed has data going back to 1971 and, in that period, before 2009, the interest rate never dipped below 5 percent.

Foreclosure Starts Hit Highest Level Since January: LPS - The August Mortgage Monitor report released Friday by Lender Processing Services, Inc. shows that foreclosure starts are continuing to accelerate, with the GSEs displaying more aggressive timelines on early stage delinquencies.Last month, the Florida-based company tracked 282,528 newly initiated foreclosures. That’s 1 percent above the number of new foreclosure cases the previous month, 20 percent higher than a year ago, and the highest level recorded by LPS since January of this year, when there were 287,865. As of August month end, there had been more than 2 million foreclosure starts so far this year, according to LPS market data. While delinquencies during that same time period dropped 5.1 percent as compared to a year ago, the company says “in the context of ‘normal market conditions,’ delinquencies remain at historically high levels.”

Nearly one in four second-quarter home sales a foreclosure - Nearly one in every four U.S. homes sold in the second quarter was a deeply discounted foreclosed house, putting the market on pace to work through distressed properties in about three years, RealtyTrac said. Banks stepped up foreclosures through the summer and will take over a record 1.2 million homes this year, up from around 1 million last year and about 100,000 in 2005 before the housing bust, according to a forecast from the real estate data company. Foreclosed homes accounted for 24 percent of all second-quarter sales, at an average price discount of more than 26 percent compared with homes not in the foreclosure process.

Foreclosures Make Up 24% of Home Sales - Foreclosed homes accounted for 24% of all residential sales in the second quarter of the year, according to the latest data from RealtyTrac, a firm that monitors the foreclosure market.  A total of 248,534 U.S. properties in some stage of foreclosure -- default, scheduled for auction or bank repossession -- sold to third parties in the second quarter. While this represents an increase of nearly 5% from the previous quarter, the figures are down 20% from the same time last year. And there's other good news. "While foreclosure sales increased in the second quarter, nonforeclosure sales increased even more, spurred on by the homebuyer tax credit that expired during the quarter," said James J. Saccacio, CEO of RealtyTrac. Saccacio did warn, however, that this may be only a temporary rise as the expiration of the homebuyer tax credit could drive more buyers back to discounted short sales and bank repossessions.

Fannie Mae and Freddie Mac: Serious Delinquent Rates decline - Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business decreased to 4.82% in July, down from 4.99% in June - and up from 4.17% in July 2009. "Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans." The second graph is for the delinquency rate for Freddie Mac. The rate declined to 3.83% in August (Freddie reports a month quicker than Fannie), from 3.89% in July. Some of the rapid increase last year was probably because of foreclosure moratoriums, and distortions from modification programs because loans in trial mods were considered delinquent until the modifications were made permanent.  More modifications have become permanent and no longer counted as delinquent, and Fannie Mae and Freddie Mac are foreclosing again (they have a record number of REOs) - so there has been a decline in the delinquency rate.

Existing Home Inventory declines slightly in September, Up year-over-year - Tom Lawler reports that at the end of September, listings on totaled 3,960,417, down 1.2% from 4,007,860 at the end of August. This is 1.7% higher than in September 2009. The NAR reported inventory at 3.98 million at the end of August, and at 3.71 million in September 2009. So they will probably report inventory at around 3.85 million for September 2010. Since sales probably only increased slightly in September, the months-of-supply metric will probably still be well into double digits again. Note: there is a seasonal pattern for existing home inventory. Usually inventory peaks in July and declines slightly through October - and then declines sharply at the end of the year as sellers take their homes off the market for the holidays.

S&P: $460B Shadow Inventory Will Take 41 Months to Clear - It’s no secret that the volume of distressed residential properties is weighing heavy on U.S. housing markets and is prolonging any meaningful recovery. Of even greater concern is the industry’s growing backlog of homes thatneed to be liquidated and resold but have yet to make their way to the market – that menacing shadow inventory that threatens to asphyxiate appreciation of home values and drive the industry to a new low in this down cycle. Standard & Poor’s (S&P) defines this shadow inventory as outstanding properties whose borrowers are, or recently were 90 days or more delinquent on their mortgage payments; properties currently or recently in foreclosure; or properties that are real estate owned (REO). The credit ratings agency has just released a new report in which it estimates that the principal balance of these distressed homes now stands at about $460 billion. S&P says this hidden supply represents nearly one-third of the non-agency residential mortgage-backed securities (RMBS) market currently outstanding.

Fitch Expert Sees Prices Falling 10 Percent - Home prices will fall another 10 percent before they stabilize in the second half of next year, Roelof Slump, Managing Director of Structured Finance Experts for Fitch Ratings told investors Thursday. Slump said the inventory of distressed properties remains high and is expected to cause further home price declines, plus negative macroeconomic trends are expected to continue to impact the mortgage market. The brightest spot Slump saw in the housing picture is a decline in delinquencies, which are still high but have been improving this year. Although liquidations have slowed, he said that the pipeline of distressed borrowers remains high.  With seven to eight million homes in the distressed inventory, the backlog will put pressure on prices and likely cause further price declines.

Ally’s GMAC unit withdraws foreclosure affidavits signed by second employee - Attorneys for homeowners in Florida say Ally Financial's GMAC mortgage unit has begun to withdraw affidavits submitted in support of foreclosures that were signed by a second employee. Like Jeffrey Stephan--the document processor who admitted in sworn testimony that he signed 10,000 documents a month without reviewing them--Kristine Wilson signed as a "limited signing officer" for GMAC. In a request to withdraw an affidavit listing debts owed by a homeowner that was signed by Wilson in a Palm Beach County Circuit Court case, lawyers for GMAC say that "information in the affidavit may not have been properly verified."  The attorneys said, however, that the "amounts reflecting the indebtedness contained therein" . . . "were believed to be correct when filed."

California demands halt to foreclosures by mortgage giant - California officials today demanded that Ally Financial Inc. stop foreclosing on homes in the state, citing reports indicating the big mortgage lender is violating the law. The cease-and-desist letter, issued by Attorney General Jerry Brown, came as officials in several other states began investigating Ally's operations. The controversy stems from a Florida court case in which an Ally official reportedly testified that he signed thousands of documents in foreclosure cases without even reviewing the homeowners' loan documents.  According to Brown, California law forbids a lender from issuing a notice of default - the first step toward foreclosure - unless it can show it has tried to contact the borrower. The law covers mortgages originated between 2003 and 2007. Attorneys general in Texas, Iowa, Illinois and Florida are also investigating.

Florida’s Kangaroo Foreclosure Courts: Judges Denying Due Process on Behalf of Banks - Yves Smith - Florida is ground zero of the foreclosure crisis. In addition to being one of the epicenters of the housing meltdown, it has also become the jurisdiction where local lawyers have been the most effective overall in unearthing how servicers and foreclosure mills have engaged in widespread document fabrications and use of improper affidavits to foreclose. This abuse of contracts and legal procedures matters because the courts are the last bastion of defense of the individual. Even libertarians, who keenly oppose government mission creep, give courts an elevated role as a protector of rights. Given the success that local attorneys are having (it has reached the point where the state attorney general’s office has opened an investigation into three so-called foreclosure mills operating in the state), pushback by the mortgage industrial complex was inevitable. The old saw about “best government money can buy” now looks to apply to the courts, the one area most people assume to be relatively free from tampering by well funded interests. The New York Times did report on this development, but its account was such a pale version of what is happening on the ground as to give readers a distorted picture.

FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them - Yves Smith- I’ve had a lot of anecdotal evidence to support the idea that these procedures, which were created in the early days of mortgage securitizations, were simply not observed on a widespread, if not a universal basis. My sense is that the breakdown in practice was well underway by 2004, but it may have taken place earlier. For instance, a group of over 100 lawyers in a loose network around Max Garndner, a North Carolina bankruptcy lawyer who has taken a serious interest in this area, now has a standing joke that the first one that finds a deal where the note was correctly endorsed must bronze it and hang it on their wall. In other words, in none of the cases this large group has seen were the notes transferred to the trust properly.  I’ve been reluctant to take as strong a stand as their collective experience suggests, but independent evidence confirms their report. One little stunner came courtesy Alan Grayson’s office. In 2009, the Florida Bankers Association wrote a letter to the Florida Supreme Court objecting to some proposed rule changes for foreclosure cases. The full text of the letter is here.

Florida's foreclosures nightmare - We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people’s property rights are being violated in such a flagrant way. If you are an investor, either as “bond vigilante” or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.  The short problem is that banks are foreclosing without showing clear ownership of the property. In addition, “foreclosure mills” are processing 100,000s of foreclosures a month without doing any of the actual due diligence or legal legwork required for the state to justify the taking of property and putting people on the street. Even worse, many are faking documentation and committing other fraud in the process. The government is allowing this to happen both by not having courts block it from going forward, but also through purchasing the services of these mills. As Barney Frank noted: “Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?” And the worst part is the lack of conversation about this. Thanks to Yves Smith at naked capitalism for following this story from the get-go; her blog has become the place for anyone interested in this topic (that link is a catch-up post). The rest of the media is starting to catch up to where she was weeks ago.  Here’s the Washington Post with the story of an individual caught in one of these nets.

Moody's places $7.6 billion of GMAC-serviced RMBS on review - Moody's Investors Services placed the ratings of $7.6 billion worth of residential mortgage-backed securities serviced by GMAC Mortgage, now Ally Financial, up for review. It's the latest development after issues have come to light in the company's foreclosure process. Moody's will review 319 tranches of 114 deals done on GMAC-serviced RMBS. These will be in addition to the 462 tranches of 80 other GMAC-serviced deals Moody's put up for review in March. According to Moody's, the action comes after GMAC foreclosure affidavits were found to be faulty on cases in 23 states. Since then, several state attorneys general offices have launched investigations, some not in those 23 states, and Moody's has put the GMAC servicer rating up for review. Moody's said the improper affidavit signings could cause higher losses in RMBS serviced by the company due to extended foreclosure and liquidation timelines and litigation costs that will come from class-action suits.

GMAC’s ‘Robo-Signers’ Draw Concerns About Faulty Process, Mistaken Foreclosures - Several states have ordered a freeze on foreclosures [1] by Ally Financial’s GMAC mortgage unit [2], which has come under fire in court for using “robo-signers [3]” who signed off on thousands of foreclosures attesting to the accuracy of the documents without having much personal knowledge of what they contained. Several other states are investigating [4] GMAC after the company said last week it was suspending foreclosure evictions and sales [5] in 23 states due to “a procedural error” that could require the servicer to “take corrective action [6] in connection with some foreclosures. One robo-signer, Jeffrey Stephan, has signed off on as many as 10,000 foreclosures a month, according to court records. The foreclosure affidavits, which established basic facts such as a bank’s ownership of a mortgage [7], were also required to be signed in the presence of a notary public. That didn’t always happen, either. (Since then, other GMAC employees [8] have also been flagged as possible robo-signers.)

Meet GMAC’s Robo Signer Jeffrey Stephan - This video is from the deposition of GMAC’s famed robo signer, Jeffrey Stephan, who estimates that he signs 10,000 documents a month. If nothing else, you need to watch from 5:00 to the end of the first segment.  Hat tip reader Barbara W, from I wish the sound quality were better; you can also read excerpts of key sections, some of which is contained in these clips.

Fitch Considering Downgrading Servicers Over Affidavits - Yves Smith - Boy, if Fitch thinks servicer problems are limited to affidavits, it is gonna learn a lot more in the coming weeks and months. This report comes via BusinessWeek: The agency believes that if more errors are found by other servicers, that could stall foreclosures in some states and increase losses related to residential mortgage-backed securities. That could prompt Fitch to downgrade ratings on servicers that are affected, the agency said. This looks reactive and appears to reflect an incomplete understanding of the problem. In judicial foreclosure states, certain affidavits were required as part of the documentation needed to proceed with a foreclosure. If the affidavits were improper, they are a fraud on the court. In non-judicial states, the same problem arises when a foreclosure is challenged. A non-judicial process moves into the court system. Bankruptcy filings routinely lead to a motion for relief the bankruptcy stay (legalese for the servicer asking to grab the house now rather than let what happens to the homeowner borrowings be resolved by the judge). So you have similar issues in non-judicial states. not just as prevalent.

It's Really On: JPM Tells CNBC It Is Systematically Reviewing Foreclosures | zero hedge - Update: BN  *JPMORGAN ASKS JUDGES TO DELAY RULINGS IN `PENDING MATTERS'.  We predict that within a week, all banks will halt every foreclosure currently in process. Within a month, all foreclosures executed within the past 2-3 years will be retried, and millions of existing home sales will be put in jeopardy. And like that, mortgage fraud goes global. JPM stock down on the news, as the American foreclosure process is now effectively shut down. More as we get it.

More Foreclosure Mess Updates: 20% of Florida Cases Have Problems, Including Phony Court Summons; JP Morgan ‘Fesses Up to GMAC Type Problems - More shoes are dropping on the foreclosure improprieties front. Let’s not forget the throughline: the parties in the securitization pipeline were so keen to rip out fees and maximize profits that they allotted too little in the way of expense dollars to executing tasks required both by statue and contractual requirements. The result was that they cut corners to such a degree (explained longer form here) that the trusts (the securitization entity) appear not to have been properly conveyed the notes (the borrower IOU which in 45 states is necessary for them to possess to be able to foreclose) on a widespread, if not pervasive basis. I’ve had attorneys tell me that when they have uncovered serious document shortcoming, the trustee’s response to the judge has been, “You can’t expect us to do that. We aren’t paid enough.” Funny, they apparently didn’t raise this issue when they signed up for the job.The failure to transfer ownership properly creates fundamental problems under securitization processes. Bottom line is we’ve spoken to a lot of people, there seems to be no simple or even not so simple fix. Put it another way: why would law firms and servicers be engaging in widespread document fabrication and other improprieties if there were a straightforward remedy?

Bankers Running Wild: Foreclosure Flurry in Florida - As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed. The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property. If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.

JPMorgan Suspending Foreclosures - JPMorgan Chase said on Wednesday that it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions are in the 23 states where foreclosures must be approved by a court, including New York, New Jersey, Connecticut, Florida and Illinois.  The bank, which lends through its Chase Mortgage unit, has begun to “systematically re-examine” its filings to verify that they meet legal standards, a spokesman, Tom Kelly, said. Last week, GMAC Mortgage said it was suspending an undisclosed number of foreclosures to give it time to take a closer look at its own procedures.  Chase and GMAC, in their zeal to process hundreds of thousands of foreclosures as quickly as possible and get those properties on the market, employed people who could sign documents so quickly they popularized a new term for them: “robo-signer.”

JPMorgan Halts Foreclosures, "Robo-Signers" Appear Commonplace - Following in the heavy and reverse-motion steps of GMAC Mortgage, JPMorgan Chase has stopped foreclosures in 23 states to review the accuracy of its filings. According to the bank, the cases may contain “defects” and “flawed paperwork” which could give homeowners reason to contest court-ordered evictions. JPMorgan’s foreclosure suspension affects some 56,000 borrowers. GMAC triggered what looks like it could be a domino effect when the company announced last week that it was suspending foreclosure actions and REO sales in judicial states because of some paperwork (and human) errors in its filings.  The sheer volume of foreclosure cases materializing out of the housing crisis seems to have given rise to what’s being called the “robo-signers” – servicing execs that mechanically sign off on foreclosure actions and push them through the assembly line thousands upon thousands a month, without abiding by clearly defined laws, such as having the signature notarized and ensuring they have personal knowledge of the information’s accuracy. Analysts say they are expecting more lenders to follow GMAC and JPMorgan and make their own foreclosure

‘Robo-signer’ controversy spreads - Controversy about so-called “robo-signers” in the foreclosure process, during which staffers sign thousands of mortgage-related documents a month, is spreading across the U.S. banking industry.  On Wednesday, J.P. Morgan Chase & Co. spokesman Thomas Kelly said that the bank’s Chase unit is stopping some foreclosures to review how employees in its mortgage-foreclosure operations sign affidavits about loan documents.  The news comes about a week after GMAC Mortgage, a unit of Ally Financial, stopped foreclosures in 23 states to deal with a similar problem. Read more about how GMAC Mortgage hits speed bump in foreclosures. At the center of the controversy are employees of mortgage lenders or servicers who sign affidavits supporting foreclosures that have to be cleared by judges in many states.  With so many foreclosures to process, there’s concern that such affidavits are signed without verifying whether loan documents and other records have the correct information.

Banks are your friends...smiled the crocodile -Key players in the development of this story are judges in each state as they interpret state law defining proper ownership. Inquiry to two people who know courts predicted most judges would probably simply ignore technical discrepancies, but as the story develops these issues are gaining traction. Bypassing property laws is a big no-no perhaps. Foreclosure mess ups in Florida as Yves Smith continues to follow the trail of difficulties with titles in 45 states. GMACS letter to agents concerning foreclosures. Fitch considering downgrading servicers as difficulties develop and homeowners contest foreclosures based on title problems. JPMorgan Suspending Foreclosures as one of the big guys says oops.

Congressmen Attack LPS, Servicer Misconduct; PR Counteroffensive Starting - Yves Smith - Some signs of motion today: Al Franken of Minnesota (ironically, the state that has implemented the most bank friendly foreclosure regime in the US) sent a letter to the supposed adults in the room (Geithner, Bernanke, Bair, US attorney general Eric Holder, HUD Secretary Shaun Donovan, and Acting Comptroller of the Currency John Walsh). He asked them to investigate servicers, identify individuals who have been harmed by illegal foreclosures, and in particular, hold GMAC and its employees accountable for any criminal misconduct. He also calls for more oversight of servicers. Full text here.  On a different front, Alan Grayson of Florida opened both barrels on what he called foreclosure fraud factories. This video is a tad more staid than his speeches on the floor of the House, but I strongly recommend you watch it. In particular, he gives some examples of people who have gotten caught in the maw of the mortgage doomsday machine. He presents case examples that are far from the borrower stereotypes that bank defenders like to talk about. He takes aim at document forgeries, and names LPS, Lender Processing Services, as a prime actor.  This video provides a very good overview (with only a few technical lapses, like the use of terms like “mortgage title”).

Foreclosures slow as document flaws emerge - The foreclosure machinery that has forced millions of Americans out of their homes is beginning to seize up as some lenders and their lawyers are accused of cutting corners in their pursuit of rapid home repossessions.  Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks.  Even lenders with no known problems are expected to approach defaulting homeowners more cautiously and look more aggressively for resolutions short of outright eviction.

Big Bank Foreclosure Delays Signal Big Trouble - JP Morgan Chase told CNBC on Wednesday that it will delay more than 56,000 foreclosure proceedings due to paperwork that was signed, "without the signer personally having reviewed those files." That came on the heels of GMAC halting foreclosures and evictions in 23 states for roughly the same reason. All this leads anybody with a heartbeat to figure that other large servicers will likely follow suit, as potential lawsuits abound. So what will that mean to the larger foreclosure crisis and the already weakening housing recovery? "It's clear the pace of foreclosures will slow down," "I would suspect that most responsible lenders are going to be looking at their processes and making sure that they've done everything properly, so they're not subject to the same accusations and lawsuits." So far the largest lender/servicer, Bank of America has not returned my request for information, but you can imagine the level of scrambling going on right now at all the major servicers, now that a big name like JP Morgan Chase has made its move.

Wrongful Foreclosures and Clouded Title - I think there's a much bigger problem lurking in the shadows behind the GMAC/JPMChase foreclosures freezes due to concerns about faulty foreclosures:  clouded title.  There's a lot of wonderful technical stuff involved with wrongful foreclosure claims, but the basic problem is pretty easy to understand:  you have to own a mortgage in order to bring a foreclosure action.  If you don't own the mortgage, you don't have any right to kick someone out of his/her house, even if that person has defaulted on his/her mortgage.  And GMAC/JPMChase are sufficiently worried that the trusts they service might not own the mortgages they are foreclosing on that they have put a halt to their foreclosure actions.   Consider, though, what it means if there have been widescale wrongful foreclosures.  If these foreclosures were nonjudicial foreclosures (and maybe even for judicial foreclosures), it means that the foreclosure sale purchasers have clouded title.  The homeowner still has claim to the property and there might still be a valid mortgage on it.  And as many foreclosure sales end up with the lender buying the property and reselling it, what does that mean for the eventual end-buyer?   What does that mean for their title insurer?   This raises all of the classic bona fide purchaser protection issues, but as the linked article reports, at least one title insurer has gotten spooked. Consider also what this means for homeowners who are current on their mortgages and want to sell their house.  Are we sure who actually owns their mortgage?  If not, there's a problem.  If it is owned by A, it doesn't do any good for B to release the mortgage upon the sale.  I think the title insurers' potential problem goes much further--it's not just title to foreclosed mortgages that are in question, it's potentially all private-label securitized mortgages.  Once the title insurers recognize the potential danger here, how willing will they be to write new policies?  And without those policies, how many folks will be able to get mortgages to buy houses?   (And without new business, the title insurers are themselves going to be a bind).  I'm very curious to see how the title insurance industry handles this problem. 

Foreclosure Flaws May Cloud US Homeownership as `Blighted Titles' Emerge - U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership. Defective documentation has created millions of blighted titles that will plague the nation for the next decade,” said Richard Kessler, an attorney in Sarasota, Florida, who conducted a study that found errors in about three-fourths of court filings related to home repossessions. Attorneys general in at least six states are investigating borrowers’ claims that some of the nation’s largest home lenders and loan servicers are making misstatements in foreclosures. JPMorgan Chase & Co. is asking judges to postpone foreclosure rulings, while Ally Financial Inc. said Sept. 21 its GMAC Mortgage unit would halt evictions. The companies said employees may have completed affidavits without confirming their accuracy.Such mistakes may allow former owners to challenge the repossession of homes long after the properties are resold, according to Kessler. Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.

7 major lenders ordered to review foreclosure procedures - A top federal bank regulator said Thursday that he has directed seven of the nation's largest lenders to review their foreclosure processes after learning about the widespread mishandling of homeowner evictions by the industry. John Walsh, acting director of the Office of the Comptroller of the Currency, told lawmakers during a hearing on the financial regulatory overhaul enacted this summer that some lenders "clearly had deficiencies" in their system for foreclosures.  The banks contacted by regulators include J.P. Morgan Chase, which announced Wednesday that it was freezing 56,000 foreclosures after finding errors in its preparation of documents, according to OCC spokesman Kevin Mukri. Other lenders contacted include Bank of America, Citibank, HSBC, PNC Bank, U.S. Bank and Wells Fargo.  "We both want to see that they fix the processing problems but also to look to see whether there is specific harm [that has been caused] in individual cases,"

Title insurers dented by ‘robo-signer’ concern - Shares of title insurers fell Friday on concern the controversy over so-called robo-signers may dent their earnings. Title insurance protects home buyers against losses arising from disputes over the ownership of their property. As the housing slump deepened during the financial crisis these insurers got more claims and suffered losses.  House prices have stabilized in recent quarters, but a record number of foreclosures are still funneling through the U.S. housing market.  In recent weeks, controversy has erupted over employees of mortgage lenders or servicers who sign thousands of affidavits supporting foreclosures that have to be cleared by judges in many states. These employees have become known as robo-signers because they sign so many documents in such a short time.

Bank of America Halts Foreclosures in 23 States; Connecticut AG Asks State Courts to Suspend Foreclosures for 60 Days - Yves Smith - More bad news for banks and servicers on the foreclosure improprieties front. The latest report, that Bank of America is stopping foreclosures in 23 states, confirms the suspicion that problems with foreclosure procedures for residential home loans in securitizations are widespread. From the AP via Washington Post: Bank of America says it is delaying foreclosures in 23 states as it examines whether it rushed the foreclosure process for thousands of homeowners without reading the documents. Bank of America is not yet able to estimate how many homeowners cases will be affected, a spokesman for the nation’s largest bank says.A bank official acknowledged in a legal proceeding in February that she signed up to 8,000 foreclosure documents a month and typically didn’t read them. The Associated Press obtained the document Friday.

Bank Of America Joins JPMorgan In Suspending Foreclosures - Bank of America is joining JPMorgan Chase and GMAC is suspending foreclosure processes in 23 states that weren't reviewed properly. A BoA exec admitted she signed up to 8,000 documents in a month and typically did not read them, according to the AP. "I typically don't read them because of the volume that we sign," the executive said. Banks had been rushing through foreclosures in an effort to reset the teetering housing market. Now it looks like many banks will have to halt

Bank of America to Freeze Foreclosure Cases - Bank of America, the country’s largest mortgage lender by assets, said on Friday that it was reviewing documents in all foreclosure cases now in court to evaluate if there were errors. It is the third major lender in the last two weeks to freeze foreclosures in the 23 states where the process is controlled by courts. But Bank of America went further than the first two lenders, GMAC Mortgage and JPMorgan Chase, which have said they will amend paperwork only in cases they think were improperly done. So far, that has amounted to only a handful of cases. Bank of America, in an e-mailed statement, said it would “amend all affidavits in foreclosure cases that have not yet gone to judgment.”

Fraud Factories: Rep. Alan Grayson Explains the Foreclosure Fraud Crisis (video) This is Rep. Alan Grayson explaining the crisis of foreclosure fraud and how it links to the entire securitization chain of Wall Street.

Wells Fargo standing by accuracy of foreclosure affidavits - The second largest servicer in the United States, Wells Fargo is not planning to review foreclosure affidavits in light of the robo-signer allegations at many of its competitors. In an email to HousingWire, Wells Fargo spokesman Jason Menke said, "Wells Fargo policies, procedures and practices satisfy us that the affidavits we sign are accurate. We audit, monitor and review our affidavits under controlled standards on a daily basis. We will stand by our affidavits and, if we find an error, we will take the appropriate corrective action."

Connecticut halts all foreclosures for all banks - Connecticut Attorney General Richard Blumenthal on Friday ordered a moratorium on all foreclosures by all banks for 60 days--the most radical action taken by a state on issue of document irregularities. California also expanded the moratorium on foreclosures it announced last week on Ally Financial foreclosures to include those by J.P. Morgan Chase. Calling the companies' review of key foreclosure documents "a ruse," California Attorney General Jerry Brown (D) ordered J.P. Morgan to prove it is following the law before it continues foreclosures in the state. Both J.P. Morgan Chase and Ally have frozen foreclosures in 23 states because some employees had signed off on foreclosure paperwork without properly reviewing the files. Colorado and Illinois have stopped foreclosures by Ally and at least seven other states have launched probes into the issue. But Connecticut is the first to institute an industry-wide ban.

As Condos Sit Empty, Florida Voters Enter Growth Battle - Lesley Blackner drove through a maze of condominium towers, rarely seeing any curtains in the windows, or residents, and tried to contain her anger. "They've crammed as much as they can in here," she said this month, noting that just a few years ago cows grazed on the land west of Interstate 95. "The people around here didn't want it - they objected. But the City Commission did it anyway." Even now, with about 300,000 residential units sitting empty around the state, the push to build continues. Since 2007, local governments have approved zoning and other land use changes that would add 550,000 residential units and 1.4 billion square feet of commercial space, state figures show. So for Blackner, a Palm Beach lawyer with a Mercedes full of paperwork, the real estate crisis is not just the fault of Wall Street, Washington or misguided borrowers; it is also the back-scratching bond between elected officials and builders - a common source of frustration in weak real estate markets wherever developers are still fighting to add more housing.

Human Landscapes In Southwest Florida - A couple weeks ago, I was listening to a story by NPR's Planet Money team about "Toxie" a toxic asset they had purchased to follow and help tell the story of the recent financial meltdown. One of the mortgages in Toxie was on a home bought for investment in Bradenton, Florida, and the team took a look at housing in the area. Many homes there are empty and have been for years. Huge developments sit partially completed among densely built up neighborhoods and swampland. A guest stated that there were "enough housing lots in Charlotte County to last for more than 100 years". Boom and bust residential development has drastically affected parts of southwest Florida for decades now, and I spent some time (with the help of Google Earth), looking around the area. With permission from the fine folks at Google, here are a few glimpses at development in southwest Florida. (26 photos total)

How to fix the US mortgage market -The current pool of US mortgages is suffering from two serious problems that continue to delay a recovery in housing markets and in turn threaten the broader economy. First, estimates put as many as 23% of US mortgages “underwater”, meaning that the value of the home collateralising the mortgage has fallen below the loan’s balance ( 2010). In most cases this was the result of ill-informed households purchasing homes at the peak of a housing bubble while reckless lenders allowed them to over-leverage. Thus there is widespread worry about strategic default. Second, the deep recession and slow current job growth continue to generate additional mortgage delinquencies (and subsequent defaults) as households remain unemployed. This proposal is specifically designed to solve the first problem although it could help the second as well.

Low credit scores mean one-third of Americans can't get a mortgage - Despite reports that the recession is "over" and loan rates are dropping, one-third of Americans still can't get a mortgage because their credit scores are too low. That's the latest from a mortgage market analysis just released by real estate web site Zillow. The economists who crafted the new report, titled Zillow Mortgage Marketplace Analysis, studied Zillow's data of more than 25,000 loan quotes and purchase requests during the first half of September.
Stan Humphries, Zillow's chief economist who has a PhD in Government, acknowledged that while it isn't a shock that, as a group, we're having trouble getting a mortgage. But even he was surprised that people with a credit score of 620 or less weren't getting even one loan offer, even one with a ridiculously high interest rate. For comparison's sake,. Humphries says that five years ago, homeowners with a credit score of 620 or less made up 20% of home sales. Now, that number has dropped to almost zero.

Which Cities Face Biggest Housing Risks? - Four years into the U.S. housing bust some communities hardest hit initially remained under stress in 2009, particularly in California and Florida, according to recently released data from U.S. Census Bureau. (click interactive map for 500 cities) Real Time Economics has worked up a simple housing-stress indicator for most of the major U.S. metropolitan areas that combines three factors — the fraction of mortgage-holding homeowners in a community with a monthly housing payment in excess of 30% of income, the percentage of all people in the region without health insurance and the fraction of the population without a job. The indicator uses 2009 data from Census’s American Community Survey. Within more than 500 metro areas, the top 20 most stressed include nine in California and six in Florida, where the housing bust has been particularly acute. Among the most populous cities, Miami tops the list, followed by California’s Inland Empire, Los Angeles and San Diego.

The ugly reality of lowering debt by default - There have been at least a few seemingly positive signs of progress during this anemic economic recovery: U.S. households are spending less. They're saving more. Debt is steadily falling. But don't be fooled by the cheery headlines. The trend toward fiscal discipline might sound uplifting, especially at a time when many have learned all too painfully that they spent too much in the years leading up to the financial crisis. But dig a little deeper and you'll find that even the best economic news is masking something ugly. It turns out that many households aren't exactly tightening their wallets and using all their saved cash to pay down debts. They're simply defaulting on them.

Hey Big Borrower: How in Debt Are We Really? - Daniel Indivglio is alarmed at consumer debt in the United States This chart should be startling. It shows that total debt has increased from around $1,186 per person in 1948 to $10,168 in 2010. And remember, that’s using 2010 dollars — and it doesn’t include real estate debt either like mortgages or home equity loans. This debt includes credit cards, auto loans, student loans, personal loans, and other non-real estate consumer debt. Perhaps an even more interesting observation is the rise of credit card debt. They account for most of the “revolving” debt shown with the green line. It was virtually non-existent until 1970. Now Americans average $3,480 in credit card debt per capita. Since just 1980, that’s an increase of 285%.  Daniel is charting real per-capita consumer debt and its growing out of control! Which reminded me of another real per-capita stat that is growing out control: personal disposable income. So I decided to see how the debt compared to disposable personal income.

10% Savings Rate + Consumer Spending At 65% Of GDP = Retail Disaster - Now that the Wall Street Journal, New York Times, CNBC and every other mainstream media outlet have figured out what some financial blogs had figured out months ago, everyone knows that the American consumers have not yet begun to deleverage. Consumer credit outstanding peaked at $2.58 trillion in July 2008. It has plummeted all the way to $2.42 trillion today, a 6% reduction over two years. The full $160 billion reduction can be attributed to write-offs by the Wall Street, Ivy League MBA run, banks.   American consumers do not want the Age of Mammon to end. They will need to be dragged kicking and screaming into the Age of Austerity. Consumer expenditures peaked at $10.2 trillion in the 3rd Quarter of 2008. They reduced spending for two quarters, but when Big Daddy Government handed them billions and told them to spend it on cars, appliances, and homes, they dutifully obeyed. Today, consumer expenditures stand at an all-time high of $10.3 trillion, still accounting for 70.5% of GDP. There really has been no hint of austerity by Americans. It is a false storyline. The major reductions in consumption still loom in the future.

Unemployment, Economy Forcing Savers To Give Up $5 Billion A Year -  Savers are giving up $5 billion in annual income as concerns about the dampening recovery and increasing unemployment push the prudent to keep their money in cash and away from investments, new research shows. Over the past year, consumers moved $542 billion from certificates of deposit to money market deposit accounts, according to Market Rates Insight, a San Anselmo, Calif.-based data provider. Representing about one-fifth of the $2.6 trillion savers have in CDs, the shift from investments that offer a fixed rate of return over a specific time period to near-zero-yielding money market accounts is a reflection of the dour economy and the fear and uncertainty that it breeds, analysts said. The average CD yielded 1.15 percent in August. The average money market account yielded 0.31 percent, or about a quarter of the average CD, according to the California-based researcher. Applied to $542 billion, the difference in interest over the course of a year equals about $5 billion in lost annual income.

Most Americans Don't Think Recession Is Over - The National Bureau of Economic Research declared last week that the recession officially ended in June 2009. But according to a new poll from CNN/Opinion Research Corporation, Americans overwhelmingly disagree. Nearly three-fourths of Americans — 74 percent — say the economy is still in a recession. That’s a slight improvement from December, when 84 percent of those polled said they believed the economy was in a a recession, but it still discouraging.So what’s the deal? How can economists be so out of touch with the suffering of “regular” people? Or how can non-economists be so ignorant about what’s really going on in the world around them?

More Americans Expect Recovery Will Take Years - The American public has arrived at the same dismal conclusion as many economists: We’re in for a long and painful economic recovery. A new survey by AlixPartners LLP, a business-advisory firm, showed a growing share of Americans think it will take years for the economy to recover to “normal times.” Some 46% said it will be 2013 or later before that happens. A smaller 36% predicted a recovery sometime before 2013. The fraction predicting a drawn out recovery has moved steadily higher. While nearly half now think it will take until 2013, 34% said the same in a May survey. At the beginning of this year, just 19% said it would be 2013 or later before the economy recovered; most expected a quicker rebound.

Confidence slips to lowest since February (Reuters) - U.S. consumer confidence fell to its lowest level in seven months in September, underscoring lingering worries about the strength of the economic recovery. But in a sign of stabilization in the housing market, U.S. home prices hovered above multi-year lows without the help of the homebuyer tax credit that ended in April. The day's data is the latest to give a mixed signal on the economy, with a 9.6 percent unemployment rate and still-tight access to credit among factors hurting consumers and keeping concerns about a double-dip recession alive. "With unemployment at a 26-year high, confidence among consumers remains weak. This decline in sentiment will give the Fed a stronger reason to increase stimulus in November,"

U.S. Consumer Confidence at Lowest Level Since February - NYTimes - September consumer confidence in the United States slipped to its lowest levels since February, driven by a deteriorating labor market and business conditions, according to a private report released Tuesday. The Conference Board, an industry group, said its index of consumer attitudes fell to 48.5 points in September, from a revised 53.2 in August.  Inflation expectations eased slightly, even after the Federal Reserve said it was ready to take action to keep yields down in an effort to stimulate growth. Consumers’ one-year inflation expectations edged down to 4.9 percent, from 5.0 percent the previous month. The August reading was revised down slightly from an original 53.5. The expectations index slipped to 65.4 from 72.0 last month, and the present situation index slipped to 23.1 from 24.9 in August.

Consumers Still Relying on Their Uncle Sam for Wages - You’re probably going to hear a fair amount today about that income and spending report this morning, how wages and spending both rose more than the Street expected. Just keep this in mind: transfer payments. We’ve written about this before, but it bears repeating: consumer wages apart from transfer payments, items like unemployment benefits and social security payments, have been and are still stagnant, especially when measured against inflation. Our colleague Kathleen Madigan pulled out some tidbits from the report: Of the $59.3 billion gain in income in August, $35.8 billion came from transfer payments. That was up from just $500 million the month before. The reason for the big surge was the cut-off and subsequent renewal of unemployment compensation. So roughly 60% of the gain came from the largesse of Uncle Sam. Then there’s the inflation picture. Wages, on a yearly basis, are up just 0.8%, Miller Tabak’s Dan Greenhaus points out. That’s a smaller rise than inflation as measured by the personal consumption expenditures index, which rose 1.5% overall from a year ago; the “core” PCE was up 1.4%.

Worried Consumers and CEOs Are Stuck in Logjam - Like patients suffering through a protracted bout of the flu, U.S. consumers can’t seem to shake off their blues. It isn’t just consumers, however, who feel more downbeat; CEOs also are more worried. Job jitters and uncertainty will constrain economic activity–and Washington deserves some of the blame. Earlier this week, the Conference Board’s consumer confidence index unexpectedly plunged to 48.5 in September, the lowest reading since February. On the heels of the consumer report came news from the Business Roundtable that its CEO economic outlook index fell to 86.0 in the third quarter, from 94.6 in the second. How do CEOs plan to respond to their lowered expectations? Many plan to cut payrolls–which goes a long way in explaining why consumers are singing the blues. According to the Roundtable survey, 23% of CEOs plan to decrease U.S. employment in the next six months, up from 17% anticipating cuts in the second quarter.

Consumer Spending in U.S. Rises More Than Forecast -- Consumer spending in the U.S. rose more than forecast in August as incomes climbed, bolstering the Federal Reserve’s forecast that the world’s largest economy will keep expanding at a “modest” pace.  Purchases rose 0.4 percent for a second month, Commerce Department figures showed today in Washington. The gain exceeded the 0.3 percent increase projected by the median forecast of economists surveyed by Bloomberg News. Incomes were up 0.5 percent, the biggest advance this year, propelled by the resumption of extended and emergency unemployment benefits as wage gains cooled.  The pickup in spending, the biggest part of the economy, bodes well for retailers heading into the holiday-shopping season. Nonetheless, a jobless rate that is projected to average at least 9 percent through next year may prevent demand from growing much more, one reason why Fed policy makers like William Dudley say they remain concerned about the speed of the recovery.

Restaurant Index shows contraction in August - Any reading above 100 shows expansion for this index.  From the National Restaurant Association (NRA): Restaurant Industry Outlook Remained Cautious as Restaurant Performance Index Was Essentially Flat in August As a result of continued soft sales and traffic levels, the National Restaurant Association’s comprehensive index of restaurant activity remained below 100 for the fourth consecutive month in August. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in August, essentially unchanged from the previous three months. In addition, the RPI stood below 100 for the fourth consecutive month, which signifies contraction in the index of key industry indicators.  Restaurant operators reported a net decline in same-store sales for the fifth consecutive month in August ... Restaurant operators also continued to report a net decline in customer traffic levels in August..

Postal Service hitting billions in losses, hoping for rate hike - Americans can still send and receive mail, but the U.S. Postal Service may not have much left in the bank after this week, as it's set to announce billions of dollars in losses as early as Thursday.  It's also waiting for postal regulators to announce Thursday whether they approve of a proposed 5.6 percent postage-rate increase, to start in January. The proposed increase faces stiff resistance from business groups and lawmakers, who say that the USPS should instead make deeper spending cuts to meet its financial obligations.  GOP opposition kept Congress from permitting the Postal Service to postpone paying $5.5 billion required by law to pre-fund retiree health benefits. A temporary spending measure to fund most federal programs through early December didn't mention the Postal Service; it passed the Senate on Wednesday and is expected to clear the House on Thursday.

Trucking Volume Collapses, Falls Most Month To Month Since March 2009 - Truck tonnage may have increased 2.9% year-over-year in August, but the collapse in month-over-month levels is much more illuminating. Tonnage fell by 2.7% from July to August, according to the American Trucking Association. That's the biggest month over month fall since March 2009. The chief economist at the ATA, Bob Costelo, says this slowdown was expected and that it should be slowing further with the economy for the remainder of the year.

ATA Truck Tonnage Index Plunged 2.7 Percent in August - The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 2.7 percent in August, which was the largest month-to-month decrease since March 2009. The latest drop lowered the SA index from 110 (2000=100) in July to 106.9 in August. Compared with August 2009, SA tonnage climbed 2.9 percent, which was well below July’s 7.4 percent year-over-year gain. Year-to-date, tonnage is up 6.2 percent compared with the same period in 2009.  ATA Chief Economist Bob Costello said that August’s data highlights that the economy, while still growing, is slowing. “We fully anticipate sluggish economic growth for the remainder of this year and the latest tonnage numbers are reflecting that slowdown.” This graph from the ATA shows the Truck Tonnage Index since Jan 2006

Memo To Andrew Leonard On High-Speed Rail - I read your Salon article The Republican threat to blow up high-speed rail with great interest— I have written extensively about high-speed rail (HSR) in the United States (here and here, for example). I support HSR as you do. I wanted to remind you that not only is there no HSR in the United States, but also that— There is not a single HSR line under-construction in the United States So, how can we speak of HSR being dead? I was wondering how the Republicans can kill something that doesn't exist. To be sure, there are plans on the drawing board, as there have been for many, many years.Andrew, the Japanese built its first high-speed rail line in 1964. In so far as we're not going to see any high-speed rail out of Obama's current plans, that means that we are still 46 years behind the curve.

U.S. Light Vehicle Sales 11.76 million SAAR in September - Based on an estimate from Autodata Corp, light vehicle sales were at a 11.76 million SAAR in Setpember. That is up 25.8% from September 2009 (the dip following cash-for-clunkers), and up 2.8% from the August 2010 sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for August (red, light vehicle sales of 11.76 million SAAR from Autodata Corp). This is the high for the year - slightly higher than in March. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current month sales rate. The current sales rate is about at the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

Fed: Midwest manufacturing slows in August - Manufacturing activity slowed in the Midwestern U.S. during August, as automakers chose to stop building up inventories, the Federal Reserve Bank of Chicago reported Monday.The Chicago Fed’s Midwest Manufacturing Index dropped 1.4% to a seasonally-adjusted level 79.9 in August, from a downwardly revised 1.9% in July. The July index stands at 81.0, down from the original estimate of 81.4. Despite the monthly setback, regional manufacturing was up 8.5% from August of last year, better than the 6.5% annual increase on a national basis.

ISM Manufacturing Index declines in September - PMI at 54.4% in September down from 56.3% in August. The consensus was for a decline to 54.5 percent.  From the Institute for Supply Management: September 2010 Manufacturing ISM Report On Business® Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter.  Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector."Here is a long term graph of the ISM manufacturing index. In addition to the decrease in the PMI, the ISM's new orders index fell to 51.1 from 53.1 in August, and the production index declined to 56.5 from 59.9. The employment index declined to 56.5 from 60.4 in August. And the inventory index was up for the 3rd month in a row to 55.6 from 51.4.

Why Are Democrats Promising to Raise Prices? - Democrats claim the American manufacturing base is declining in the face of unfair competition from a Chinese government that is unfairly helping its own manufacturers through currency manipulation and export subsidization. To which I say: So what? We should be thrilled that the Chinese government and its people see fit to spend their own money to subsidize lower prices for American businesses and consumers. Last week, President Obama put substantial pressure on the Chinese prime minister to revalue Chinese currency, a revaluation that would have the effect of raising prices of all Chinese goods in the United States. What possible sense does such a move make, particularly in a recession? There is no question that if Democrats are successful in changing China’s currency policy and/or imposing new tariffs (taxes) on Chinese goods, prices will rise for all Americans, but particularly so for the lower income brackets that are supposedly the Democrats’ constituency.  In a sane world, Democrats would be celebrating Chinese imports as one of the greatest anti-poverty programs that exist in America today. 

Needed: a fix for the previous fix - MANY of us, especially politicians and pundits, have a special fondness for small businesses. This idea is fueled by the fact that small businesses account for most job growth. Of course, they also destroy many jobs because small businesses are more likely to fail. Also, the real job creators are high-growth firms and "gazelles", young firms that suddenly grow quickly. Because successful businesses usually start small and create jobs as they grow, it leads the data to suggest that small businesses create most of the jobs. But once you control for firm age, the small-firm effect weakens. So the question is whether we believe small businesses are so important and create so many jobs that in addition to paying too much for bad coffee, we should have policies to promote them. The government already guarantees small business loans and favours small businesses when awarding government contracts. But should it do more in terms of subsidies and tax treatment? From an economic perspective, favouring one industry or type of business is usually a bad idea.

Unemployment May Be Headed Up Despite Growth - The strong likelihood of tepid economic growth through next year suggests unemployment may rise, rather than fall, as many forecasters currently predict. In a paper published Monday, economists at the Federal Reserve Bank of San Francisco warn business cycle analysis generated within the central bank system is pointing to growth that will be “at or below potential” growth levels.This modest rate of advancement won’t be enough to generate the needed level of job growth, which suggests “the unemployment rate could rise by as much a 0.5 percentage point during this period,” moving from the current level of 9.6% to 10.1%. The paper’s authors observe “such a scenario would take the unemployment rate back to the peak recorded in October 2009.”The San Francisco Fed’s worrying prediction is based on work on the business cycle done by the Chicago and Philadelphia regional Fed banks.

Op-Ed - The New American Normal - The “animal spirits” of which Keynes spoke are on the prowl across the United States. Their mood is ugly. The spirits are wary and troubled. Corporations and individuals are hoarding cash, when they have any, because they’re not buying into the recovery.  On a weeklong visit, I found a mood of deep unease in an America that seems to have descended into tribalism — not ethnic, but political, economic and social. Uncertainty is pervasive. The government’s rescue of Wall Street combined with the acute difficulties of a middle class struggling to get by on stagnant or falling incomes has sharpened resentments.  This is not a momentary phenomenon. Nobody seems to think unemployment is going to fall significantly from 9.6 percent — a level more often associated with France — in the near future. Get used to the new normal.

Employers Aren’t Trying Hard to Hire, Study Suggests - Unemployed workers have a point when they complain that companies aren’t really trying to fill open jobs, a new study suggests. In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. By some estimates, if openings were turning into hires at the rate they typically do, the unemployment rate should be about three percentage points lower than the current 9.6%. Explanations have tended to focus on workers. Extended unemployment benefits could make people less willing to take jobs that pay poorly or don’t quite fit. Mortgage troubles and employed spouses could make it harder for people to move for work. People might not have the right qualifications for the jobs available. A new paper, though, suggests employers themselves are at least part of the problem. The authors take a deep dive into Labor Department data and come up with an estimate of what they call “recruiting intensity,” a measure of employers’ vacancy-filling efforts including advertising, screening and wage offers.

The Ghost of Full Employment - After nearly two years of bad economic news, which topped off three decades of economic insecurity, perhaps it's understandable that we've grown indifferent to labor-market pains. We shrug at long-term double-digit unemployment. We greet the news of record-breaking poverty with a national yawn. We've come to believe that unconscionable levels of inequality are something natural to the social order.  The government's direct response to the jobs and poverty crisis has been simple indifference. Wedded to the idea that propping up the market will naturally lead to job growth, officials have responded with "solutions" drawn only from the narrow menu of economic fundamentalism -- tax cuts and stimulus. Now that gross domestic product is positive, the unemployment problem is mostly considered "structural" -- a skills mismatch -- and thus beyond our capacity to solve.  Yet not that long ago, in the midst of another long-term economic meltdown, politicians dared to think beyond the idea that growth alone would solve all problems.

Goldman: Unemployment Will Remain Sky-High For A Very Long Time - Maybe stubbornly high U.S. unemployment is less perplexing than it appears. According to Jim O'Neill at Goldman Sachs, most major housing crises result in persistently high unemployment: Goldman Sachs' Jim O'Neill:Most importantly, the rebound in growth tends to be more subdued than normal (Chart 6) and it can take many years before unemployment rates fall (Chart 7). In essence, the pressure from the private- sector adjustment and deleveraging tends to make it difficult to deliver the kind of strong growth that is needed to eat into spare capacity. Updating our work here and plotting the US experience so far—together with our latest forecasts—shows that the US recovery, although slower than most normal recoveries, is not particularly unusual relative to the experience of the more serious housing busts.

What Structural Unemployment Looks Like - Krugman - One thing I should probably make clear in this discussion of structural unemployment is that I have no problem in principle with the idea that shifts in the economy can temporarily lead to a large rise in the “natural” rate of unemployment. Let me offer a case in point: it was quite clear, circa 1990, that Britain was no longer capable of running unemployment rates as low as those of the 1960s and early 1970s. But how did we know this? First, through experience: the Lawson boom of the late 1980s never brought unemployment below 7 percent, yet it was accompanied by a sharp rise in inflation. Clearly, the economy was hitting speed limits even at relatively high unemployment by previous standards. And all the kinds of mismatch so conspicuously not present in America today were very clearly in evidence in Britain during the 1980s. Think Full Monty.There were large regional disparities in unemployment, with the south and east doing well but the north and west deeply depressed. There were obviously declining industries — steel, coal, shipbuilding — coupled with rising service and financial sectors. Times were terrible for blue-collar workers, not so much for white-collar.

Bill Clinton gets it wrong - Former President Bill Clinton recently provided fuel to the misguided claim of structural unemployment when he claimed that employers are having a hard time filling job openings because the unemployed workers are inadequately skilled for the available jobs. Speaking during a televised interview, Clinton noted that, “We are coming out of a recession but job openings are going up twice as fast as new hires….People don’t have the job skills for the jobs that are open.” The data, however, tell a different story: that hiring has actually outpaced job openings. The Chart shows that there have been roughly 53 million people hired into the private sector in the 14 months starting in June 2009, the official beginning of the recovery, but only 32.7 million job openings over the same period.

The Power of Conventional Wisdom - Krugman - When everyone – tout le monde, as Tom Wolfe used to put it, meaning a relative handful of people, but everyone who supposedly matters – is saying something, it takes a real effort to step outside and say, wait a minute, how do we know that? It’s especially hard if you spend most of your time hanging out with other Very Serious People; I know that I myself have a hard time saying that people I know personally are talking nonsense, even when they are. The VSP effect is one reason smart bloggers, both on economics and on politics, have generally been a better guide to what’s really happening in America than famous reporters: their distance, their lack of up close and personal insights, is actually an advantage. And so Clinton, despite what I believe to be genuine concern about the plight of the unfortunate, finds himself parroting the structural unemployment line, probably quite unaware until he opened his paper this morning that it’s a fantasy spun to justify inaction.

Structure of Excuses, by Paul Krugman - What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve.  But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. In other words, structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions.

It's the Housing, Stupid - Why Krugman keeps beating a dead horse, as he does here this morning, is beyond me. The man is a little slow, he's wedded to a one-good, sticky-price, sticky-wage view of the world, or maybe he just hates Narayana Kocherlakota? You tell me. First, it would be nice if discussion of this issue did not revolve around the idea that there are two kinds of unemployment: "structural" and "demand-deficiency" unemployment. Unemployment is unemployment.  Now, some people, including Narayana Kocherlakota and yours truly have argued that there is something anomalous going on in the current recession. The unemployment rate is unusually high, and we can find good reasons for that in the data, that have to do with the sectoral reallocation of labor, both across sectors of the economy, and across geographical areas. Long-term shifts from manufacturing to services, combined with the housing boom and bust, have acted to make the unemployment rate higher, as have the facts that the long-term shifts and the housing market boom and bust affected different states disproportionately.

Orwell Watch: “Structural Unemployment” As Excuse to Do Nothing -  Yves Smith - The spin-meisters continue to package things that ought to incite outrage in anodyne wrappers in the hope no one will look inside. “The new normal” and “structural unemployment” join the universe inhabited by such gems as “extraordinary rendition” and “pre-emptive strike”.  “New normal” is particularly insidious, since it implies that we must accept current conditions, since they are “normal” hence it would be abnormal and/or require exceptional effort to experience anything else. “New” acknowledges things have changed, but “new” usually has positive connotations, and masks the fact that pretty much nobody except the banksters and some members of the top 1% are exactly keen about present conditions. It also had no footprint of how things changed; if you didn’t know what it stood for, it could just as easily be used to describe a dramatic natural shift, for instance, how the weather changed in the wake of the Krakatoa eruption. “Structural unemployment” is not only sneaky, but also downright misleading. The catchphrase is meant to convey that unemployment just can’t be helped, it results from fundamental problems in the job market.

Structural Misalignment and a Counterfactual Economy - Maxine Udall - Paul Krugman weighs in on the structural unemployment debate here , here, here, and most recently and comprehensively here. First let me say that I agree with Krugman in the essentials, but I find myself wondering if we can be confident that there really is not a larger structural problem embedded within the obvious acute problems of high unemployment and depressed aggregate demand? For example, suppose that there have been massive and pervasive distortions of human capital and labor and other markets resulting from massive distortions in or induced by financial markets. Suppose those distortions lasted at least 10 years and maybe a long as 30 years. Then many sectors of the economy and the workers in them have been shaped by the distortions in ways that may be difficult to discern. If my conjecture is right, might an economy, shaped by persistent and pervasive distortions in combination with a massive downturn and tightened credit, be characterized by no new and thriving sectors requiring new workers with new skills (because much of the capital that would have fueled them has been siphoned into contingent markets and housing) even as the existing sectors and workers languish? Could there be a larger structural problem, but we can't see it because the economy has been so distorted?

Structural Problems, Not Structural Unemployment - Krugman - Maxine Udall responds to my writing about structural unemployment and the absence thereof by arguing that the US economy probably does have some major structural problems. She’s right, of course — but there’s no contradiction between arguing that structural unemployment has very little to do with the sharp rise over the past three years, and arguing that the economy was badly distorted even in 2007. To be fair, Udall seems to get that; but others might not. Maybe a couple of examples of how good micro performance doesn’t mean good macro performance, and vice versa, will help make the point.

What does "structural" mean? -Atlanta Fed's macroblog - On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart summed up one of the hot policy questions of the moment this way: "A necessary debate is jelling on the diagnosis of our economic troubles and the appropriate prescription. As I think about it, there are three lines of argument. One argument maintains there is not enough spending occurring—in economists' terms, a shortfall of aggregate demand—and that this shortfall can be reduced by further stimulus. A second argument is that the economy is undergoing deep structural adjustments in industry composition, labor markets, and household finances, especially the level of debt, and these adjustments will take considerable time to play out. Finally, it can be argued that much of the uncertainty has to be dealt with in other areas of government, and monetary policy can't do much about this kind of problem. This characterization doesn't do full justice to the complexity of the matter, but it lays out in broad strokes what questions are in play."

Wise heads - In the Washington metro area, the unemployment rate is 6.3%. In Minneapolis, it's 6.8%. In Austin, it's 7.3%, and in Boston, it's 8.4%. Contrast that with unemployment in Riverside, California (15.1%), Miami (12.1%), Detroit (15.2%), and Las Vegas (14.8%). Those are some substantial disparities! One wonders to what extent present unemployment in the hardest hit metropolitan areas is structural. In parts of the desert southwest, up to 10% of employment, during the boom, was in local construction. Was that a sustainable level of local construction employment (particularly given the overbuilding that resulted)? Mr Krugman himself has written that the economic fundamentals which justified a concentration of car manufacturing in Detroit have eroded. One may argue that the oversupplied skills in individual metropolitan areas may ultimately be matched with demanding employers elsewhere in the country, but that assumes that labourers are geographically mobile. Metropolitan unemployment disparities suggest that they may not be. There is some analytical evidence to this effect...

Estimate of Decennial Census impact on September payroll employment: minus 78,000 - The Census Bureau released the weekly payroll data for the week ending September 18th today. If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment. The Census Bureau releases the actual number with the employment report.  This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. The Census payroll decreased from 83,955 for the week ending August 14th to 6,038 for the week ending September 18th.

Outsourcing Claims Not Supported by the Data - The Senate is about to consider the "Creating American Jobs and End Offshoring Act" which aims to use various tax credits and incentives to discourage U.S. firms from moving jobs overseas and encourage them to bring back jobs that have been previously outsourced abroad.  While the premise of the legislation is that U.S. companies have been furiously moving domestic jobs offshore, job loss data from the Department of Labor does not support the claim that offshoring is a significant factor in mass layoffs. In its more recent quarterly report on mass layoffs, the Bureau of Labor Statistics reported that 338,064 workers lost their jobs for more than 31 days in mass layoffs in the second quarter of 2010. As the table below shows, nearly half of these job losses were among seasonal workers. The reduction in business demand accounted for 26 percent of the losses, while organizational changes (such as ownership changes) and financial issues (such as bankruptcy) are the other major factors in job losses. Of all the factors that resulted in recent mass layoffs, job relocations accounted for only a tiny percentage.

Indian immigrants To U.S. Find Better Life Back In India - Thousands of Indian immigrants are choosing to leave the United States in the midst of the recession and move back to India to find better jobs. While many cite better job opportunities in India as their primary reason, most also feel they are able to have a better quality of life in India.

The mega payoff of increased immigration is lost on the pols - I have a plan that will raise wages, lower prices, increase the nation's stock of scientists and engineers, and maybe even create the next Google. Better yet, this plan won't cost the government a dime. In fact, it'll save money. A lot of money. But few politicians are going to want to touch it.  Here's the plan: More immigration. A pathway to legal status for undocumented immigrants. Economists will tell you that immigrants raise wages for native-born Americans. They'll tell you that they make things cheaper for us to buy here, and that if we didn't have immigrants for some of these jobs, the jobs would move to other countries. They'll tell you that we should allow for much more immigration of highly skilled people, because that's about as close to a free lunch as you're likely to find. They'll tell you that the people who should most want a path to legal status for undocumented immigrants are the low-income workers who are most opposed to such plans. And about all this, the economists are right.

Job Loss Looms as Part of Stimulus Act Expires -Tens of thousands of people will lose their jobs within weeks unless Congress extends one of the more effective job-creating programs in the $787 billion stimulus act: a $1 billion New Deal-style program that directly paid the salaries of unemployed people so they could get jobs in government, at nonprofit organizations and at many small businesses.  In rural Perry County, Tenn., the program helped pay for roughly 400 new jobs in the public and private sectors. But in a county of 7,600 people, those jobs had a big impact: they reduced Perry County’s unemployment rate to less than 14 percent this August, from the Depression-like levels of more than 25 percent that it hit last year after its biggest employer, an auto parts factory, moved to Mexico.  The money came from a pot of $5 billion that was included in the stimulus package as an emergency fund for the Temporary Assistance for Needy Families program, the main cash welfare program for families with children. Of the $4.3 billion that has been approved so far, $1.4 billion has gone toward basic assistance, $1.8 billion has been used to help families pay one-time emergency expenses like rent and utility bills, and a little over $1 billion has been used to subsidize jobs.

99ers Legislation Blocked In Senate - Legislation by Sen. Debbie Stabenow (D-Mich.) to help the "99ers" -- unemployed people who've exhausted the 99 weeks of unemployment insurance available in some states -- failed in the Senate on Wednesday, to nobody's surprise. Sen. George LeMieux (R-Fla.) objected to Stabenow's unanimous consent request. Stabenow's bill would have provided an additional 20 weeks of benefits in states where the unemployment rate is above 7.5 percent, and it would have boosted a tax credit for businesses that hire unemployed workers. Stabenow said she wanted the bill to be designated "emergency spending" and exempt from "pay-as-you-go" rules, as is customarily the case with unemployment benefits. "The reality for us in America is that we will never get out of debt with more than 15 million people out of work," said Stabenow. "So when folks talk about the deficit and leaving the deficit for our children, we will never get out of debt had this country until people get back to work, until they have good-paying jobs, and in between times, we will not move this economy forward until we are helping people be able to keep going in this recession."

Does unemployment make us sick? - Can losing your job make you sick?It seems like such a straightforward question: Does losing your job make you sick? And extrapolating from that: Does poor economic health—recessions and jobless recoveries—lead to poor personal health?  In economics, however, remarkably few questions have straightforward answers. And thus while the question has been much studied, there's a frustrating lack of consensus about the answer. Still, there's a lot that we can learn from the competing responses.  Pretty much everyone agrees that unemployed people are, in the aggregate, less healthy than the rest of the population, both physically and mentally, and especially over prolonged jobless periods. Common sense suggests many reasons why: Unemployed people tend to have less money to spend on health care; they are subject to social and psychological stress, which takes its toll on the body and spirit; and, in a country where health care benefits are usually tied to a job, the jobless are less likely to have access to heath care (PDF).

Income and Satisfaction - We recently learned that earning a salary of $75,000 a year was the key to happiness, but it may depend on whether that is more or less than what your peers earn According to a new study, the satisfaction of employees with their jobs and income go down if they learn that they earn less than the median of their co-workers. And their satisfaction doesn’t seem to improve if they earn more than the median. The study was conducted by David Card, Alexandre Mas, Enrico Moretti and the recent MacArthur Foundation award winner Emmanuel Saez. In the study, the economists used a Web site established by The Sacramento Bee that revealed the salaries of all state employees, including faculty and staff at the University of California. The researchers then contacted a random group of university employees on three campuses and told some of them about the site to see if they would look up the salary information, and then asked them how they felt. In sum, it turns out that nobody likes to feel underpaid, but if you’re actually paid well relative to your colleagues, it doesn’t make you feel any better.

Personal Income Growth - Despite the point that the first data reported in the monthly personal income report is nominal personal income, it does not get much attention in the press and by bloggers. Weare starting to see a rebound in nominal personal income growth even though it is still quite low by historic norms. The current smoothed growth rate is 2.8% and the earlier signs that growth is accelerating have faded. This is why it is important to monitor the growth in weekly average earnings in the employment report. The way to look at nominal income growth is that it is a necessary condition but not a sufficient condition for economic growth to become self-sustaining. Moreover, this cycle, for the first time in the post WW II era nominal growth must be sufficient to accommodate both inflation and rising personal savings before real income growth can strengthen. In previous cycles rising personal savings was not a major factor dampening growth and/or creating a wedge between nominal income growth and real personal spending..

Real Median Household Income: 1967 to 2009 According to the US Census Bureau's Income, Poverty and Health Insurance report, the real median household income in 2009 was $49,777, not statistically different from the 2008 median.  Real median income declined by 1.8 percent for family households and increased 1.6 percent for nonfamily households between 2008 and 2009. The Survey of Income and Program Participation (SIPP) provides monthly data about labor force participation, income sources and amounts, and health insurance coverage of individuals, families, and households during the time span covered by each of its panels. The data yield insights into the dynamic nature of these experiences and the economic mobility of U.S. residents.

Median Household Income Fell Once Again in 2009 -The US Census Bureau announced earlier this week that real median household income in the United States dropped in 2009 to $49,777. This was down from $50,122 in 2008, and $50,233 in 2007.  It's not very surprising to note that real median household income in the United States has dropped since the beginning of the "Great Recession" in December of 2007.  If you had to guess when the United States hit its peak in terms of inflation adjusted median household income, what year would you guess? If you said 1999 (which was the height of the dot com bubble), then you would be correct.  Inflation adjusted median household income in the United States in 1999 was $52,587. That's not really a surprise, especially considering the fact that the national unemployment rate was hovering near an outrageously low (relatively speaking) 4%. Times have changed.  If you feel poorer than you did 10 years ago, that's because you probably are.

US Income Gap Widens: Census Finds Record Gap Between Rich And Poor - The income gap between the richest and poorest Americans grew last year to its widest amount on record as young adults and children in particular struggled to stay afloat in the recession. The top-earning 20 percent of Americans – those making more than $100,000 each year – received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line, according to newly released census figures. That ratio of 14.5-to-1 was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968. A different measure, the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations. At the top, the wealthiest 5 percent of Americans, who earn more than $180,000, added slightly to their annual incomes last year, census data show. Families at the $50,000 median level slipped lower.

Using multiple price indexes to measure changes in inequality - “Consumption inequality” is in general the wrong way to think about the consequences of inequality. As Mark Thoma recently pointed out, wealth is largely not about what one consumes, but about the time and freedom one has to sacrifice to sustain “normal” consumption. The price of freedom is nowhere in ones “consumption basket”. It is related to the gap between income and ordinary consumption, and also to the price of what one does not ordinarily consume, the cost of deviation. Indebtedness also entails a cost in freedom that we miss if we focus on consumption. In my view, freedom, not consumption, is the central distinction between rich and poor. It is odd that I should argue this point with libertarian Wilkinson.But, let’s put that question aside and focus on consumption inequality. Here’s a thought experiment that I think captures Wilkinson’s view of why we should “use multiple price indexes” when thinking about changes in inequality.

Income gap between rich and poor in U.S. at record high - The income disparity between the wealthiest and poorest Americans expanded to a record high in 2009 as the recession tore at the fabric of the poor and lower middle-class, according to data from the U.S. Census Bureau.The top 20 percent of American earners -- those making more than $100,000 annually - received 49.4 percent of all income generated in the country, compared with the 3.4 percent earned by those below the poverty line. That translates to a ratio of 14.5-to-1, up from 13.6 in 2008 and almost double the low figure of 7.69 recorded in 1968. The U.S. income gap between rich and poor is the greatest among Western industrialized nations.

The United States of income inequality -In 1968, reports Hope Yen for the Associated Press, the ratio expressing the share of wealth taken home by the top 20 percent of Americans compared with the share accounted for by those under the poverty line was 7.69 to 1. By 2009, that number doubled -- to 14.5 to 1. As of last year, income inequality in the United States reached its worst extent since records started being kept.The top-earning 20 percent of Americans -- those making more than $100,000 each year -- received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line, according to newly released census figures ... A different measure, the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations. There you have it: From Richard Nixon through Barack Obama, the gap between the rich and the poor in the United States has cracked wide open into a global embarrassment.

Wealth and an American paradox - The liberal blogosphere is currently atwitter over a new study produced by Michael Norton and Dan Ariely (pdf) showing how much Americans underestimate economic inequality in America. A 2005 on-line survey asked thousands of respondents to estimate what proportion of all the total wealth in the country was owned by the richest one-fifth of Americans, the next richest one-fifth and so on. On average, the respondents guessed that the richest one-fifth owned about three-fifths of the nation’s wealth; in reality the richest one-fifth own over four-fifths of it. The survey also asked respondents for their ideal distribution; on average, they preferred a society in which the richest one-fifth owned about one-third of the national wealth. According to the new study, then, Americans not only think that wealth is much more equally distributed than it really is, they want an America that is much more equal than they imagine it is today. And yet, Americans are notably opposed to the government doing anything to move the distribution of wealth in that direction. Why the contradiction?

Why income distribution can't be crowd-sourced. - Earlier this month I published a 10-part Slate series (PDF; serial version; slide show) about the 30-year rise in income inequality that Princeton's Paul Krugman has dubbed "The Great Divergence." In the first installment, I noted that in 1915, when the richest 1 percent accounted for about 18 percent of the nation's income, the prospect of class warfare was imminent. Today, the richest 1 percent account for 24 percent of the nation's income, yet the prospect of class warfare is utterly remote. Indeed, the political question foremost in Washington's mind is how thoroughly the political party more closely associated with the working class (that would be the Democrats) will get clobbered in the next election. Why aren't the bottom 99 percent marching in the streets?  One possible answer is sheer ignorance. People know we're living in a time of growing income inequality, Krugman told me, but "the ordinary person is not really aware of how big it is."

We Haven’t Hit Bottom Yet – Wallingford is nobody’s definition of a depressed community. It’s a middle-class town on the Quinnipiac River. But the number of people seeking help at Master’s Manna is rising, not falling. And when I asked Cheryl Bedore, who runs the program, if she was seeing more clients from the middle class, she said: “Oh, absolutely. We have people who were donors in the past coming to our doors now in search of help.”  The political upheaval going on in the United States right now is being driven by the economic upheaval. It’s sometimes hard to see this clearly amid the craziness and ugliness stirred up by the professional exploiters. But the essential issue is still the economy — the rising tide of poor people and the decline of the middle class. The true extent of the pain has not been widely chronicled.  “The minute you open the doors, it’s like a wave of desperation that’s hitting you,” said Ms. Bedore. “People are depressed, despondent. They’re on the edge, especially those who have never had to ask for help before.”

These Families Shop When Aid Arrives - WSJ - At midnight on the first of the month, a scene unfolds at many Wal-Mart Stores Inc. sites that underscores the deep financial strains that many low-income American consumers still face. Parking lots come to life after 11 p.m. as customers start to stream into the stores, cramming their shopping carts full of milk, infant formula and other necessities.Then at midnight, when the government replenishes their electronic-benefit accounts with their monthly allotments of food stamps, nutritional grants for mothers with babies or other aid for needy families, they head for the registers."We're not starving or anything, but we come every month at 11:55," said Tyrel Fogle, 26 years old, early Friday morning as he loaded a cart with frozen food at a Wal-Mart here on the northwestern edge of the nation's fourth largest city.

The Real Impact of Food Stamp Cuts - Congress is poised to cut food stamps, taking away an extended benefit created by the 2009 stimulus before its original expiry date and setting up an unprecedented “cliff” in food stamps, now known as Supplemental Nutrition Assistance Program, or SNAP, benefits. To demonstrate how hurtful this might prove, anti-hunger advocate Joel Berg recently spent a week eating according to the SNAP budget. “I had done it in 2007, as well,” he said. “This time, it was much harder, because the price of food has increased more than the benefit has increased. Last time, for instance, I ate an apple a day, along with other food. This time, I couldn’t afford a single piece of fruit.” Berg is the executive director of the New York City Coalition Against Hunger, which represents New York’s 1,200 nonprofit soup kitchens and food pantries and its 1.4 million residents that cannot afford enough food. (A more extended version of our conversation is below.)

Living Paycheck To Paycheck -   A survey conducted by highlights just how tough life has become for American workers. We should bear in mind as we read this that these are the people who actually have jobs.— As the effects of the recession linger on, one place it continues to have a tight grip is on workers’ wallets. Nearly eight-in-ten (77 percent) workers report that they live paycheck to paycheck to make ends meet. Sixty-one percent of workers said that they felt they lived paycheck to paycheck to make ends meet in 2009. Workers went on to say that sometimes they are unable to make ends meet at all, with one-in-five (22 percent) saying they have missed payments on bills in the last year. This is according to a new nationwide survey of more than 4,400 workers by CareerBuilder that was conducted from May 18 to June 3, 2010.

Google’s Pound of Flesh - The best way to find out why Google was exhibiting at the OLA show would be to simply ask them, which one of my readers did as favor to all of us. And the answer he got from folks manning the Google booth was surprising — or at least it surprised me. He was told “the (payday loan) industry is ripe with inefficiencies, shady practices, and shady people. Coupled with overwhelming consumer demand, Google believes it can right these inefficiencies, provide better transparency, and ally with consumer protection agencies. ” If I heard correctly, that means Google is thinking of entering the payday loan business. Like a lot of big tech companies, Google is sitting on a ton of cash — $30 billion — that is just dragging-down earnings because interest rates for non-payday-type investments are close to zero. That’s 10 times the total float of the entire payday loan industry!

Economy Brings Couples Together, but Not in Marriage - Between 2009 and 2010 there was a 13% increase in opposite-sex couples living together and an analysis, notes demographer Rose M. Kreider in a new working paper based on Census Bureau data. She finds that 24% of men in newly formed couples in 2010 didn’t work last year compared to 14% in 2009. Meanwhile, the percentage of couples in which one partner was employed and the other was unemployed increased to 15% in 2010 from 8% in 2008, suggesting economic concerns are pushing people together. “Pooling resources by moving in together may be one method of coping with extended unemployment of one of the partners,” Kreider says. However, even as more people are moving in together, the U.S. marriage rate continues its long-term trend downward, according to data released last month by the Centers for Disease Control and Prevention. The marriage rate in 2009 fell to 6.8% in 2009 from 7.3% in 2007. There were 80,000 fewer marriages in 2009 than 2008, even as the population base rose 2.3 million.

Federal jobs program's funding set to expire - Miller’s job is one of many that are at-risk if Congress does not act by Sept. 30 to reauthorize funding the Temporary Assistance for Needy Families Emergency Fund. This fund provided North Carolina with $11.4 million for a subsidized jobs program that allowed for public dollars to go to private companies that hire low-income workers.  “This program has caused me to maintain self sufficiency and pay my rent and do things I need for my children,” said Miller, a single mother of 1-year-old and four-month-old girls. “Without this job, I don’t know where we’d be. We’d probably be on the verge of being evicted from my apartment because this is how I’ve been paying my bills. This has been my livelihood.” The TANF Emergency Fund resulted in 400 jobs in North Carolina with a projected goal to create 500 jobs. In addition to jobs program, TANF Emergency Funds provided North Carolina with critical funding to child care subsidies ($23.6 million), More at Four ($30.5 million), and Work First family assistance ($9.7 million).

Stimulus-subsidized jobs in jeopardy - The American Recovery and Reinvestment Act of 2009 created a $5-billion fund that states could tap to cover the additional costs of their swelling welfare rolls, including paying the wages of low-income parents and youths hired as trainees at government agencies, nonprofit organizations and private businesses. Federal officials said 38 states have used the fund to create about 250,000 jobs.  Using funding from last year's $787-billion stimulus bill, California counties have put to work more than 35,000 people by subsidizing their employment for up to a year, according to figures from July. Many of those jobs are now in jeopardy unless Congress extends the funding beyond Thursday, the end of the fiscal year. The U.S. House of Representatives has voted to extend the fund for a year at a cost of $2.5 billion. However, the proposal has stalled in the Senate amid concern over the size of the national deficit. Anyone laid off would face a tough job market, with California's unemployment rate at 12.4%, well above the national rate of 9.6%.

Latest unemployed: Stimulus-subsidized workers - Tens of thousands of low-income workers lost their jobs Thursday as a stimulus-subsidized employment program came to an end. About a quarter of a million people in 37 states were placed in short-term jobs thanks to a $5 billion boost to the Temporary Assistance for Needy Families program, according to the Center on Budget and Policy Priorities. States used about $1 billion to provide subsidized employment, with the remaining funds going to cash grants, food programs, housing assistance and other aid. With the program expiring, many of the adults have been told not to report to work anymore. And it won't be easy for them to find a new position at time when the unemployment rate continues to hover at 9.6% "They are just joining the millions of other people looking for permanent work,"

Jail and Jobs - Incarceration reduces former inmates’ earnings by 40 percent when compared to demographically similar counterparts who have not been imprisoned, according to a new report from Pew’s Economic Policy Group and the Pew Center on the States. The report estimates that after being released, former inmates typically work nine fewer weeks a year, and their annual earnings drop  to $23,500 from $39,100. Not surprisingly, given the stigmatizing effect that a criminal record can have on a job applicant’s resume, former inmates enjoy less income mobility than counterparts who did not serve time. Among the other disturbing findings (in chart form) from the report: 1) The United States houses more inmates than the top 35 European countries combined. 2) Incarceration rates in the United States have risen dramatically since 1980, especially for young black men. Today more than one in three young black men without a high school diploma is currently behind bars.3) If you include inmates when looking at the jobs picture, that picture looks a whole lot worse. Believe it or not, young black men who dropped out of high school are more likely to be incarcerated than employed.

Calif. May Stop Paying Some Workers' Comp Benefits - About 2,700 injured workers in California may not receive the workers' compensation benefits they are entitled to because the state has not yet passed its budget. According to Susan Gard, chief of legislation and policy for the California Division of Workers' Compensation, the DWC only has about one or two more weeks of cash remaining to pay injured workers covered by the Uninsured Employer Benefit Trust Fund (UEBTF) and Subsequent Injuries Benefits Trust Fund (SIBTF). Letters were sent to the approximately 2,700 workers covered by these two special funds to make them aware of the situation, she said. The UEBTF is a fund designed to help pay benefits to workers injured on the job but whose employers are illegally uninsured. In this situation, if an employee gets injured or sick because of work, but the employer does not have the required insurance, the worker can sue the employer for the illegal practice, work privately with the employer to secure payment for the injury, or file a claim with the UEBTF. Once the employer is joined into a lawsuit, the UEBTF then could pay the injured worker benefits from the special fund, Gard explained.

Meredith Whitney on state budget crisis - From CNBC: States Are Poised to Be Next Credit Crisis for US: Whitney "The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically," [Meredith Whitney] said. "Municipal debt has doubled since 2000, spending has grown way faster than revenues." "You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt at least for the third near-trillion-dollar bailout." "We think October, after the banks report, you'll see a really ugly Case-Shiller number, which means the fourth quarter is going to be very tough for banks." Many states have serious budget and debt issues, but I doubt it will result in a "near-trillion-dollar bailout" (note that Whitney is saying an "attempt" at a bailout). More likely the states will raise some taxes and cut more services - and this will be a drag on growth for some time. I think Whitney is correct on the timing of the Case-Shiller numbers, but I don't think the numbers will be anywhere near as "ugly" as earlier price declines.

Meredith Whitney’s new target: The states - The housing crash not yet realized its full impact on budgets in the most vulnerable states. It's the banking crisis all over again – and it's time to stop ignoring it. Meredith Whitney, the superstar analyst who famously forecast disaster for America's big banks before the credit crisis struck, is now warning about another looming threat: The wreckage from over-stretched state budgets. Today, Whitney is releasing a 600-page report, colorfully entitled "The Tragedy of the Commons," that rates the financial condition of America's 15 largest states, measured by their GDP. Whitney claims that the study is the most comprehensive, in-depth analysis of the states' murky patterns of spending, revenues and benefits programs ever assembled by the government, foundations, or another research firm.

Whitney Says US States May Need Federal Bailout - The U.S. government will face pressure to bail out struggling states in the next 12 months, said Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008. While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable. “People will think the federal government will bail these states out,” Whitney, 40, the founder of Meredith Whitney Advisory Group Inc., said in an interview on Bloomberg Television’s “In the Loop.” “It’s going to be an incredibly divisive issue.”

States are not like banks - For the record, I have not read Meredith Whitney’s much-hyped report on how the states will present the next bailout-inducing credit crisis.  I’ve only seen her interview on CNBC. Meredith Whitney is obviously a very good bank analyst and has earned her popularity.  But it is not difficult to tell that here she has wandered outside her bailiwick.  Somehow she goes from complaints about disclosure in the muni market (which would be very valid complaints in another context) to predicting massive bailouts.  It actually is not difficult to find information on state budgets.  Most states produce volumes of information about their spending habits.  The problem with disclosure in the muni market is with smaller issuers (who consider preparing financial statements an onerous activity), and this is complicated by the diverse types of borrowers in that market and the diverse types of revenues pledged.  Muni analysts and the SEC have been trying to increase disclosure in the market for many, many years.

 Evaluating states' credit with bond yields - States continue to struggle through their worst budget crises in recent memory. Most states have seen red ink for the last three years, with total state budget gaps estimated at $96 billion for Fiscal Year 2011 (which started in July) and $72 billion for Fiscal Year 2012. With no end in sight to state budget woes, some bond investors are reasonably starting to worry about default. How likely is it that states will default on their bond obligations? And which states should be of greatest concern? Information from the municipal-bond markets shows that while some states are still able to borrow at low rates, spreads for California and Illinois indicate that they are considered to be at far greater risk of default. Just as credit card companies offer the lowest rates to individuals with the best credit histories, investors in the bond market offer the most favorable financing terms to states that are the most creditworthy. We can use the interest rates that investors demand as a way to determine which states are most likely to keep paying the interest on their bonds and ultimately repay the principal. Below is a table of yields on long-term, general-obligation Build America Bonds (“BABs”) issued by fourteen mostly large states.

California leaders reach 'framework' of budget deal -After two all-day negotiating sessions in Gov. Arnold Schwarzenegger's private Santa Monica office, the governor's spokesman said they had reached "a framework of an agreement" on eliminating the state's $19.1-billion deficit.‬‪ Top legislators concurred. But the legislative leaders, who had traveled to Southern California for a rare budget summit outside the state Capitol because Schwarzenegger has a severe cold, left the talks in SUVs and cars without providing details about what was in their framework.  Both Democrats and Republicans have said any new budget is unlikely to raise broad taxes such as sales or income taxes. But the spending plan, once completed, is expected to cut into numerous government services to close the deficit.

Oregon's Treasurer calls for halt in state borrowing - Oregon Treasurer Ted Wheeler wants the Legislature to cut up its credit cards before convening in January as the combination of plummeting revenues and past borrowing threaten to lower Oregon's credit scores and increase future borrowing costs. Wheeler on Friday called for a halt on new borrowing backed by the state's general fund until its finances recover. The recommendation was unanimously endorsed at a special meeting Thursday of the state's Debt Policy Advisory Commission. Based on the latest shrinking revenue projections, the commission also has asked the Department of Administrative Services to "reconsider the timing" of some projects that have been approved by lawmakers but for which the bonds have not yet been issued. That list includes a wide mix of pressing needs and stimulus measures around the state, from the new state hospital, a collaborative research building at Oregon Health & Science University, a statewide emergency radio network and a slew of projects at community colleges.

Recession Takes Toll on City, Census Survey Shows - In the first measurement of the full brunt of the recession, New Yorkers’ median income and house values declined between 2006 and 2009, and the percentage of people dependent on food stamps soared, according to census data released Tuesday. The 2009 American Community Survey also suggested that the sluggish economy had other indirect effects on New York City. Fewer families reported having both parents in the work force, more people were living in housing that had no kitchen, the proportion paying 35 percent or more of their income on rent rose to 42 percent, and a smaller share of people owned two vehicles. While the poverty rate has remained unchanged in the city, it has risen in the state since 2008 to 14.2 percent from 13.8 percent, and in New Jersey to 9.4 percent from 8.8 percent. Median household income has remained about the same. In Connecticut since 2008, the poverty rate and median income have remained unchanged.  The proportion of New York City residents receiving food stamps rose to 17.2 percent from 14.9 percent in 2008 and 13.3 percent in 2007.

How To Shrink A City - Since cities first got big enough to require urban planning, its practitioners have focused on growth. But cities don’t always grow. Sometimes they shrink, and sometimes they shrink drastically. Over the last 50 years, the city of Detroit has lost more than half its population. So has Cleveland. They’re not alone: Eight of the 10 largest cities in the United States in 1950, including Boston, have since lost at least 20 percent of their population. But while Boston has recouped some of that loss in recent years and made itself into the anchor of a thriving white-collar economy, the far more drastic losses of cities like Detroit or Youngstown, Ohio, or Flint, Mich. — losses of people, jobs, money, and social ties — show no signs of turning around. The housing crisis has only accelerated the process. Now a few planners and politicians are starting to try something new: embracing shrinking. Frankly admitting that these cities are not going to return to their former population size anytime soon, planners and activists and officials are starting to talk about what it might mean to shrink well.

$27.5m Because The Feds Don't Like the Font.....New York City will change the lettering on every single street sign - at an estimated cost of about $27.5 million - because the feds don't like the font. Street names will change from all capital letters to a combination of upper and lower case on roads across the country thanks to the pricey federal regulation (see photo above).  MADISON AVE. will become Madison Ave. and will be printed in a font called Clearview, the city Department of Transportation says. The Federal Highway Administration says the switch will improve safety because drivers identify the words more quickly when they're displayed that way - and can sooner return their eyes to the road. from NY Daily News

Harrisburg City Employees Will Be Paid, At Least This Week - The political grandstanding is emblematic of a city that narrowly avoided defaulting on its general obligation debt earlier this month and faces lawsuits over missed payments in $288 million in debt tied to an incinerator project, more than four times its annual budget. Last week, Moody's Investors Service noted Harrisburg's "ineffective political process" as contributing to its crisis. Thompson has opposed filing for bankruptcy, while Miller has advocated such a move. The City Council on Tuesday evening will consider a resolution that would allow it to hire advisers to look into a rare municipal bankruptcy.

Harrisburg to seek 'distressed' status - Harrisburg Mayor Linda Thompson is planning to announce that she will seek “distressed city” status for the cash-strapped and debt-ridden state capital at a news conference at noon today, sources said. The move to seek protection under the state’s Act 47, which would put the city under a form of state oversight, comes nine months after Thompson took office facing the prospect of municipal default on $288 million in accumulated Harrisburg incinerator debt. In that time, the mayor has been unable to develop a plan on how to attack the city’s fiscal woes and a majority of City Council members have battled incessantly on even basic steps to get a recovery process started.

It cold in Detroit, fire houses faced utility shut-offs - Everyone know how cold it can get in Detroit, especially this time of the year. But the temperature wasn’t the problem, its what the fire houses around Detroit were facing. DTE sent out a final notice to the city of Detroit for a bill that was pass due in the amount of $55K. A collection official told The News on Monday that if the city did not come up with a $30,000 down payment by Sunday -- "the absolute minimum" -- then DTE would shut off the gas. This story bring back to my memory when Henry FordHenry Ford Hospital owed DTE thousands of dollars and face a similar situation. The city of Highland Park actually had their lights turned off for unpaid bills.

Local Taxes Roil US Mid-Term Elections - A recent rise in state and local taxes is roiling voters in an already tumultuous year, complicating the debate over whether to extend Bush-era tax cuts and upending some campaigns. As Washington is consumed with the debate over whether to extend Bush-era tax cuts beyond the end of the year, voters in many parts of the country are focused on state tax increases already hitting them. In fiscal 2010, states raised taxes by the largest amount since at least 1979, according to the National Governors Association, a bipartisan group that represents the country's governors, with 29 states increasing taxes by about $24 billion. The rise was reflected in Census Bureau data out Monday, showing that state and local tax collections rose in the second quarter, partly because of tax increases and also due to some improvement in the economy.

Budget Could Be Worse Next Year - They know the budget picture looks even worse next year. "We'll be facing for the following year, a budget deficit of about $1.5 billion," Bauer says. Bauer tells us the state's lifeline this year was stimulus money. Michigan received about $ 1 billion in federal grants -- more than $350 million of that went to Medicaid, another $300 million supported schools. "Every school district in this state needs to realize that this is one-time money," says Sen. Majority Leader Mike Bishop. They can't rely on it in the future."

As L.S.S.I. Takes Over Libraries, Patrons Can’t Keep Quiet…A private company in Maryland has taken over public libraries in ailing cities in California, Oregon, Tennessee and Texas, growing into the country’s fifth-largest library system.   The company, known as L.S.S.I., runs 14 library systems operating 63 locations. Its basic pitch to cities is that it fixes broken libraries — more often than not by cleaning house.  “A lot of libraries are atrocious,” Mr. Pezzanite said. “Their policies are all about job security. That’s why the profession is nervous about us. You can go to a library for 35 years and never have to do anything and then have your retirement. We’re not running our company that way. You come to us, you’re going to have to work.”

Governor Christie to Test Teachers in Reading and Math - If you can't read, write, or do basic math, you sure can't teach it. That is the logic behind Governor Chris Christie's reform package that will require teachers in kindergarten through fifth grade pass tests in reading and math in order to be certified. Everyone but the teachers' unions and incompetent teachers should be happy with Sweeping N.J. Education Reform Christie is turning his take-no-prisoner’s style to the classroom, demanding a top to bottom overhaul of how New Jersey students learn and teachers teach. And that means undoing tenure, seniority and other union work rules. “We cannot wait. Your children are sitting in these classrooms today. We cannot wait to make it better,” Christie told CBS 2’s Marcia Kramer. The governor wants to turn the old seniority system inside out and put quality teaching ahead of lack-luster performance. He will:

  • Prohibit salary scales based on seniority
  • Grant raises based on classroom performance
  • Give tenure based on classroom performance

Obama: Money alone can't solve school predicament - Bemoaning America's decreasing global educational competitiveness, Obama sought in a nationally broadcast interview to reinvigorate his education agenda. At the same time, the president acknowledged that many poor schools don't have the money they need and he defended federal aid for them. But Obama also said that money alone won't fix the problems in public schools, saying higher standards must be set and achieved by students and teachers alike. Asked in an interview if he supported a year-round school year, Obama said: "The idea of a longer school year, I think, makes sense." He did not specify how long that school year should be but said U.S. students attend classes, on average, about a month less than children in most other advanced countries. "That month makes a difference," the president said. "It means that kids are losing a lot of what they learn during the school year during the summer. It's especially severe for poorer kids who may not see as many books in the house during the summers, aren't getting as many educational opportunities."

How do you increase support for more education spending? Don’t let people know how much we spend now - Matt Yglesias made the case recently that we should increase teachers’ salaries in order to raise teacher quality. He provides this graph showing teacher salary compared to per capita GDP in different countries: Unfortunately for Matt, if he wants to increase teacher salaries the last thing he should be doing is telling people how much teachers make. A 2009 survey by Education Next and Harvard’s Program on Education Policy and Governance surveyed 3,000 people and split them into two groups. In the first group they found that 56% supported increasing teachers’ salaries and 46% supported increased education spending. The second group was first told the average teacher salary in their state and the average spending per pupil and then they asked them the same questions. Support for more teacher pay fell from 56% to 40% and support for more education spending fell from 46% to 38%. Apparently a majority of people favor higher teacher pay, but not when they know how much teachers currently make.

How progressive ideology is holding back the healthy schools movement - If integrating a school garden into curriculum can help teach kids subject matter better and get them to eat healthier, then I’m all for it. Likewise, I think improving school lunches and making them healthier are something worth spending money on. People like TV chef Jaime Oliver and school garden maven Alice Waters who are working to push these issues into mainstream deserve praise. Unfortunately, it seems that these genuinely useful policies and programs are being bogged down with wasteful progressive ideas.

For-profit school battlers dig in heels - For the past couple of years, Wall Street and corporate America’s fights in Washington have been dramas of manoeuvre warfare. Huge “comprehensive” legislative packages have been countered with the mobilisation of heavy battalions of lobbyists, covered by air support from fleets of corporate jets. As we now see in the case of the government-financed for-profit schools, that action is beginning to transform into numbing trench warfare over the details of regulation. Few on the right or the left believe there will be any legislative initiatives of consequence covering education, or anything else, for the next two years. Instead, there will be relentless bureaucratic and Congressional sniping, and niggling litigation. That’s what we can see already in the case of the for-profit colleges. These “free market” companies are around nine-tenths dependent on Federal loan and grant money. It has been one of the few equity groups with high revenue and profit growth since the start of the recession, and has attracted outsized attention from value investors and short sellers.

How to Pay for Social Security - We have been treated recently to a great deal of hysteria about "the deficit" and the huge horrible Burden of Social Security, including the mysterious Trust Fund: is it real? or only Phony Iou's? has it been Looted? or will it Cripple the Economy to pay it back? and why should I Pay Twice for my Social Security? And how did Social Security run up such a Huge Debt anyway? and when exactly is it Going Broke?All of this is nonsense: Carefully constructed nonsense by the highly paid non partisan experts who dwell in Big Think Tanks dwelling on these things, thinking of better ways to fool the people into cutting off their heads to save the cost of tomorrow's dinner. They don't have to convince you, exactly; they just need to get you to stand quietly or cheer, while they "fix" Social Security. Of course, in their minds "fixing" it means ending it. They don't like the idea that the hired help can retire just because they saved enough of their own money to be able to afford to.

War veterans' care to cost $1.3 trillion - The expense of caring for veterans of the Iraq and Afghanistan wars is an unfunded budget liability for U.S. taxpayers that in years to come will rival the cost of entitlement programs such as Social Security and Medicare, lawmakers will be told Thursday. The House Veterans' Affairs Committee will hear new estimates of the cost of lifetime medical care and benefits for returning troops disabled by their service — a total of more than $1.3 trillion. "It's somewhere between Medicare and Social Security in terms of its potential impact" on the budget, said Rep. Bob Filner, California Democrat and committee chairman. "This is another entitlement that we have committed ourselves to that is going to break the bank unless we deal with these issues as soon as possible,"

Recession Drove Millions to Medicaid in ’09, Survey Finds… Joblessness and the accompanying loss of health benefits drove an additional 3.7 million people into the Medicaid program last year, the largest single-year increase since the early days of the government insurance plan, according to an annual survey by the Kaiser Family Foundation.  Enrollment in the program, which provides comprehensive coverage to the low-income uninsured, grew by 8.2 percent from December 2008 to December 2009, the second-largest rate of increase in the 10 years that Kaiser has conducted the survey. There were 48.5 million people on Medicaid at the end of 2009, or about one of every six Americans. Every state showed enrollment growth, with nine above 15 percent and Nevada and Wisconsin above 20 percent.

Medicaid enrollment spikes to 48M in weak economy. — More people signed up for Medicaid last year than at any time since the program's inception, as the recession wiped out jobs and workplace health coverage. A report released Thursday by the nonprofit Kaiser Family Foundation found that enrollment in the low-income medical insurance program jumped to more than 48 million. With the economy barely improving, states are forecasting a 6 percent increase in the rolls next year, meaning another strain on their cash-depleted budgets. Nearly 6 million people have signed up for Medicaid since the start of the recession in December 2007, according to Kaiser. Starting in the fall of 2008, the federal government provided more than $100 billion in additional Medicaid funding to the states to help cover growing numbers of people in need. The last of that money will run out in June of next year, and states are still likely to be strapped."

Medicaid numbers hit record - More than 2.2 million Pennsylvanians are eligible for Medicaid, the federally mandated, state-managed program that provides health care for people and families who can't afford care otherwise.  It is the highest number on record, representing nearly 18 percent of the population -- more than one in six Pennsylvanians -- and underscoring the worrisome economic climate and continued difficulty many people have finding jobs and employer-provided insurance.  But the swelling Medicaid roster is not just a sign of the economic times. It's also reflective of growing dependence on state-sponsored health care and safety nets, as well as the increasing cost of health care and long-term care -- trends showing few signs of immediate abatement.  As a result, the state's Department of Public Welfare budget, and the need to trim it, have been regular sources of political strife for Gov. Ed Rendell and the state Legislature. The same will remain true for future governors and lawmakers.

Health benefits cut for adults in Arizona's Medicaid program - The Arizona Health Care Cost Containment System will cut coverage for basic health services such as physicals, most dental care, podiatry, some organ transplants and other programs.  The state also will slash benefits for medical equipment such as insulin pumps, hearing aids, cochlear implants, computer-controlled lower limbs and joints, and other equipment.  Administrators say the cuts, which take effect Friday, are necessary to deal with the state's budget crisis and an increase in the number of enrollees during the bad economy. The benefits cuts will save an estimated $20 million through the end of June. More than 1.3 million Arizonans were enrolled in the state's Medicaid program as of Sept. 1.

What makes the US health care system so expensive – Investment in Health - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Investment in health is made of three categories: (1) prevention and public health, (2) public investment in research and development, and (3) investment in medical facilities.  It may surprise you (it certainly did me), that the United States spends a surprising amount in this category – $144 billion in 2006.  Still more surprising is that this is more than you would expect given out wealth, $50 billion more than you would expect. In the first category, prevention and public health, the US spent $59 billion in 2006, $27 billion more than you’d expect given its wealth.  Most of that was spent by states ($49 billion) for community health centers, tobacco prevention, and public health departments.  The remaining $10 billion, spent by the federal government, mostly goes to the CDC and FDA.

What makes the US health care system so expensive – Red Herrings - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive. Red Herrings are things that divert our attention away from things of true significance.  In the case of health care spending, I’m using red herrings to describe the things that people sometimes believe are the real reasons for blame, when they either just aren’t or not nearly as much as thought. 1) People in the United States are older.  Since the elderly consume more care, in general, that accounts for our extra spending. No:As you can see, the United States has the lowest percentage of its population age 65 and above.  This argument is completely wrong.  In fact, it gets worse:

What makes the US health care system so expensive – Conclusion - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces discussed one of the components of unexpected spending that accounts for why our system is so expensive. The posts all followed a common theme.  I highlighted how the United States is spending more than you’d expect given our wealth.  Much of this came from the McKinsey & Company study, Accounting for the cost of health care in the United States. By now, I hope I’ve impressed upon you the complexity of the problem.  If you listen to politicians, and sometimes advocates, you would think the solution  is easy.  It’s pharma’s fault.  It’s the insurance companies.  It’s trial lawyers.  It’s hospitals. No. It’s all of those things, and more.  Our system costs more because just about every part of it just costs more.  And curbing that spending won’t be easy.  Much of what we choose to spend money on is stuff that we as Americans seem to value.  Much of that value, unfortunately, isn’t all it’s cracked up to be.

What makes the US health care system so expensive – Responses to comments - There have been a lot of excellent comments and questions.  I wish I could get to them all, but there are only so many hours in the day.  I am going to try to get to some, though, and this post is a start. Many of you (physicians) take exception to the post on how much docs earn.  Some of you claim that as long as a shortage of physicians exist, docs will make more.  Fair point.  But there’s likely not a shortage because docs don’t make enough, as we obviously make more compared to other countries.  It could be because we don’t train enough physicians, but that can be fixed. Other reasons cited include the high cost of education.  Having paid a small fortune for my education, I don’t disagree it’s expensive.  But is this the reason for the overspending?  I’m not sure.  Here’s another chart from an older version of the McKinsey & Company paper:

Health Care thoughts: Comparative Effectiveness Research, Gender and Emotion - A key cost bending feature of PPACA (Obamacare) is comparative effectiveness research (see This research is designed to apply statistical, economic and clinical analysis to care and treatment to encourage effective care and block ineffective treatments. It is highly likely, based on current research, the statisticians will recommend less screening and much less treatment for prostate cancer. As my doc says, "almost all old men die with prostate cancer, almost none of them die from prostate cancer." Screening should likely be focused on younger men and more aggressive forms of the cancer. With men being somewhat nonchalant about such matters, and prostate cancer being something less than a celebrity telethon issue, it is unlikely there will much of a fuss. Money can be saved and the resulting increased mortality will be slight. At the same time, current recommendations about breast cancer are suggesting a lot less mammography, and there is an uproar.

The Shape of Things Not to Come - Yglesias - It was suggested to me by a number of parties this week that I should give some explicit account of why the blog has turned in what you might call a more “neoliberal” (though I don’t really like the term) direction of late. There’s a couple of reasons. One is simply product differentiation—I don’t think just writing the same posts as Kevin Drum and Ezra Klein and Jon Chait is what the world needs from me, but we obviously all have similar political opinions. The other is the point I’ve made before, namely that with the passage of the Affordable Care Act the long struggle to expand the scope of the welfare state is largely over. Maybe the clearest way to show that is with Austin Frakt’s graphical presentation of the CBO’s baseline scenario:

Changing the Malpractice System - The current medical malpractice system is part of this nation’s general tort system, whose impact on the economy has led to a similar debate. Critics of the tort system have argued that it imposes  an insidious “tort tax” estimated to be close to $10,000 for a family of four and “equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry.” . Gregory Mankiw of Harvard, in his role as chairman of the president’s Council of Economic Advisers, asserted in 2004 that “in 2002, tort costs amounted to more than $233 billion – over 2 percent of G.D.P.” Other researchers have concluded that “it is hard to find any evidence that increased tort costs have harmed the U.S. economy” and that “the evidence to justify such charges is remarkably weak and exaggerated.” One study, by W. Kip Viscusi and Michael J. Moore, concluded that the tort system actually increased research and development and product innovation.

Repeal? Most Americans think health reform did not go far enough, poll finds - President Barack Obama's health care overhaul has divided the nation, and Republicans believe their call for repeal will help them win elections in November. But the picture's not that clear cut. A new AP poll finds that Americans who think the law should have done more outnumber those who think the government should stay out of health care by 2-to-1. "I was disappointed that it didn't provide universal coverage," More than 30 million people would gain coverage in 2019 when the law is fully phased in, but another 20 million or so would remain uninsured. Bleakley, who was uninsured early in her career, views the overhaul as a work in progress.

Animal farms are pumping up superbugs - The superbugs are among us and they are not leaving. Indeed, they are growing stronger."The incidence of drug-resistant infections is a national and global problem, in both the civilian and military world, and has grown dramatically over the past decade in civilian hospitals," said Rep. Vic Snyder, D-AK, at a House subcommittee hearing Wednesday on what the military is doing to deal with multi-drug resistant organisms, aka superbugs. In July of this year, Dr. Stuart Levy, director of the Center for Adaptation Genetics and Drug Resistance at Tufts University School of Medicine, and a world-renowned expert on superbugs, appeared before another House subcommittee. "We are not gaining ground in the struggle against antibiotic resistance," Levy said. "All of us - you, me and your constituents - are at ever greater risk of contracting a resistant bacterial infection and even one that is untreatable."

What's Wrong With Our Food System - TEDxNextGeneration - 11 year-old Birke Baehr spoke about "What's Wrong With Our Food System? And How Can We Make A Difference?" The world is ready to listen to what youth have to say. We need to hear their wisdom.

Are corporations allowed to sell healthy food? - Whenever advocates for healthy food talk to food business executives, one common response is: Personally, I would like to serve a healthier product.  But, if these efforts threaten profitability, I risk getting sued by stakeholders.  Corporations are obliged to pursue maximum profits and no other goal. The executives' response is not entirely correct.  Courts give a lot of deference to corporate management to use their own best business judgment.  Admittedly, a corporation cannot simply give away profits freely to serve public causes like better nutrition.  However, the managers have plenty of legal maneuvering space to develop a healthy product line, without fear that shareholder lawsuits will succeed.   A recent working paper (.pdf) by Tufts economics professor Julie Nelson reviews the long history of relevant court cases.  She finds that, when people argue that the law requires profit maximization as the sole goal, they commonly are really describing their wishes that this were true, not evidence that it actually is true.

Fat World: The Globalization of American Obesity? - Although they're arguably becoming a country of fatheads as well, Americans are better known worldwide for their astonishing girth. A new OECD study finds that over a third of these stupendously gluttonous people are clinically obese. Indeed, there's no stopping Yankee pavement pounding tonnage in the obesity league tables as the percentage of overweight folks is set to increase even more in the coming years: It seems exceedingly odd to me that other IPE people don't make more of these ominous statistics. Whether it's common American unwillingness to face up to the fats I really don't know. I'm not hitting below the belt here (besides, I can't see where America's belt lies since it's well-hidden under rolls of flab). So the weighty truth stares us in the quintuple chin: it is well-known and accepted that health care bills will gobble the bulk of developed country budgets in the coming years. However, there is a deadly combination of fiscal and health indiscipline driving this dietary-industrial complex. It ain't cheap to be chubby, honey

GM food battle moves to fish as super-salmon nears US approval - The company's dream of selling genetically modified salmon eggs that allow the fish to grow to maturity in half the normal time received a giant fillip last week when it announced that the US Food and Drug Administration (FDA) was close to granting approval.A positive FDA response would see salmon become the first GM-engineered animal marketed for human consumption. Dramatically speeding up the time it takes to harvest a mature salmon could stimulate a huge rise in production, making salmon plentiful and cheaper, GM enthusiasts say. AquaBounty expects to receive the nod by the end of this year, meaning GM salmon could be on supermarket shelves within three years. The company's share price doubled on the strength of the announcement. But the euphoria the company and its investors experienced following last week's announcement quickly evaporated amid a furious backlash from consumer groups.

Deficit Hawks Threaten Ethanol's Future - Sensenbrenner happens to be the top Republican on the House Select Committee on Energy Independence and Global Warming. His ethanol aversion is a sign that the darling of alternative fuels is hitting a political wall. "People are worried about deficits, debt, and special-interest handouts," Sensenbrenner says. "Ethanol is all three."  That sentiment is endangering the $27 billion industry that has grown up since federal support began under President Jimmy Carter amid the 1970s energy crisis. Today the U.S. offers a 45¢ per gallon tax credit to refiners that blend ethanol with gasoline. The government also requires gasoline makers to use a steadily increasing amount of the additive, and it imposes an import tariff to deter foreign competition.  The tax credit, worth more than $4.7 billion last year, expires on Dec. 31, as does the protective tariff. If Republicans control the House after the Nov. 2 elections, the renewal of those measures will be in doubt. Ethanol could go the way of biodiesel, an alternative fuel made from soybeans, whose production has ground to a near-halt since biodiesel's $1-a-gallon incentive expired at the end of last year, according to the National Biodiesel Board.

Health advocates urge EPA regulation of greenhouse gases - Labeling climate change “a serious public health issue,” more than 100 leading health advocates called on Washington policymakers this week to allow the Environmental Protection Agency (EPA) to regulate greenhouse gas emissions. The advocates — including 18 national public health organizations, 66 state-based groups and dozens of individual medical experts — urged lawmakers to “recognize the threat to public health posed by climate change and to support measures that will reduce these risks.” “In order to prepare for changes already under way, it is essential to strengthen our public health system so it is able to protect our communities from the health effects of heat waves, wildfires, floods, droughts, infectious diseases, and other events,” the advocates wrote Tuesday to House, Senate and White House policymakers. “But we must also address the root of the problem, which means reducing the emissions that contribute to climate change.”

High grain prices may provoke world food crisis - Grain price growth poses a threat to world food security, claim experts of the UN Food and Agriculture Organization, FAO. The FAO experts meet in Rome twice a year to take up problems of food accessibility, to ensure an active and healthy life to one and all. But this time it was an emergency meeting to look into the world grain market situation. World prices for wheat and other grain crops keep steadily increasing. The FAO experts pointed out in their recent reports that the situation around gain reserves in the world causes no apprehension, despite major harvest losses due to this summer’s drought. Nonetheless, the cost of a bushel of wheat in the United States has doubled as against the price of September last year, while in Europe the price has grown by 80%.A number of experts have rushed to link growth in grain costs to Russia’s decision to impose a provisional ban on its own grain exports. The Chairman of the Russian Duma Agrarian Committee Valentin Denisov shrugs off the claims as rubbish

UN Warned Of Major New Food Crisis At Emergency Meeting In Rome - The world may be on the brink of a major new food crisis caused by environmental disasters and rampant market speculators, the UN was warned today at an emergency meeting on food price inflation. The UN's Food and Agriculture Organisation (FAO) meeting in Rome today was called last month after a heatwave and wildfires in Russia led to a draconian wheat export ban and food riots broke out in Mozambique, killing 13 people. But UN experts heard that pension and hedge funds, sovereign wealth funds and large banks who speculate on commodity markets may also be responsible for inflation in food prices being seen across all continents. In a new paper released this week, Olivier De Schutter, the UN's special rapporteur on food, says that the increases in price and the volatility of food commodities can only be explained by the emergence of a "speculative bubble" which he traces back to the early noughties.

Civilization's Foundation Eroding - The thin layer of topsoil that covers the planet’s land surface is the foundation of civilization. This soil, typically 6 inches or so deep, was formed over long stretches of geological time as new soil formation exceeded the natural rate of erosion. But sometime within the last century, as human and livestock populations expanded, soil erosion began to exceed new soil formation over large areas.  This is not new. In 1938, Walter Lowdermilk, a senior official in the Soil Conservation Service of the U.S. Department of Agriculture, traveled abroad to look at lands that had been cultivated for thousands of years, seeking to learn how these older civilizations had coped with soil erosion. He found that some had managed their land well, maintaining its fertility over long stretches of history, and were thriving. Others had failed to do so and left only remnants of their illustrious pasts.

Sewage: A Solution For 'Peak Phosphorous' - Believe it or not, climate change and "Peak Oil" are not the biggest problems facing the 21st century.  "Peak Phosphorous" could hit sooner and harder, threatening food supplies for half the Earth's population. Phosphorous is a fertilizing nutrient that is vital to large-scale agriculture, and currently it can only be mined, but supplies are growing shorter and shorter.  Fortunately, there may be a solution. Ostara, a Canadian-based company backed in part by environmental legend Robbert Kennedy Jr., has patented a technique to extract valuable chemicals out of the waste stream (i.e.: sewage).  The result is called "Crystal Green" a slow-release chemical fertilizer that contains high levels of phosphorous and is extracted from an abundant, ever-flowing resource ... sewage.

Genetically inserted insecticide contaminates U.S. waterways - Add another compound to the long list of agricultural pollutants in the nation's streams, rivers and waterways: the Bacillus thuringiensis or Bt toxin, a protein crystal known as Cry1Ab that kills caterpillars and other agricultural pests. A wide variety of crops, including 63 percent of the corn planted in the U.S. in 2009, have been genetically engineered to build the bacterial protein in their leaves and stems. Those roots and stems are apparently washing into the waterways of the Midwest; 86 percent of 217 streams in Indiana surveyed by scientists contained such detritus. And, according to the results of that survey published online September 27 in Proceedings of the National Academy of Sciences, 23 percent of the streams had the Bt toxin floating in the water—six months after harvest.  All of the contaminated streams lay 500 meters or less from a corn field and, based on current maps of lands used for agriculture, the researchers estimate that 91 percent of waterways in the Midwest—Iowa, Illinois, Indiana—are within that distance from a corn field.

Groundwater Depletion Rate Accelerating Worldwide — In recent decades, the rate at which humans worldwide are pumping dry the vast underground stores of water that billions depend on has more than doubled, say scientists who have conducted an unusual, global assessment of groundwater use. These fast-shrinking subterranean reservoirs are essential to daily life and agriculture in many regions, while also sustaining streams, wetlands, and ecosystems and resisting land subsidence and salt water intrusion into fresh water supplies. Today, people are drawing so much water from below that they are adding enough of it to the oceans (mainly by evaporation, then precipitation) to account for about 25 percent of the annual sea level rise across the planet, the researchers find. Soaring global groundwater depletion bodes a potential disaster for an increasingly globalized agricultural system, says Marc Bierkens of Utrecht University in Utrecht, the Netherlands, and leader of the new study.

Water crisis mounting - By 2015, 80 percent of South Africa's fresh water resources will be so badly polluted that no process of purification available in the country will be able to make it fit for consumption. The Environment and Conservation Association said in a statement on Tuesday that it was estimated that in five years, almost 80 percent of the country's fresh water resources would be so badly polluted that no process of purification available in the country would be able to clean it sufficiently to make it fit for human or animal consumption.  "If we do not find a completely new source of water altogether in about two years, most of Gauteng will be without safe health drinking water." The impending disaster that would be created by acid mine drainage as well as sewerage and industrial pollution had on many occasions been brought to the attention of the government, however with no positive results, the association said.

80 Percent of Global Water Supplies at Risk = River biodiversity and our water security are in serious trouble, according to a comprehensive survey of waterways released yesterday. At risk are the water supplies of nearly 80 percent of humanity, and two-thirds of the world’s river habitats. Hotspots of concern include nearly the whole of Europe, the Indian subcontinent, eastern China, southern Mexico, and the United States east of the Rockies. But experts say there may be hope for restoring rivers and securing future water needs for cities, farms, energy production, industry—and for ecosystems—by “working with nature.” “We, as a global society, are taking very poor care of water resources,”

Water use in Southwest heads for a Day of Reckoning. — A once-unthinkable day is looming on the Colorado River. Barring a sudden end to the Southwest’s 11-year drought, the distribution of the river’s dwindling bounty is likely to be reordered as early as next year because the flow of water cannot keep pace with the region’s demands. For the first time, federal estimates issued in August indicate that Lake Mead, the heart of the lower Colorado basin’s water system — irrigating lettuce, onions and wheat in reclaimed corners of the Sonoran Desert, and lawns and golf courses from Las Vegas to Los Angeles — could drop below a crucial demarcation line of 1,075 feet. If it does, that will set in motion a temporary distribution plan approved in 2007 by the seven states with claims to the river and by the federal Bureau of Reclamation, and water deliveries to Arizona and Nevada would be reduced.

BBC News - 'Pollination crisis' hitting India's vegetable farmers - A decline in pollinating insects in India is resulting in reduced vegetable yields and could limit people's access to a nutritional diet, a study warns. Indian researchers said there was a "clear indication" that pollinator abundance was linked to productivity. They added that the loss of the natural service could have a long-term impact on the farming sector, which accounts for almost a fifth of the nation's GDP. Globally, pollination is estimated to be worth £141bn ($224bn) each year. The findings were presented at a recent British Ecological Society meeting, held at the University of Leeds. Each year, India produces about 7.5 million tonnes of vegetables. This accounts for about 14% of the global total, making the nation second only to China in the world's vegetable production league table.The UN Food and Agriculture Organization (FAO) estimates that of the slightly more than 100 crop species that provide 90% of food supplies for 146 countries, 71 are bee-pollinated, primarily by wild bees, and a number of others are pollinated by other insects.

New study shows over one-fifth of the world’s plants are under threat of extinction - A global analysis of extinction risk for the world's plants, conducted by the Royal Botanic Gardens, Kew together with the Natural History Museum, London and the International Union for the Conservation of Nature (IUCN), has revealed that the world's plants are as threatened as mammals, with one in five of the world's plant species threatened with extinction. The study is a major baseline for plant conservation and is the first time that the true extent of the threat to the world's estimated 380,000 plant species is known, announced as governments are to meet in Nagoya, Japan in mid-October 2010 to set new targets at the United Nations Biodiversity Summit.

Study: Global Warming, Energy & Food Shortages, Recession To Cause 'Industrial' Failure In 10 Years - The study, A User’s Guide to the Crisis of Civilization: And How to Save It, predicts that converging crises may trigger resource short-falls leading to political and economic failure in the West, while accelerating international conflict including ‘intercommunal’ warfare in less developed countries.  Authored by international security analyst Dr. Nafeez Mosaddeq Ahmed – Executive Director of the IPRD and Associate Tutor at the University of Sussex School of Global Studies – the study is the first systematic review of data, evidence and theory across physical and social sciences, including academic research and industry reports, assessing the connections between different global crises including the danger of violent conflict. Former UK Environment Minister (1997-2003) Rt. Hon. Michael Meacher MP described the study as “the first book to systematically explore their interconnections... within a single comprehensive narrative... a very worthwhile read for policymakers everywhere.”

How Warm Was This Summer? by James Hansen - Let's look at the surface temperatures in the summer of 2010, which justifiably received a lot of attention. Figure 1 shows maps of the June-July-August temperature anomaly (relative to 1951-1980) in the GISS temperature analysis (described in paper in press at Rev. Geophys., available for 2009 and 2010, as well as maps for December-January-February (Northern Hemisphere winter, Southern Hemisphere summer) for the past two years. June-July-August 2010 was the 4th warmest in the 131 year GISS analysis, while 2009 was the 2nd warmest¹. 2010 was a bit cooler than 2009 mainly because a moderate El Nino in the equatorial Pacific Ocean during late 2009 and early 2010 has been replaced by a moderate La Nina. Also most of Antarctica was cool in winter 2010, while it was warm in 2009. Antarctic winter temperature anomalies are very noisy, fluctuating chaotically from year to year.

Research suggests climate change target 'not safe', EurekAlert: An analysis of geological records that preserve details of the last known period of global warming has revealed 'startling' results which suggest current targets for limiting climate change are unsafe. The study by climate change experts at the University of Exeter has important implications for international negotiators aiming to agree binding targets for future greenhouse gas emission targets. Professor Chris Turney and Dr Richard Jones have reported a comprehensive study of the Last Interglacial, a period of warming some 125,000 years ago, in the latest issue of the Journal of Quaternary Science. The results reveal the European Union target of limiting global temperature rise to less than 2°C above pre-industrial levels shouldn't be considered 'safe'. ...

Gearing Up For Climate Change Could Supercharge The Job Market - Could one major crisis be solved.... by solving another? If we're talking about the nation's desperately poor job market on the one hand, and the dire threat of climate change on the other, then the answer is: Quite possibly, yes. The solution to both would be an enormous investment in green technology and green jobs -- creating a robust "clean energy economy" while reducing carbon emissions; putting millions of Americans back to work while increasing our energy independence; rebuilding our manufacturing base while saving consumers money on their energy bills; and saving the planet. It certainly sounds a heck of a lot cheerier than the alternative. And it makes sense that to genuinely restart the American jobs engine, you're going to need something really big.

Regulators could require 62 mpg average by 2025 -- The federal government is looking to raise corporate average fuel economy requirements to something between 47 and 62 miles per gallon by 2025, according to documents released Friday by the National Highway Traffic Safety Administration and the Environmental Protection Agency. Currently these requirements, known as CAFE, call for an increase in fuel economy to an average of 34.1 mpg by 2016.The requirements proposed Friday are for the next round of fuel economy increases scheduled to begin in 2017.  The government's proposed 2025 goal would reflect annual increase of 3% to 6% per year from 2017 to 2025, according to a Notice of Intent issued by the agencies.

 Huge wind energy potential off Eastern U.S. – study (Reuters) – The densely populated U.S. East Coast could meet close to half its current electric demand by relying on offshore wind turbines, a study by an ocean conservation group found. North Carolina, South Carolina, New Jersey and Virginia offer the most potential for easily captured wind energy, according to the Oceana study, which estimates that the 13 coastal states could together generate 127 gigawatts of power. That represents the potential for far more wind power than the United States currently generates. At the end of 2009, the nation’s land-based turbines were capable of producing some 35,000 megawatts of power — enough to meet the needs of 28 million typical American homes.

Scotland to get 100 pct green energy by 2025 (Reuters) – Scotland should produce enough renewable electricity to meet all its power demand by 2025, First Minister Alex Salmond said on Tuesday. “Scotland has unrivalled green energy resources and our new national target to generate 80 percent of electricity needs from renewables by 2020 will be exceeded by delivering current plans for wind, wave and tidal generation,” Salmond said.“I’m confident that by 2025 we will produce at least 100 percent of our electricity needs from renewables alone, and together with other sources it will enable us to become a net exporter of clean, green energy,” he said a statement ahead of a renewable energy investment conference. Last week, Scotland raised its 2020 renewable electricity target from 50 to 80 percent of total demand, much of which is expected to be met by offshore wind despite costs soaring over the last few years.

Craig Venter: Without Scale, Algae Fuel Companies “Playing” - Craig Venter, considered to be the father of genomics and the founder of synthetic biology startup Synthetic Genomics, said there’s a fundamental problem with algae fuel at the Wall Street Journal’s Eco:nomics conference on Thursday: in his view if algae fuel companies can’t generate billions of gallons of fuel then people are “just playing” and “wasting investors money.” In other words the algae companies need to be able to reach the scale at which the oil companies currently operate to be competitive. “That’s the real bugaboo for everybody,” said Venter. To address that hurdle, last July Synthetic Genomics announced that it was partnering with ExxonMobil on a $600 million algae biofuels program.

Fossils With a Bright Future - FOR ALL THE HOOPLA SURROUNDING alternative energy, fossil fuels still show vibrant signs of life. Global producers see crude oil, coal and natural gas—often from unconventional sources—quenching the world's thirst for energy well into this century. Although climate change is a major concern, many executives and policy makers say the availability and affordability of energy will be the key focus in coming decades. "Much of the extra demand is expected to be met by fossil fuels," said Shosuke Mori, chairman of Kansai Electric Power, one of Japan's largest utilities, at the World Energy Congress in Montreal earlier this year.

Bio-geoengineering - Musings on a Satellite Photograph - However, staring at the aerial photos and thinking about the solar energy budget of a particular piece of property is starting to make me think about the problem rather differently. The most striking thing about the picture to me is the albedo variation across the property.  Recall, if you've forgotten your high school science that the albedo of an object is defined thus: The albedo of an object is a measure of how strongly it reflects light from light sources such as the Sun. It is therefore a more specific form of the term reflectivity. Albedo is defined as the ratio of total-reflected to incident electromagnetic radiation. It is a unitless measure indicative of a surface's or body's diffuse reflectivity.

What will future generations condemn us for? - Once, pretty much everywhere, beating your wife and children was regarded as a father’s duty, homosexuality was a hanging offense, and waterboarding was approved — in fact, invented — by the Catholic Church. Through the middle of the 19th century, the United States and other nations in the Americas condoned plantation slavery. Many of our grandparents were born in states where women were forbidden to vote. And well into the 20th century, lynch mobs in this country stripped, tortured, hanged and burned human beings at picnics. Looking back at such horrors, it is easy to ask: What were people thinking? Yet, the chances are that our own descendants will ask the same question, with the same incomprehension, about some of our practices today.Is there a way to guess which ones?

States tally oil spill toll to send BP their bills - Alabama Attorney General Troy King sued BP in federal court for the damage he says the Gulf oil spill inflicted on his state's environment and economy. Florida Attorney General Bill McCollum is hoping to negotiate with BP to compensate his state for its lost tax revenue and damaged coastline. He hasn't sued yet — but says he wouldn't hesitate to do so if the oil company fails to pay up.While the strategies differ, every state bordering the Gulf of Mexico is calculating the damage caused by an estimated 5 million barrels of oil spilled in the Gulf and the chemicals used to clean it up, and preparing to present BP with a bill. All of the states say they can back up their claims with a lawsuit if BP won't pay.

Gulf waters contain high levels of carcinogens linked to oil spills - University researchers said on Thursday they recently found alarming levels of cancer-causing toxins in an area of the Gulf of Mexico affected by BP’s oil spill, raising the specter of long-lasting health concerns. Oregon State University (OSU) researchers found sharply heightened levels of chemicals including carcinogens in the waters off the coast of Louisiana in August, the last sampling date, even after BP successfully capped its runaway Gulf well in mid-July. Near Grand Isle, Louisiana, the team discovered that polycyclic aromatic hydrocarbons (PAHs) — which include carcinogens and chemicals that pose various risks to human health — remained at levels 40 times higher than before the area was affected by the oil spill.  The compounds may enter the food chain through organisms like plankton or fish, a researcher said. “In a natural environment a 40-fold increase is huge,” said Oregon State toxicologist Kim Anderson, who led the research. “We don’t usually see that at other contamination sites.” 

Scientists: 40 Times More Cancer-Causing Toxics in Gulf than Before Spill … Dispersants to Blame - Scientists from Oregon State University have found a 40-fold increase in the amount of cancer-causing polycyclic aromatic hydrocarbons (PAHs) near Louisiana's Grande Isle between May and June. The Oregon team is looking at "the fraction of PAHs that are bioavailable – that have the potential to move into the food chain." As I pointed out last month, PAHs are harmful to both human health and seafood safety: McClatchy notes today:The Gulf of Mexico oil spill still poses threats to human health and seafood safety, according to a study published Monday by the peer-reviewed Journal of the American Medical Association. The Oregon researchers also believe: The use of chemical dispersants during the oil spill coupled with the ultraviolet exposure in the Gulf may have increased the formation of OPAHs beyond expected levels. And one of the researchers explained to the Huffington Post: Based on the findings of other researchers, [Kim Anderson, an OSU professor of environmental and molecular toxicology] suspects that the abundant use of dispersants by BP increased the bioavailability of the PAHs in this case.

Oil, Health, And Health Care - Future health and prosperity require that we prepare for life without cheap oil. The April 2010 oil leak in the Mexican Gulf illustrates the risks being taken to extract oil from inaccessible fields, and in June a Lloyd’s 360° risk insight report said, “we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility and how much we will pay for it.”1 The reason why such damaging extraction methods are pursued, and why Lloyd’s are telling us we face a “new energy paradigm” rather than normal market volatility, is that oil discoveries peaked 40 years ago, and oil supply is probably at its maximum, with decline soon to follow.2 This has substantial implications for transport, food, jobs, health, and health care.3 Yet many people still haven’t heard of “peak oil” and few are discussing it. The International Energy Agency says that we are running out of time to build the skills, systems, and infrastructure needed for a prosperous future.4 They forecast a depleted energy supply in the next decade. Energy availability underpins economic growth, and without the opportunity for future repayment of debt the financial system as we know it could stop working.5

Could peak oil save the human species? - I asked McPherson, who gave a talk this weekend near where I live, what would change his mind about the trajectory of industrial civilization. He answered that the discovery of a miraculous, cheap, easily scalable new energy source would probably allow our current arrangements to persist for a while longer. But such a development would be a death sentence for the human race since it would lead to the total destruction of the life support systems we rely on, systems which are only seriously crippled now. It would result in further population overshoot, resource depletion including that of soil and water, and further destruction of species we rely on for our well-being. He likened what we are doing now to constructing an extra floor on the top of a 30-story brick structure using bricks pulled from the lower floors. We are engaging in the "world's largest game of Jenga" with the building blocks of our existence.

50 Years of OPEC - The Economist produced this great graphic as the cartel of oil producers, celebrated its 50th anniversary on September 14th. The organisation was founded in 1960 with the clear motive of influencing oil prices by controlling supplies.   The Organisation of Petroleum Exporting Countries (OPEC), is a cartel of 12 countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. It has generally proved successful. OPEC controls around 80% of the world’s proven reserves and over 40% of the world’s production among its 12 member states. The Gulf states that dominate OPEC have the biggest reserves and lowest costs, so can most easily turn the taps on and off when required to keep prices high. Despite the slow return to health of a sickly world economy, oil fetches a lofty $75 a barrel, which Saudi Arabia, OPEC’s most influential member reckons is “ideal”.

Saudi Crude Output Falls 11.3% In 2009 Vs '08 -Ctrl Bk-Saudi Arabia's crude production fell 11.3% to 2.9 billion barrels in 2009 from 3.4 billion barrels in the year earlier, while exports fell 14.4% to 2.3 billion barrels, the country's central bank said Sunday.  Proven oil reserves at the world's top energy exporter were steady at 264.6 billion barrels at the end of last year, while proven reserves of natural gas rose 4.6% to 279.7 trillion standard cubic feet versus last year, the Saudi Arabian Monetary Agency, or SAMA, said in its annual report posted on its website.  Total domestic consumption of refined products, crude oil and natural gas rose by 3.7% to 1.2 billion barrels in 2009, compared with 1.1 million barrels a year ago due to a 6.4% increase in public consumption and a 16% fall in the oil industry consumption, the report said.

Oil analyst tells Forbes: Peak oil by 2017 - Respected oil analyst Charles Maxwell has told Forbes – and with it the North American business establishment – to brace itself for peak oil by “2017 or 2018.” Much of the reaction to this isn’t over what was said – Maxwell has voiced similar peak oil warnings previously – so much as where it was said. Forbes is not noted as a friend of the peak oil hypothesis, which states geological restrictions mean there will be a time of maximum oil output and that, despite investment and innovation, production will subsequently diminish. Unconventional oil supplies such as Canadian oilsands will not be able to prevent this, despite the hype. Canada’s Prime Minister may claim “Alberta's tar sands are second only to Saudi Arabia as the world’s largest oil reserve,” but these are “energy- and capital- and time-intensive” and have lousy flow rates – output cannot be scaled up to meet the ravenous global demand for oil.

Future Economy, Energy Portfolio Must Look Dramatically Different, Speaker Says - With available energy and natural resources depleting in an economy that depends on them to grow, author and speaker Chris Martenson said the next 20 years are going to have to look fundamentally different from the last 20. And while every decade has been shaped differently from the past, Martenson said the shift that will occur is unlike any other because of the change in economic structure and energy profile that will be forced to occur. "We don't have any good way of looking at history to find out how this story works out," he said

A New Look at Peak Oil - After yesterday’s interview with Chris Martenson I have been unable to get the concept of Peak Oil out of my head.  What I am reconnecting with mentally right now is how many people don’t have any idea what peak oil is all about. Peak oil isn’t the end of oil it is only the point at which production reaches a peak and can’t continue to grow concurrently with demand. Additionally most people are not aware of what oil really means to our economy beyond the obvious.  How oil effects coal extraction, wind power, making plastic, making medicine, transporting our food, etc.  Today’s show is more of just me chatting with our than a more conventionally hard outlined show. I will give you some numbers and statistics but mostly I want to talk more about what peak oil really means even with out a cataclysmic no oil left doomsday type event.  Imagine just a 5% shortfall in oil demand, the effect on cost, service reduction, economic impact, etc

Military reports leading the charge in peak oil debate - Another military report is targeting future oil supply concerns. Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment, published September 27, is the third military consideration of a future of scarce oil published so far this year. It states that 77 per cent of the US Department of Defense’s “massive energy needs” are met by petroleum – but “given projected supply and demand, we cannot assume that oil will remain affordable or that supplies will be available to the United States reliably three decades hence.” To remain as an effective fighting force, the entire US military must transition from oil over the coming 30 years. Back in February, the United States Joint Forces Command published The Joint Operating Environment 2010. Written by the military for the military, this was seemingly intended as a discussion document to guide “future force development.” As such, it was concerned with probable “future trends and disruptions” – a variety of geopolitical issues: demographics, globalization, US debt, the global recession, water shortages, food supply, climate change and dwindling oil supply.

UK government's oil shock warning - A UK government minister is preparing for a coming global oil shock – a possible doubling of the price of oil. As Monday’s UK Daily Telegraph newspaper reported, "Energy Secretary, Chris Huhne, told the Liberal Democrat conference last week that in a world facing economic "shocks" it was possible that the price of oil would double from its current level of about $75 a barrel and that he had ordered his officials to look at the impact of a Seventies-style oil price spike on the British economy." A slew of reports published this year have pointed to a coming tightening of global oil supplies. I recently considered six reports written by groups as wide ranging as UK business leaders, the US military, insurers Lloyds, Kuwait University engineers, the German military and an Australian think tank. Taken as a whole they refer to aging oilfields, oil industry underinvestment, the limited output of unconventional sources such as oil sands, increasing global demand and the possibility of the world being close to peak oil, the geological natural maximum output. The point is, you don’t have to believe in peak oil theory to see a coming oil supply crunch. These reports didn’t all agree on the issue of peak, but nevertheless pointed to a supply crunch between 2011 and 2015.Against this, the International Energy Agency is forecasting record world oil demand, and warning that the “era of cheap oil is over.”

Supply and demand is the law? - Ah, the confusion of economics students when they encounter the subject of supply and demand in introductory “micro.” They learn that prices are determined by supply and demand. Then they’re taught that the quantities supplied and demanded are determined by… prices! So Americans know quite well how Big Money can pollute the truth. Can we expect the mother of all money-making theories, unlimited growth theory – along with its crazy correlates – to come to us on wings of truth? Sure, sure, higher prices stemming from lowered supplies actually “increase” supplies because they provide an incentive to “supply” even more. And more smoke makes the air “cleaner” by providing an incentive for smokers to increase the “supply” of clean air. More traffic increases the “supply” of open road. More noise actually leads to a greater “supply” of quietness. Less of a good thing leads to more of it! More of a bad thing leads to less of it! Or, if you prefer, less of a good thing leads to less of a bad thing, and more of a bad thing leads to more of a good thing!

The Economy Can’t Grow Forever - Those of us who believe that the economy should serve us instead of the other way around are conflicted.  We know that the only way to end unemployment at home and poverty around the world is to make the economy grow faster. But we also know that nothing can grow forever, that the faster the global economy grows, the sooner we’ll run out of essential resources, including fossil fuels, water, arable land, healthy ecosystems and moderate climate.  Economists and politicians can’t admit it, but the laws of physics apply, no matter what the latest polls tell us. The Earth has finite resources that will someday limit our economic growth. The Earth cannot forever support 7 billion people consuming as much as Americans consume. And yet we’ve staked our future — individually, nationally, and maybe even as a species — on that impossible dream.

More "curse of oil"  -- Brazil is apparently doing quite well. I wanted to compare to the basket cases and the folks at the Economist Intelligence Unit let me look at their Venezuela Country Report. The consequences of Hugo Chavez rule have been much worse than I had expected. Start with 3 years of negative GDP growth. And we call two negative growth quarters a "recession". There is also crime, inflation, press censorship, devaluation and on it goes. It is easily the region's disaster. Just when Brazil is taking off.  So sad. I did some work there in the 1980s and saw reasons to be optimistic. Upended by the "curse of oil"? The EIU also forecasts declining 2011 GDP growth for the world, the OECD, the EU27 as well as the U.S. Not good.

The race is on for Greenland’s Arctic oilfields - Greenland, eighty per cent covered in ice, is emerging as a potential oil producer and the race in on to get access to its fields. A self-governing colony of Denmark, Greenland is emerging as a potential petroleum giant and the competition between oil companies to access its resources is intensifying.  Although Cairn's discovery is not commercially viable, it reinforces the Greenland government's belief that offshore west Greenland has potential. It has found two types of oil and is analysing samples. Until recently, exploration had only been seven wells and they were all declared dry.

Japan to drill for controversial “Fire Ice” - In a bid to shore up its precarious energy security, Japan is to start commercial test drilling for controversial frozen methane gas along its coast next year. The gas is methane hydrate, a sherbet-like substance consisting of methane trapped in water ice—sometimes called “fire ice” or MH—that is locked deep underwater or under permafrost by the cold and under pressure 23 times that of normal atmosphere. A consortium led by the Japanese government and the Japan Oil, Gas and Metals National Corporation (Jogmec) will be sinking several wells off the southeastern coast of Japan to assess the commercial viability of extracting gas from frozen methane deep beneath local waters. Surveys suggest Japan has enough methane hydrate for 100 years at the current rate of usage. Lying hundreds of meters below the sea and deeper still below sediments, fire ice is exceedingly difficult to extract. Japan is claiming successful tests using a method that gently depressurizes the frozen gas.

You Don't Bring a Praseodymium Knife to a Gunfight -Last week, the New York Times published a stunning story: China, amid a nasty territorial spat with Japan, had quietly halted shipments of rare-earth minerals to its East Asian neighbor, threatening to escalate a skirmish into a full-blown trade war. China swiftly denied the story, while other journalists rushed to confirm it. The Times reported on Sept. 28 that China, while still not admitting the existence of the ban, may be tacitly lifting it -- but the damage to the country's image as a reliable supplier has been done. But the truth is that though most of the rare earths, both metals and oxides, do come from China, this isn't the same at all as having a monopoly that is sustainable -- as Beijing is about to find out in a fairly painful manner. Now that the specter of a monopoly being exercised for political ends has been raised, there will be sufficient political will to break that monopoly.

Western Australia commodity boom - too much reliance on China? -Currently visiting Western Australia and one can’t help realising that Australia’s strong economy is dependent on Chinese demand for its commodities. However, the focus on supporting the boom as an “all eggs in one basket” approach to State development raise questions as to how prudent this strategy really is.   There are concerns that China cannot sustain such growth levels and the main threats to ongoing high growth rates are in the main environmental, industrial, financial and ultimately political. Australia should be working on a Plan B if exports start to dry up. Read more from the West Australian

China Likely To Reach Energy Efficiency Goal: Official(Xinhua) -- A senior official of China's top economic planner Wednesday said China will likely reach its goal of improving energy efficiency by 20 percent from 2006 to 2010. "Due to the unremitting efforts of central and local governments, the target of a 20-percent reduction in energy consumption relative to economic output is within reach," said Xie Zhenhua, Vice Minister of the National Development and Reform Commission, at a press conference. In the four years from 2006 to 2009, small thermal power plants with a total capacity of 60 million kilowatts were shut down. For the first seven months this year, small thermal plants with another 10 million kW were eliminated. "The high energy-intensive power generation capacity eliminated during the four years and seven months in China is more than the total installed power generation capacity of the whole United Kingdom, which stands at 60 million kW," said Xie.

China, Energy, and Global Power - If you want to know which way the global wind is blowing (or the sun shining or the coal burning), watch China. That’s the news for our energy future and for the future of great-power politics on planet Earth. Washington is already watching -- with anxiety. Rarely has a simple press interview said more about the global power shifts taking place in our world. On July 20, the chief economist of the International Energy Agency (IEA), Fatih Birol, told the Wall Street Journal that China had overtaken the United States to become the world’s number one energy consumer. One can read this development in many ways: as evidence of China’s continuing industrial prowess, of the lingering recession in the United States, of the growing popularity of automobiles in China, even of America’s superior energy efficiency as compared to that of China. All of these observations are valid, but all miss the main point: By becoming the world’s leading energy consumer, China will also become an ever more dominant international actor and so set the pace in shaping our global future.

Technology The Showcase As Energy Remains The Cornerstone The pavilion is a showcase for the latest and safest nuclear technologies, hi-tech solutions for the 2014 Sochi Olympic Games and Dmitry Medvedev's pet project – the innovation center Skolkovo, which is open to hi-tech companies all over the world including China. Trade between Russia and China is heavily weighted towards energy. The world most populous and fastest growing country is hungry for power, and Russia has plenty of it. But the point of contact lies not only in oil and gas. Chinese companies are investing in manufacturing in Russia, such as Thunder Sky Corporation joining with Rusnano to build a half billion dollar plant in Novosibirsk to produce batteries for electric cars and buses.

Fears of Chinese Land Grab As Beijing's Billions Buy Up Resources - China is pouring another $7bn (£4.4bn) into Brazil's oil industry, reigniting fears of a global "land grab" of natural resources. State-owned Sinopec clinched the deal with Spain's Repsol yesterday to buy 40 per cent of its Brazilian business, giving China's largest oil company access to Repsol Brasil's estimated reserves of 1.2 billion barrels of oil and gas. It also follows a slew of similar deals across the world. While much of the developed world is baulking at its debts in the aftermath of the financial crisis, China has continued a global spending spree of unprecedented proportions, snapping up everything from oil and gas reserves to mining concessions to agricultural land, with vast reserves of US dollars.This year alone, Chinese companies have laid out billions of dollars buying up stakes in Canada's oil sands, a Guinean iron ore mine, oil fields in Angola and Uganda, an Argentinian oil company and a major Australian coal-bed methane gas company.

Op-Ed Columnist - Their Moon Shot and Ours - China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars. Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.

China’s quiet power grab - Over the past decade, China has kept silent, lain low and behaved more like a multinational company than a global superpower -- and garnered enormous political influence as a result. The fruits of this success are everywhere. Look at Afghanistan, for example, where American troops have been fighting for nearly a decade, where billions of dollars of American aid money has been spent -- and where a Chinese company has won the rights to exploit one of the world's largest copper deposits. Though American troops don't protect the miners directly, Afghan troops, trained and armed by Americans, do. And though the mine is still in its early phases, the Chinese businessmen and engineers -- wearing civilian clothes, offering jobs -- are already more popular with the locals than the U.S. troops, who carry guns and talk security. The Chinese paid a high price for their copper mining rights and took a huge risk. But if it pays off, our war against the Taliban might someday be remembered as the war that paved the way for Chinese domination of Afghanistan.

China / Taiwan Love-In, Banking Edition - And now for some very insightful news from a rather unlikely source. Something I do appreciate about reading official news agency articles is that they seldom fail to fall out out of line with official policy stances. And so it is that we have another interesting sign of detente between the People's Republic of China and the Republic of China. The Global Times usually features some of the more bellicose commentary from Chinese official media, but this time, it seems to be positively cottoning up to Taiwan. A few months ago, the PRC and ROC inked an Economic Cooperation Framework Agreement or ECFA--an arrangement similar to what the PRC has with its special administrative regions of Hong Kong and Macau. I suppose China can't bad mouth the US (currency, trade, Tibet, South China Sea); Japan (Senkaku islands, WWII grievances); and Taiwan at the same time. So, while the first two are in Beijing's doghouse, it's Taiwan's turn to be rewarded in signing an FTA with the PRC as well as putting off any aspirations for formal independence in the near future. Economic relations are becoming closer as each--can I use the word "country"?--of the protagonists is keen on establishing a financial service presence in the mainland and Taiwan, respectively:

Gravy Train: High Speed Rail's Economic Benefits - As you probably know, China is in the vanguard of high-speed rail technology almost alongside the Europeans and the Japanese after investing tonnes and tonnes of dough in this technology. Governator Arnold Schwarzenegger of California even dreams of groping some high-speed trains from the PRC for his state with what should be incredibly funky Chinese financing given the perpetually empty coffers of the, ahem, "Golden State" (so ironic, that). However, the purpose of today's post is not to heap more well-deserved dirt on the festering carcass of American hegemony, but to instead contemplate its benefits for those still in the land of the fiscally living. Sometime ago, I discussed China's vaunted proposals to establish a high-speed network linking a New Silk Road. Years and years of rapid Chinese growth despite all the acknowledged pitfalls of doing business in that country--corruption, pollution, and so on--suggest to me that infrastructure is important.

China’s Rise Curbs U.S. Influence in Australia - Michael Pascoe, writing for Australia’s The Age, argues the US has nowhere near the potent influence on China many assume, despite that idea’s widespread belief. He tackles in particular the unassailable concept of the US consumer, suggesting this group not only fails to support practically all of China’s expansion, as is so often implied by the media. From The Age: “Spare me the usual myopic line born of American xenophobia and ignorance about China being dependent on exports to the USA [...] net exports’ contribution to China’s growth over the past decade has averaged just 1.5 per cent. And the United States’ share of China’s exports is 20 per cent so the much ballyhooed American consumer is only good for 0.3 per cent of China’s GDP growth – growth that runs along in double digits or close to it even in the Great Recession. “That’s only part of it. The stuff China exports to the US is mainly low value-added – clothing, toys, electronic gadgets. About half of China’s exports now go to the developing world and that half has higher value-added content – power stations, mining machinery and the like.”

Andy Xie is much less bearish on Chinese housing market - Recently I pointed to some comments by Andy Xie which indicated he was taking a less apocalyptic stance toward the Chinese property market. It was difficult to discern how much of a climb down this was for the China bear. But, judging from Chinese Property Bust Is Morphing Into a Slow Leak just published in Bloomberg, Xie has not recanted entirely; he is still bearish on the Chinese property market. He just expects the timing of the collapse to be different and the effect on the real economy to be less severe.Xie writes:I thought the current bubble, fueled by rapid monetary expansion and expectations of a stronger yuan since the beginning of 2007, would go the same way. Recent developments have changed my mind. This bubble may not end suddenly, but with a slow leak. Previously, I thought the government would relax its credit-tightening policies in the fourth quarter, leading to another surge in property prices. The bubble would pop with a big bang in the second half of 2011 or in 2012. But the government is not relaxing property restrictions at all. So Xie is changing his story.

Is Andy Xie Blaming The Chinese Government For Ruining His Property Crash Prediction? - As I wrote here, China bear Andy Xie appeared to be have changed his tune in a CNBC interview. Today he confirms that shift in a new column for Bloomberg-Chinese Property Bust Is Morphing Into a Slow Leak-in which he says Chinese real estate prices have peaked and will decline, but much more slowly than he expects. He seems to blame the government for ruining his “Crash Call”.  I am not sure how any economic pundit opining on China can be surprised by the role of the government, especially when the government has repeatedly said it is not interested in a large decline in property prices, just a moderating of their increase. I know I know, it is crazy to think that Chinese policymakers can manage around market forces that must “inevitably” lead to a crash, as many of the China bears argue. Then again, maybe the bears don’t understand how China works. As I wrote a few months ago in Are There More China Bears Than Panda Bears?:

China: Proudly Demolishing Buildings Before Completed In Pursuit Of The Glorious Housing Bubble Perpetual Engine - Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La. In the meantime, more on the whole "controlled demolition thing" from China Hush.

The rise of China's heartland - Welcome to Chongqing: A city of 33 million that you've never heard of.On most days, a thick blanket of fog and smog shrouds the city of Chongqing and its surrounding hills. Light rain beats down on the thousands of steps that weave up and down the city. The horn of a distant ship occasionally bellows out somewhere down the Yangtze River. It’s only when the sky clears in the afternoon, if the sky clears, that shiny high rises and construction cranes appear, stretching as far as the eye can see. Once a quiet port city of 200,000 people perched at the confluence of the Yangtze and Jialing rivers, nestled in the mountains of central China, Chongqing today has transformed into a sprawling metropolis. The city center and surrounding districts and municipalities are home to nearly 33 million, roughly the population of all of Canada

Lawmakers urge Obama challenge China on clean energy - More than 180 U.S. lawmakers urged President Barack Obama on Tuesday to fight back against what they called China’s “unfair” tactics to dominate global production of clean energy technology. “Through a variety of predatory trade practices, China’s industrial policy seeks to give its manufacturers an unfair advantage in the green technology revolution and to capture this emerging sector,” the group of mostly Democrats and at least two Republican lawmakers said in a letter. “If left unchecked, these practices will achieve their intended effect, which is to drive American manufacturers from this critical emerging sector,” they said. The letter came on the eve of vote in the House of Representatives on a bill to give the White House a new tool to protect U.S. companies from China’s currency practices, which many lawmakers also believe are unfair.

GOP blocks Democrats’ jobs outsourcing bill - The Senate on Tuesday blocked tax legislation that would have punished U.S. firms that export jobs. But the political symbolism of trying to save American jobs, not passing a bill, was the Democrats' closing argument on the economy in the waning weeks of the congressional elections.Republicans complained that the vote used a serious subject — economic recovery — to score points with voters five weeks before the balloting in which all 435 House seats, 37 Senate seats and the Democratic majority are on the line. The bill in question, Republicans said, would make U.S. companies less competitive.

Bill to End Tax Provision on U.S. Jobs Is Blocked— The Senate on Tuesday rejected efforts by Democratic leaders to advance a bill to end a tax provision that supporters of the measure said encourages American companies to ship jobs overseas. The bill also would have given a tax break to companies that move jobs back to the United States.  Republicans unanimously opposed the bill, which their party leader, Senator Mitch McConnell of Kentucky, dismissed as an ill-conceived political stunt by Democrats seeking to portray themselves as opposed to the outsourcing of jobs.   “The way to get U.S. businesses to produce more here isn’t to tax them even further, it’s to stop punishing them with our high corporate tax rate.”

Risk of trade war rises as key US committee backs tariffs on China - The adoption of the measure by the Ways and Means Committee on Friday means it will now be voted on by the House of Representatives on Wednesday. "China's exchange-rate policy has a major impact on American businesses, and Americans jobs, which is what this is all about," said Sander Levin, a Democrat from Michigan and chairman of the committee. China's determination to shackle the strength of its currency helped turn the country into the world's manufacturing hub for everything from iPods to T-shirts and, until the recession bit, attracted few critics. But an unemployment rate of 9.6pc in the US, as well as upcoming Congressional elections, is spreading anger across Capitol Hill. According to the bill's supporters, a properly valued yuan would move jobs back to the US as exports from China become more expensive. The Peterson Institute for International Economics in Washington argues up to 500,000 American jobs could be created.

China Currency Measure Set for Vote in U.S. House - Legislation pressing China to raise the value of its currency is set for a vote in the U.S. House next week, as Republicans joined Democrats in expressing frustration that the yuan is appreciating too slowly. “We cannot wait any longer to level the playing field for U.S. businesses and protect American manufacturing jobs,” Democratic Leader Steny Hoyer of Maryland said yesterday after the Ways and Means Committee sent the bill to the full House.
The committee adopted the measure by voice vote after the panel’s top Republican, Dave Camp of Michigan, voted with Democrats to back the bill. The full House will vote Sept. 29, said committee Chairman Sander Levin of Michigan, a Democrat. The measure would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency. President Barack Obama’s administration hasn’t taken a position on the bill, said Natalie Wyeth, a Treasury Department spokeswoman.

House Is Likely to Pressure China to Raise Renminbi: The House is expected to give the Obama administration another tool in its diplomatic pouch to pressure China to let its currency rise in value, reflecting growing concern around the country over the loss of manufacturing jobs, persistently high unemployment and a rising trade deficit.  In what is likely to be one of Congress’s last significant measures before the election, the House will vote Wednesday on a symbolic but not insignificant measure threatening China with punitive tariffs on its imports to the United States. In the past, Beijing has responded to such tactics by allowing its currency to rise gradually in relation to the dollar. Lately, though, efforts at cajoling the Chinese to revalue their currency have met with little, if any, response. But it is unclear whether the legislation, which faces cloudy prospects in the Senate, will succeed this time in prodding a China that has become more self-confident on the world stage.

House Fires Shot Across China’s Bow - Yves Smith - A measure passed by the House tonight, which would permit the US to impose tariffs on countries that keep their currencies artificially low, is at this juncture a mere statement of intent. It is nevertheless playing into a dynamic of the hardening of stances between the US and China. Note that the bill has yet to pass the Senate, but given its wide approval margin, and more important, broad bipartisan support, a win there seems assured. But the bill does not require action, and so leaves any escalation in the hands of the executive branch. Given Obama’s tendency to talk tough and do little beyond elaborate symbolism, such as misbranded reform measures, I would not expect the Administration to suddenly change stripes and increase pressure on China in a meaningful fashion. Not surprisingly, China pointedly lowered the value of the renminbi today, clearly signaling it has no intention of cooperating.

Senator Schumer Says He Will Push Yuan Revaluation Bill After Elections - U.S. Senator Charles Schumer of New York, the lead Democratic sponsor of legislation to get China to raise the value of its currency, said he plans to seek a Senate vote on the measure after the November elections.“Critics of our bill say it would start a trade war with China -- but this isn’t right because American companies already are fighting a war for survival in China,” Schumer said today on the Senate floor. “The issue here is not U.S. protectionism, but China’s flouting of the rules of free trade

Taking On China, by Paul Krugman - Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. But serious people, who have been wrong about so many things since this crisis began are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries. Let’s step back and look at the current state of the world.

Very Serious Reactions to the Levin Bill - Krugman - As regular readers know, I’m getting increasingly disgruntled with Very Serious People, who offer wise reasons not to do anything about devastating unemployment. Inevitably, the VSPs are weighing in on the Levin bill authorizing countervailing duties on Chinese goods, offering very wise-sounding reasons why we should do nothing about outrageous, destructive currency manipulation.  Today’s editorial in the usually sensible FT is a case in point; it sounds very reasonable, unless you have actually looked at and thought about the subject. So, first: Yet slapping tariffs on Chinese imports is not an effective response. It is needlessly confrontational given that China has been willing to address US concerns, if at snail’s pace, through diplomacy. It has allowed the renminbi to appreciate by almost one percentage point since Barack Obama’s top economic adviser Lawrence Summers visited Beijing two weeks ago, around half of the total increase since June.Seriously? They think diplomacy has been working? Here’s the actual exchange rate story:

Paul Krugman, seriously - Paul Krugman has not been happy with China's currency interventions, and he hasn't been satisfied with the yuan appreciation that's taken place since the Chinese government announced a new period of flexibility for the currency back in June. I've commented on all of this before. Mr Krugman thinks that slow appreciation over the summer was due to America's taking the pressure off Beijing; I think it's just as easily explained by the serious concerns that erupted over the summer, that China's efforts to cool its economy were working too well. Mr Krugman believes that a major revaluation will provide a significant boost to the American economy. I think it's more likely that because of the extent of the structural imbalances in China's economy, a major, rapid revaluation would devastate China's economy and have a net negative impact on the global economy. Meanwhile, structural imbalances in America would reduce the benefit of Chinese revaluation; production would, in many cases, simply shift to other export-oriented Asian nations. We got some sense of the elasticities here during China's previous episode of revaluation.

Risky business - On Wednesday, the House of Representatives passed one of the last significant measures likely to be debated in the 111th Congress, a bill threatening to slap tariffs on Chinese-made goods unless China allows its currency to rise in value. As a political gesture, this is pretty good. The public wants to see action on unemployment. But job-creating "stimulus" has become unpopular, so a nice piece of legislation blaming foreigners for our problems makes a lot of sense. Unfortunately, Congress' proposed solution is risky and unlikely to work. The good news is that there's a better way.  It doesn't take a nation of billions to drive the value of the dollar down; we can and should do it ourselves.The spectacle of the world's only superpower puzzling over the best way to reduce the value of our own currency is slightly bizarre. To be crude about it, you make dollars less valuable by having the Federal Reserve print more dollars, not by complaining to China.

U.S. business fears "downward spiral" in China trade (Reuters) - Congressional passage of a bill to pressure Beijing to revalue its currency could further harm U.S.-Chinese trade relations already hampered by mutual mistrust and suspicion, U.S. companies invested in China said on Monday. With U.S. congressional elections looming on November 2, many U.S. lawmakers who blame unfair Chinese trade practices for American job losses are eager to show they are taking steps to get tough with Beijing and help tackle high U.S. unemployment. The U.S. Congress is considering legislation that would treat what lawmakers call China's undervalued yuan currency as an export subsidy, a step that would give the U.S. Commerce Department increased ability to slap duties on Chinese goods. The U.S. House of Representatives is expected to pass the bill this week, but its future in the Senate is uncertain.

Preemptive Unilateral Disarmament - Krugman - So, why did Tim Geithner feel the need to declare, We’re not going to have a trade war; we’re not going to have currency wars. I don’t know what that means, but people are saying that. I suspect that he was trying to reassure the markets — but if we’ve learned anything lately, I hope it is that actions, not talk, matter. And look, if China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should. All Geithner did here was signal to the Chinese not to worry, U.S. officials will keep making excuses for China’s behavior and doing nothing, regardless of provocation. Remember, this statement comes after China blatantly reneged on earlier promises about the exchange rate. They must take us for fools — because we (or at least some of us) are.

China's On Top, So Get Used To It - In an all-too-predictable development, our trade problems with those devious, untrustworthy Chinese has come to the fore again. In an election year, politicians must find someone to blame for America's economic woes. Balance of trade and currency questions are complex, but the bogus story making the rounds goes like this: if the Chinese would allow the yuan (China's dollar) to float, it's value relative to other currencies (the U.S. dollar, yen & euro) would stengthen, which would make U.S. exports more competitve. Thus we would boost exports both to China itself and China's export markets, which would lower our trade deficit and create manufacturing jobs in the United States. This story sounds good, especially to dummies like Paul Krugman, but there are many, many obstacles standing between us and this happy result. I laid out my own views When In Doubt, Blame China, which I wrote last March.

Will China's Economy Collapse? - In the upcoming week I will be looking at the state of the global economy, which means I will be talking about China. Forbes columnist Gordon Chang has been waiting for the Chinese economic miracle to come to an end for a long time now. His book The Coming Collapse of China was published in 2001. China is now the biggest energy consumer in the world. China is likely to surpass the United States as the biggest manufacturer in the world in 2011. The Chinese have complete control of the rare earth elements (REE) supply as I described in China's On Top, So Get Used To It. And yet China's economy has significant structural weaknesses. They have failed to development their domestic consumption markets, and thus still rely on the exports model that worked so well for them before the "Great" recession and the European debt crisis. China's economic growth since the bottom in early 2009 has depended on a massive, unsustainable government stimulus. This free flow of government money has inflated massive property bubbles that rival our own Housing Bubble, which set the "Gold Standard" by which every other bubble must be judged.

Are We Nearing a Consensus on U.S. Competitiveness? - There certainly is a cyclical element to worries about American competitiveness: When the economy is faltering, we worry. When it isn't, we don't. Summers — who remains President Obama's top economics adviser until January — figures that we're currently overshooting on the worry front. "I am more optimistic than the American public," he said Tuesday, "much more optimistic than many of my friends." But beliefs about competitiveness have converged somewhat since 1990. Back then the debate was between worried business school professors, some corporate types, and an assortment of pundits on the one hand, and relatively blithe economists on the other. Economists of the center and right argued that private markets are better than governments (or keiretsu) at allocating resources, and economists of almost all political leanings pushed the doctrine of comparative advantage — which holds that we're all better off when countries trade freely with one another and specialize in the economic activities that they're relatively better at. A few economists on the libertarian right even went so far as to argue that America's chronic trade deficits were even evidence of the country's economic strength.

Falling behind - THE rise in concern over American competitiveness that has taken place in recent years was utterly predictable. The same cycle of fear has played out multiple times before. Somewhere in the world, a large underdeveloped economy enjoys rapid catch-up growth. As this country grows, it works its way up the value-added change, moving from production of very basic goods to products requiring a high level of human capital. Americans observe these rapid growth rates and changes in production, and they compare them to slow growth rates at home alongside painful structural transformations that mean the destruction of old jobs. They begin to worry. CEOs are quoted in magazines touting the growing market and the greater level of drive and investment it enjoys. Americans panic, and propose everything from industrial policy to tariffs. The old models are broken, they say, and America must learn from its competitors. Then, inevitably, growth rates in the challenger slow. The stories fade from the headlines, until the next catch-up contender arrives.

Is It Good to Live in a Destroyed World? –Krugman - On this blog and elsewhere, I often see assertions that America prospered after the Depression because our competitors were in a state of ruin. That’s just not right. First of all, trade was a minor factor in the US economy both before and after the war, with both imports and exports a much smaller share of GDP than they are now.Second, while it’s true that the war had largely destroyed our overseas competitors, it had also largely destroyed our overseas customers — because by and large these were the same thing.Here’s the data on net exports as a share of GDP, which is what matters for overall demand. It was a small number before the war, and was back to being a small number by around 1950. There was a bulge for a few years in the late 40s. What was that about? The Marshall Plan, which temporarily allowed ruined economies to buy more from us — in effect, a form of fiscal stimulus.In general, devastation is bad for business.

America Embraces Trade Discrimination - Economists generally agree on the advantages of openness in trade. But the case for non-discrimination in trade is also a compelling one. So good trade policy should push for multilateral trade liberalization such as at the Doha Round, rather than preferential trade agreements (PTAs) such as free-trade areas (FTAs), and also ensure that any retreat into protectionism does not degenerate into discriminatory trade practices.The last G-20 meeting in Canada was a disappointment on the first front. At the insistence of the United States, an earlier reference by the G-20 to a definite date for completing the Doha Round was dropped. Instead, unwittingly rubbing salt into the wound, President Barack Obama announced his administration’s willingness to see the US-South Korea FTA through. On the second front, there are distressing recent reports that the US Commerce Department is exploring ways to strengthen the bite of anti-dumping actions, which are now generally agreed to be a form of discriminatory protectionism aimed selectively at successful exporting nations and firms.

Currency brinkmanship - FROM 2005 to 2008, China's government allowed its currency to appreciate by nearly 20% against the dollar. In the first twelve months of this period of appreciation, the yuan rose by just 3.4%. In the three months since the Chinese government once again turned the yuan (somewhat) loose, the yuan has risen 2.1% against the dollar. Progress has been slow but meaningful. Much of that appreciation has taken place in just the past month. Two forces have contributed to the more recent flexibility. One is better Chinese economic data, which has convinced Chinese leaders that a slowdown in growth hasn't gotten out of hand. And the other is a renewal of international, but primarily American, pressure on Beijing to move forward with additional appreciation. The application of pressure is a dangerous game, however. It is in China's interest to let its currency appreciate, but various interest groups within the government have competing opinions on the matter. It's not clear how American pressure is likely to affect the balance of domestic interests in China, and it's therefore not clear how high the heat can be turned up before pressure backfires.

China Plays By Its Own Currency Rules The past two years have been tough on China-oriented Western economists. China's archaic mercantilism, tight capital controls, over-regulated financial sector, managed exchange rate and, above all, its need to purchase and sterilize massive inflows of foreign exchange were, according the theorists, leading the country to economic calamity. However, Western triumphalism in 2008 took a tumble as the West's most sophisticated financial innovators led the world economy off a cliff. Meanwhile, China's ham-fisted socialists saved China and, to a certain extent, the rest of the world with an enormous stimulus program (US$586 billion in domestic spending plus significantly relaxed limits on bank lending) that, as a ratio of the gross domestic products (GDP), dwarfed America's stimulus spending by a factor of more than five.

How to Manage Yuan Exchange Rate Pressure_English_Caixin - The yuan began a sharp appreciation against the U.S. dollar September 9, gaining 1 percent by September 15. Why? The obvious explanation is forced intervention. From a long-term perspective, a move such as this does not help China manage international economic relations. We need a better way. International economic pressure has become and will remain a persistent phenomenon now as China has become the world's second-largest economy. And the nation's No. 1 priority now is to use more wisdom when playing economic cards at the international level. While visiting the United States in April, President Hu Jintao reiterated two principles on reforming China's exchange rate regime. First, he said, China will hold firm to a policy of reforming the yuan's exchange rate regime. Second and more importantly, this policy will not change regardless of external pressure.

Large Yuan Gain `Not Good for Anybody,' Former PBOC Adviser Fan Gang Says (Bloomberg) -- Large gains in China’s currency aren’t in anyone’s interest and the yuan is already appreciating progressively, according to a former adviser to the nation’s central bank.  “A big fluctuation is not good for anybody -- not good for Chinese companies, not good for the global financial monetary system,” Fan Gang, a former member of the People’s Bank of China monetary policy committee, said in an interview in Kuala Lumpur today. The yuan “will be appreciating against the U.S. dollar, and it’s in the process” of doing so, he said.  Premier Wen Jiabao has been resisting international calls to allow the yuan to appreciate significantly, saying this month a 20 percent rise would cause job losses and “major social upheaval.” The currency has gained about 2 percent against the dollar since June 19, when the central bank said it would pursue a more flexible exchange rate after keeping it pegged for almost two years.

The politics of Chinese adjustment - I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances.  Remember that rebalancing, in the Chinese context, has a very specific definition.  It means raising the consumption share of GDP.  This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus. But there are many ways this can happen.  The good way is by a surge in consumption growth that allows GDP growth to remain strong.  The bad way is for consumption growth to slow, and for GDP growth to slow much more rapidly.So how will China rebalance?  Unfortunately there is no obvious answer.  I always tell my students that even if I were smart enough to know the optimal sequence, it would nonetheless be very difficult to make any reasonable prediction since the sequence is not likely to be subject to economic analysis.  This is as much or more a political issue as it is economic, for at least two reasons

The Donkey in the China Shop - President Obama has just issued a blackmail to Prime Minister Wen Jiabao of China: “You immediately revalue the yuan or else…”Surely, this is a most unseemly use to which the sacred grounds of the Security Council, dedicated as it is to the maintenance of peace and prevention of war, have ever been put. The reason given for Obama’s most unusual procedure is that he and his Congressional cohorts are “protecting U.S. interests: American jobs and American competitiveness”. Of course, Obama would never pay the blackmail if China wanted to force upon the U.S. an unpalatable dollar-policy, e.g., demand that the dollar be immediately put back on a gold standard on the theory that the present dispute would not have arisen if the dollar were gold redeemable as it had been before Nixon’s default. Obama has grossly overplayed a very weak hand. The U.S. has never been in a weaker bargaining position. All the trump cards are in the Chinese hand.

Blaming China Won’t Help the Economy - The Asian nations’ interest in American politics stems not just from America’s standing as the sole global superpower, but also from a growing belief among Asian leaders that the era of United States hegemony will soon be over, and that the polarization of its politics symbolizes America’s inability to adapt to the changing nature of global capitalism after the financial crisis.  What does this sweeping statement have to do with the price of yen? Plenty. On Sept. 15, the yen dropped sharply against the dollar, improving the competitiveness of Japanese exporters. After a brief bounce last week, expect the downward trend to continue. Mr. Kan’s government has decided to follow the lead of China and other Asian nations in “managing” (some critics would say manipulating) its currency; it spent a record $23 billion in a single day on foreign exchanges — the largest such intervention ever — instead of leaving the yen’s value entirely to market forces.

China Imposes a Steep Tariff on U.S. Poultry -— Days after it flexed its economic muscle in a diplomatic dispute with Japan, China continued to display a more assertive international economic policy on Sunday as it imposed steep tariffs on poultry imports from the United States. China’s commerce ministry announced on its Web site that it would impose import tariffs on American poultry of up to 105.4 percent. It said the tariffs reflected the result of its own antidumping investigation, which looked at whether the United States was harming China’s poultry industry by exporting chicken parts for less than it cost to produce them. The commerce ministry started the investigation less than two days after President Obama imposed steep tariffs on Chinese tires a year ago. Chinese officials have denied that the inquiry was in retaliation, but poultry is one of the few categories in which the United States runs a trade surplus with China, making it an ideal target for Chinese trade actions. The tariffs are another example of China’s willingness to use its economic leverage when it feels it is being challenged. An official at one of Japan’s top traders in rare earth minerals said on Monday that there appeared to be no resumption in shipments to Japan, a result of a still-simmering dispute over Japan’s arrest of a Chinese fishing boat captain

China raises antidumping duties on U.S. chicken - China’s Commerce Ministry has decided to increase an antidumping duty on U.S. chicken products, months after the punitive measures were first introduced, in a sign of continuing trade frictions between the two economic superpowers.  China will raise the minimum chicken duty to 50.3% on chicken products imported from the U.S., compared with minimum duties of 43.1% that were introduced in February, the ministry reportedly said in a statement on Sunday. The maximum antidumping tariff for the chicken products will remain at 105.4%, reports said.

Why China Is Unwilling to Revalue the Yuan - All countries exploit the dynamics between their political and economic systems. But China’s situation is exceptional. For three decades, the government of the People’s Republic of China has perpetuated a grand political dream, claiming a single-party political mandate from the Communist ideals espoused by Mao Zedong, while simultaneously drawing power from the capitalist canon. Beijing has been able to pull it off, largely through the promise of spreading wealth and opportunities to even the poorest of villages and maintaining benefits for cadres and workers in state-owned enterprises which cannot easily be absorbed into the capitalist system. A high rate of GDP growth is required year after year to maintain this state of affairs. A sudden change in the value of the Yuan could have the effect of throwing a wrench into the works, potentially setting off a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy.

China’s spat with Japan: Deng’s heirs ignore his advice - “PERHAPS the next generation will be wiser than us and find a way of actually resolving this problem.” China’s then leader, Deng Xiaoping, who said this in 1978, has been proven wrong about his country’s dispute with Japan over the Senkaku Islands, known in China as the Diaoyu. In recent days tensions have risen to a point where China’s leaders refuse even to meet their Japanese counterparts and are threatening worse to come. China’s response to Japan’s arrest on September 7th of a Chinese fishing crew near the disputed islands has exposed a dangerous source of instability in the relationship. Far from putting the dispute to one side, as Deng urged, China is escalating it into a full-blown diplomatic stand-off. It has suspended official exchanges with Japan at the level of government minister or above, including provincial leaders. The prime minister, Wen Jiabao, is unlikely even to meet his Japanese counterpart, Naoto Kan, in the sidelines of a United Nations gathering attended by both men in New York this week. A Chinese spokeswoman said the atmosphere was “not suitable”.

Japan Calls Out China on Rare Earths Ban -  Yves Smith - An ongoing China v. Japan/US row is getting interesting, and probably not in a good way. Readers may recall that we took note of a ban on shipments of rare earths raw materials to Japan, which in many ways was also a shot across the US bow. Even though so-called rare earths are not that hard to find, they are nasty to mine, and it would take years to gear up production to replace Chinese output. Developed economies have allowed China to obtain a 93% share of this market, and many of these elements are important for production of advanced technology goods. The New York Times noted that China was trying to use this stranglehold to force its way into the production of higher-value-added end products: But no ban has been imposed on the export to Japan of semi-processed alloys that combine rare earths with other materials, the officials said. China has been trying to expand its alloy industry so as to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing. China had denied that a ban was underway (the New York Times had mentioned that in its initial report; they clearly didn’t buy it, and got confirmation from executives in a separate story).

BOJ Intervenes For Second Time In A Week, Fails - The half-life of central bank interventions is getting shorter and shorter. After Shirakawa decided to show the Fed who is boss, only to be met with the biggest beatdown the dollar has experienced since March, tonight the BOJ decided to show Bernanke how it's done. Too bad the idiots at the BOJ have learned nothing from the SNB's Hildebrand, who was last seen cowering in a fetal positions, underneath his desk. After surging by 100 pips post the second intervention in a row, the "wolfpack" is back, and the yen has retraced more than half it losses in under 2 hours. This pathetic attempt to weaken its currency has just cost the BOJ another few trillions yen, while the end result is the same: a Japan whose export economy is about to be crushed, and a central bank president who will now be forced to join the ranks of the unemployed within a month.

Japan may ease policy after tankan: report -- The Bank of Japan is even more likely to ease monetary policy at next week's board meeting, following the release of a September tankan survey showing concern among businesses about the country's economic outlook, according to a report published Thursday. The Nikkei business daily reported that the central bank could "boost its ceiling for the fixed-rate funds it loans to financial institutions from the current level of 30 trillion yen." Further easing of monetary policy has been called for to help stop the yen from strengthening sharply against the U.S. dollar

Kan Says Will Sell Yen If Needed, Urges BOJ to Fight Deflation - Japan’s Prime Minister Naoto Kan said he is prepared to resume selling the country’s currency to prevent it from strengthening and called on the central bank to do more to bolster an economy threatened by deflation. “We will continue to take decisive measures as needed” on the yen, Kan said today in a policy speech in parliament that also touched on faltering ties with China. “We expect the Bank of Japan to closely coordinate with the government and take further policy measures needed to beat deflation,” he said.  The speech came a day after a report showed Japan last month spent $25 billion intervening in the foreign exchange market to combat the yen’s climb to a 15-year high against the dollar. Companies such as Nintendo Co. have cut profit forecasts as the stronger currency erodes overseas revenue.

Japan threatens more yen intervention - Japanese Prime Minister Naoto Kan on Friday renewed his threat to intervene in currency markets to cap the strong yen, while vowing to pass an extra budget to shore up the flagging economy.  "The government and the Bank of Japan carried out foreign exchange intervention. We are going to take firm measures if necessary from now on," Mr Kan said in a keynote speech in parliament.  Japan stepped into the currency markets on September 15 for the first time since 2004 to weaken the yen and help safeguard a fragile economic recovery after the unit hit a 15-year high of 82.86 against the dollar.

On the Folly of Pricing off of Sovereigns - It is common practice in the fixed income world to price debt to a sovereign benchmark.  Perhaps it is just habit, but when a country like Japan is yielding .97% for a 10 year bond (and .5% for a 7 year bond) when it is as indebted as it is something is not right.  Japan pays  about 40% of its revenues as interest expense each year even with these low yields.  To make matters even more absurd, the country has recently been active in the open market trying to WEAKEN it's currency!!!  So for a foreign investor the BOJ is actively trying to weaken how much you will get paid back over time while you are getting compensated for that risk and default risk with very measly yields.  If yields in Japan were to come up to current U.S. levels for whatever reason then 100% of Japan's revenues would be consumed by interest alone (forget principal repayment).

Japan Said to Consider Up to $55 Billion Extra Stimulus as Recovery Slows (Bloomberg) -- Japan is considering a stimulus package of as much as 4.6 trillion yen ($54.6 billion) that will be funded with existing revenue, a government official said as policy makers seek to shore up the nation’s recovery  Prime Minister Naoto Kan’s administration will aim to avoid increasing issuance of government bonds, and pay for the package by allocating higher-than-forecast tax revenue and left over funds from the 2009 budget, the official said on condition of anonymity. Savings on debt-interest costs from a slide in bond yields will also be tapped, the person said.  The plan comes as evidence mounts of the economic damage of the yen’s climb to the highest level in 15 years, with figures today showing the smallest gain in exports this year. Economy Minister Banri Kaieda said additional liquidity injections by the Bank of Japan could be effective in influencing the yen, signaling rising pressure on the bank to do more. BOJ Governor Masaaki Shirakawa said he’s ready to act if needed.

Bank of Korea reportedly intervenes to curb won — South Korean authorities bought dollars Monday to curb the won’s rise to a four-month highs, according to reports citing foreign-exchange traders.  The U.S. dollar was buying 1,148.2 won, after falling as low as 1,146.0 won earlier, its lowest since mid-May. The central bank was said to have entered the market around the 1,148.0 won level, and may have bought between 500 million and $700 million.  The Bank of Korea also reportedly took direct market action in the previous session. On Friday, authorities were said to have bought dollars in the range around 1,153.5 won to 1,155 won, in amounts estimated between $300 million and $500 million.

Korea Won Reaches 4-Month High as Yuan Gains Deter Intervention(Bloomberg) -- The won rose to a four-month high on speculation a strengthening yuan will deter South Korea from intervening to help exporters compete with Chinese rivals. The won has gained 4.3 percent so far this month, the best performance among Asia’s 10 most-used currencies, while the yuan has advanced 1.7 percent. Korean Finance Minister Yoon Jeung Hyun said Sept. 15 that gains in China’s currency, as well as the Japanese yen, may lead to a stronger won. Measures will be taken to stabilize the exchange rate when ‘exceptional” moves occur, Kim Yi Tae, director of foreign exchange at the Ministry of Strategy and Finance, said the same day. “The government is allowing the won to gain somewhat as it is wary that U.S. pressure on China to appreciate its currency will spill over to Korea,” said Seo Jeong Hun, chief economist at Korea Exchange Bank in Seoul. “Economic fundamentals and strong exports give the won more room to strengthen in the long- term.”

What should exporters’ monetary policies target? - Over the last decade, the volatility of commodity prices has led many Latin American and Caribbean countries to demand a currency regime that accommodates terms-of-trade shocks. This column compares proposals for “product price targeting” with exchange-rate and CPI targeting. It finds that product price targeting would be more effective at stabilising the real domestic prices of tradable goods.

Brazil Warns Of World Currency War - The world is in an "international currency war" as governments manipulate their currencies to improve their export competitiveness, said Guido Mantega, the Brazilian Finance Minister. Mr Mantega's speech to Brazilian industrial leaders on Monday included some of the strongest comments to date by any senior government official on the recent bout of currency intervention by countries, including Japan and China.  Brazil's currency, the real, is now the world's most overvalued major currency, according to Goldman Sachs.  Near a 10-month high against the dollar, the real continued to rise after Mantega's comment as traders bet the government may be waiting for the outcome of Sunday's presidential election before taking action.  "We're in the midst of an international currency war," Mr Mantega said. "This threatens us because it takes away our competitiveness." 

Strauss-Kahn Sees No `Big Risk' of Global Round of Currency Devaluations -- International Monetary Fund Managing Director Dominique Strauss-Kahn said he sees no major danger of an escalation of currency devaluations as countries seek to boost economic growth.  “I don’t feel today there’s a big risk of a currency war, but that’s part of the downside risks,” Strauss-Kahn told reporters at a briefing today at the Washington-based institution. “It will be one of the questions that will be very much discussed” in coming meetings of finance ministers and chiefs of state of the Group of 20.  Japan this month sold the yen for the first time in six years to spur exports and economic growth, joining countries across Asia and Latin America that have tempered gains in their currencies against the dollar. Brazilian Finance Minister Guido Mantega yesterday warned of a “currency war” and said that his government will buy all “excess dollars” in the market to curb the real’s appreciation.

Bank Of Israel Buys $250 Million In Forex - The Bank of Israel bought an estimated $250 million worth of foreign currency on Tuesday, ynet reported, in an attempt to weaken the shekel after Monday’s hike in interest rates. "They want to stop the drop in dollar-shekel," said a dealer at a large Israeli bank. The shekel weakened to 3.6830 per dollar after the fact, as a result of the intervention, from its official rate of 3.6770, which is the strongest it’s been since January 13. According to ynet, the Bank of Israel raised its interest rate for October by a quarter-point to 2% on Monday, its sixth rise since August 2009. That sent the shekel to 3.6650 per dollar.

MAS Intervened At $1.3200 Vs. US$: Source - The Monetary Authority of Singapore intervened in the forex market yesterday to sell the Singapore dollar after it hit yet another record high against the US dollar, Dow Jones quoted an unnamed person familiar with the situation.  The source said the intervention near the $1.3200 level was aimed at smoothing the fall of the greenback after the US unit fell to $1.3192 overnight.

Brazil’s finance minister: World in “international currency war” - From the Financial Times: Brazil warns of ‘currency war’ Guido Mantega, Brazil’s finance minister, said on Monday the world was in an “international currency war” ... Mr Mantega, who has made increasingly aggressive comments recently about the need to control Brazil’s currency, said governments around the world were trying to weaken their currencies to promote competitiveness."We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he said. It seems everyone wants to devalue to export more.As a reminder, Bernanke touched on devaluation in his well known 2002 speech: Deflation: Making Sure "It" Doesn't Happen Here Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.

Are currency interventions a good idea?  - the Economist - IN THE latest print edition, our writers take a long, hard look at big challenges in the world of global currencies. Multiple Briefings address the crisis in the euro zone and what might be done to secure the future of the common currency, and there is a Lead note on the globalisation of the yuan. Meanwhile, another piece tackles the sticky question of currency manipulation, brought to the fore by disputes over the value of the Chinese yuan and intensified by the news that Japan is intervening to weaken the yen: We asked the economists at Economics by invitation whether interventions were likely to help or harm the global economy. Michael Pettis warns:[W]we know how that game ends. In 1930, following France’s very successful 1928 devaluation and Britain’s tightening of trade conditions within the Commonwealth, the world’s leading trade-surplus nation passed the Smoot-Hawley tariffs in a transparent attempt to gain a greater share of dwindling global demand. This would have been a great strategy for the US had no one noticed or retaliated, but of course the rest of world certainly noticed,

The Value of Money and Joining the Currency Wars - Martin Wolf has an excellent piece in the FT about growing global currency wars and the structural problems beneath, particularly he talks about China and the great problems their economic model will have in accommodating a higher valued yuan. In his piece, Wolf brings up one of the great quotes of money politics of the last half-century, Nixon's Treasury Secretary John Connally's quip to the Europeans that the dollar "is our currency and their problem."  However, in this era of at best economic stagnation, deflation, and currency volatility, it shows up in less economic activity, hitting particularly hard the bottom, who don't have inflationary money, but no money, while the top is flooded with money of questionable value, and decreasing economic activity putting into question the value of that money. Thus what accompanies the currency war, is a growing war amongst finance as to what debt is good or bad, with people continuing to position themselves to keep hold of the good money, while forcing the bad money onto others. This also begins to come straight into politics as policy recommendations try and make sure "good" debt stays good for those who own it and the losses of "bad" debt are forced on everyone else. Right now, our financial aristocracy is the only one in this fight, it's time for us to join and make them take losses, look now folks, the currency wars are raging in your backyard.

Fears Over World Currency Battle (Video) Analysts warn of a global currency war as countries attempt to devalue their currencies to give their exports a competitive edge.

Currencies clash in the new age of beggar-my-neighbour -“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” This complaint by Guido Mantega, Brazil’s finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results. This is not the first time for such currency conflicts. In September 1985, now 25 years ago, the governments of France, West Germany, Japan, the US and the UK met at the Plaza Hotel in New York and agreed to push for depreciation of the US dollar. Earlier still, in August 1971, the US president Richard Nixon imposed the “Nixon shock”, levying a 10 per cent import surcharge and ending dollar convertibility into gold. Both events reflected the US desire to depreciate the dollar. It has the same desire today. But this time is different: the focus of attention is not a compliant ally, such as Japan, but the world’s next superpower: China. When such elephants fight, bystanders are likely to be trampled.

FT Alphaville » Currency wars: sound bite of the week - Every now and then, someone comes along and delivers a neat soundbite that captures the zeitgeist and blitzes both the mainstream media and the blogosphere. Such is the case of Guido Mantega, economist, politician and Brazil’s finance minister, who, as the FT (and just about everyone else) reports on Tuesday, has warned that an “international currency war” has broken out, as governments around the globe compete to lower their exchange rates to boost competitiveness. The quick uptake of Mantega’s comments – which appeared on nearly every financial blog on Tuesday – reflected his perfect timing, on the heels of currency interventions by central banks in Japan, South Korea and Taiwan — not to mention intensifying tensions between the US and China over Beijing’s refusal to allow its renminbi to rise. Meanwhile countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.

Currency Wars: A Fight to Be Weaker -Tensions are growing in the global currency markets as political rhetoric heats up and countries battle to protect their exporters, raising concerns about potentially damaging trade wars. At least half a dozen countries are actively trying to push down the value of their currencies, the most high-profile of which is Japan, which is attempting to halt the rise of the yen after a 14% rise since May. In the U.S., Congress is considering a law that targets China for keeping its currency artificially low, and in Brazil, the head of the central bank said the country may impose a tax on some short-term fixed income investments, which have contributed to a rise in the real.

Hostilities escalate to hidden currency war -Everyone has been thinking it, but Guido Mantega, the Brazilian finance minister, has been one of the few policy­makers publicly to admit it. His assertion that there is a currency war going on follows a recent escalation of competitive intervention in the foreign exchange markets, with heavyweight powers armed with serious weaponry getting involved. Although some argue that a generalised burst of foreign exchange intervention could act as a global monetary easing, a more widespread view is that such a round of competitive devaluation is more likely to inflame international ­tensions. It was a symbolic moment when Japan this month ended its six-year abstinence from intervening in the foreign exchange markets and sold an estimated $20bn of yen. Japan is the only one of the large industrialised Group of Seven economies regularly to have used currency intervention over the past 20 years. But its traditional rationale – that interest rates were so close to zero that conventional monetary policy was losing its strength – now applies to many more ­countries.Aside from China, whose intervention is one of the main causes of the global currency battle, several big economies have been intervening for some time. Switzerland started unilateral intervention against the Swiss franc last year for the first time since 2002 and did not sterilise it by buying back in the domestic money markets what it had sold across the foreign exchanges. In common with several east Asian countries, South Korea, host of the Group of 20 summit, has been intervening intermittently to hold down the won during the course of this year. Deliberately weakening a currency while running a strong current account surplus has raised eyebrows in Washington.Recently it was revealed that Brazil itself, which has been expressing concern since last year about inflows of hot money pushing up the real and unbalancing the economy, had given authority to its sovereign wealth fund to sell the real on its behalf

Asian Central Banks Keep Up Intervention—The central banks of South Korea, Singapore, Thailand and Indonesia were suspected of intervening in foreign exchange markets Wednesday to contain gains in their currencies, but analysts say the continued weakness of the U.S. dollar means Asian units should extend their rallies. The wave of intervention, which has continued across the region for most of this year, hasn't been strong enough to reverse the strengthening trend in Asian currencies, as many policymakers are allowing their currencies to rise slowly to limit imported inflation. That stance was reinforced after China, the top trading partner for key Asian countries, said in June it would let the yuan strengthen against the dollar—meaning that other Asian countries can maintain their export competitiveness against China even if their currencies rise a bit. On Wednesday the Thai baht and the Malaysian ringgit hit their highest levels since the 1997 Asian currency crisis, while the Singapore dollar rose to an all-time high.

Capital Controls Eyed As Global Currency Wars Escalate - Stimulus leaking out of the West's stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies. Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.  Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. "It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said.

Retaliation is Likely – For the next several years I expect the global economy will suffer from anemic consumption growth. Currency intervention is just one of many policy tools that can be used to acquire a greater share of global demand, now the world’s most valuable economic resource, along with manipulating after-tax wages, suppressing interest rates (in bank-dominated economies), raising trade tariffs, imposing import quotas, and subsidising production directly. Countries that have excess demand and very large trade deficits may or may not be justified in trying to weaken their currencies or otherwise altering the trade balance, but when countries with deficient demand do so, they almost certainly invite retaliation.And we know how that game ends. In 1930, following France’s very successful 1928 devaluation and Britain’s tightening of trade conditions within the Commonwealth, the world’s leading trade-surplus nation passed the Smoot-Hawley tariffs in a transparent attempt to gain a greater share of dwindling global demand. This would have been a great strategy for the US had no one noticed or retaliated, but of course the rest of world certainly noticed, and all Smoot-Hawley did was accelerate a collapse in global trade which, not surprisingly, hurt trade surplus countries like the US most.

Leaving the Plaza Accord behind -Once again, Japan’s experience post-Plaza Accord has been brought up as a mistake to be avoided, against the backdrop of the escalating pressures on China to revalue the renminbi.This time it was Chinese economist and member of the Central Bank’s monetary policy committee Li Daokui, who said last week that "China will not go down the path that Japan did and give in to foreign pressure on the yuan's exchange rate.” I personally find the parallel misplaced and the reason is that it confuses the legitimacy of the objective with the (in)appropriateness of its implementation. So, the mantra linking the Plaza Accord with Japan’s subsequent economic malaise goes like this: The large revaluation of the yen prompted large amounts of speculative capital inflows into Japan which, together with a loose monetary policy, fuelled an asset bubble that then burst pretty spectacularly. In my view, the key weakness of the argument is in its presumed causality from the yen’s appreciation to Japan’s asset bubble. Of all the factors cited in the literature as contributing to the asset price boom and then bust, the yen’s move is at best an incidental one.

Plaza II is the wrong approach for global rebalancing - In many respects, the Chinese renminbi looks increasingly like the Japanese yen thirty years ago. The US Congress is in the process of passing legislation enforcing tariffs on imports from China, as US politicians blame the undervalued renminbi for their own economic problems. President Obama has openly criticised China for “having not done enough”.  How should policymakers deal with global imbalances? This column argues that a return to the Plaza Accord of the 1980s with an exclusive focus on the exchange rate could well dilute the G20’s other agendas and may not even work in practice. The best solution is instead to focus on structural reforms.

What drives reserve accumulation (and at what cost)? -Total foreign exchange holdings are larger than ever, largely due to reserve accumulation by emerging and developing economies. This column investigates the driving forces behind the accumulation of foreign exchange reserves and finds that exchange-rate smoothing, rather than precautionary stockpiling, is the main driver.

How to stop currency manipulation without a trade war - With the US threatening to label China a “currency manipulator”, this column presents a plan to address global imbalances without risking a trade war. It proposes a “reciprocity” requirement – if the US can’t buy Chinese government bonds, then China can’t buy US bonds either.

France and China hold talks on exchange rates -  France and China have been in talks for the past year as part of an effort by Paris to heighten co-ordination of exchange rates to promote stability of the international monetary system in the wake of the financial crisis.The talks and their content have been kept secret, in an attempt to draw China into a discussion on global currency co-ordination, a subject that Beijing has been reluctant to countenance in the past.  In an ambitious move reminiscent of the currency accords of the 1980s, President Nicolas Sarkozy hopes to open a debate on the subject when France takes over the presidency of the G20 group of leading nations in November, according to people familiar with the matter.  France has long advocated greater global economic governance. This summer, in a speech to French ambassadors on France’s priorities for the G20, Mr Sarkozy called for a “new framework for discussing currency movements”.  Mr Sarkozy is hoping to win Chinese support for a common approach during discussions with Hu Jintao in November, when the Chinese president visits Paris. The move comes against the background of rising concern over exchange-rate interventions by a host of countries, most notably China but also Japan and South Korea, to prevent their currencies from rising against the dollar.

From currency warfare to lasting peace - The 'international currency war' mentioned by Brazil's finance minister poses massive dangers for the world trade and financial systems. This column by one of the world's most respected international economist argues that there is a better way. The G3 should engage in quantitative easing so they all can export more to each other. For the emerging markets, the danger lies in inflation, asset bubbles and trade retaliation. To shield their key manufacturing sectors, they should encourage the domestic demand for manufactures.

Gold is the final refuge against universal currency debasement – States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.  “We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker “It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Is the world in a trade war? - Protectionism has been the worst nightmare of policymakers since the earliest days of the financial crisis. It has become an article of faith among economists that protectionist policies during the 1930s exacerbated the Great Depression, and everyone knows full well that adopting similar practices today would have the same disastrous impact on the Great Recession. But we have to ask if the world's leaders are repeating the same mistakes anyway. Guido Mantega, Brazil's Finance Minister, thinks we are. In comments earlier this week, Mantega declared that the world is already involved in "a trade war and an exchange rate war," which would force Brazil to take action to defend its own economic interests. It's hard to argue Mantega‘s wrong. Though there hasn't yet been a single, sweeping event signaling a worldwide descent into protectionism -- like the passage of the notorious Smoot-Hawley tariff of 1930 – there has been mounting evidence that policymakers around the world are increasingly flirting with beggar-thy-neighbor policies. When these dots are connected, they form an arrow pointing in a very dangerous direction for the entire world economy.

How to Close WTO Doha (Nearly a Decade On)  Here's something that I just missed from the ever-interesting Foreign Affairs which always has something good to read (even if I disagree with the contributors once in a while). In case you're still counting--and even I tend to lose count for obvious reasons--we are nearing the tenth year of Doha Development Agenda negotiations with nary a sign of it nearing completion. Began in 2001 partly in sympathy for America after the 9/11 attacks, let's say the rest of the world hasn't given the red, white, and blue a free pass in the trade realm since then. What is interesting is how these two authors focus on the two big players who now arguably hold the cards in world trade. In particular, what should be done to make this a genuine development round? On one hand we have the world's biggest largest exporter of goods and services as well as its largest importer of the same (America). On the other we have the world's largest merchandise exporter, having recently surpassed Germany, so let's read the authors' prescriptions for Chimerica:

Growth reducing structural change - I have been doing some work on the relationship between structural change and economic growth in different parts of the world, and some of the early results are too striking to wait for the paper to come out. Here is a chart that provides a key insight on why Latin America has done worse than Asia since 1990. The chart decomposes labor productivity growth in the two regions into three components: (i) a “within” component that is the weighted average of labor productivity growth in each sector of the economy; (ii) a “between” component that captures economy-wide gains (or losses) from the reallocation of labor between sectors with differing levels of labor productivity; and (iii) a “cross” component that measures the gains (or losses) from the reallocation of labor to sectors with above-average (below-average) productivity growth.(The countries identified by “HI” are the high-income countries.) Note first that Latin America does better than Asia in terms of the “within” component (the blue bars).

World Bank President starts brawl about research - World Bank President Robert Zoellick gave a speech at Georgetown University today calling for the “democratizing” of development research.  Bob Davis at The Wall Street Journal reports some reactions:Nobel Prize-winning economist Michael Spence, who led a commission on economic growth, said Mr. Zoellick’s comments are “generally not only in the right direction, but very useful.” Harvard economist Dani Rodrik…. also praised the World Bank president. “The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints…and focus on evaluation but not at the expense of the big questions,” Mr. Rodrik said.But the reaction wasn’t unanimous. New York University economist William Easterly…called Mr. Zoellick’s comments “amazingly presumptuous.” He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them “to reach the ‘right’ conclusions,”

Zoellick Embraces 'Multipolar' World - World Bank president Robert Zoellick, speaking ahead of next week's World Bank and International Monetary Fund annual meetings here, critiqued both development economics generally and the lack of transparency of his own institution.  The speech picked up on some of the themes of the speech he gave in the run-up to the last World Bank/IMF meetings, in April.  "It's time we recognize the new economic parallel," he said then. "If 1989 saw the end of the 'Second World' with communism's demise, then 2009 saw the end of what was known as the 'Third World'. We are now in a new, fast-evolving multipolar world economy."

The European crisis gets quietly worse - Edward Hugh has a must-read overview of the euro crisis as it stands right now: not nearly as panicked as when everybody was concentrated on Greece back in May, yet in many ways worse than that.Greece still seems certain to default sooner or later, and its bonds are trading at levels very near to those seen in May. Spain has improved a bit — but that tiny improvement seems to have been accompanied by a significant rise in complacency on the part of the government, so it’s unlikely to last long. And both Ireland and Portugal have deteriorated significantly. Ireland’s debt is trading at worse levels than ever before, its economy is still in recession, and its banking system is a mess; in Portugal, the public deficit is likely to reach 9% of GDP this year, and the country’s debt spreads are also looking distressingly similar to Greece circa April 2010.

You can't keep a good crisis down - EDWARD HUGH has written a long post that seems to have refocused blogospheric attentions on the developing crisis situation in Europe. It's worth reading, though I tend to be slightly more optimistic about the situation than Mr Hugh. To catch you up briefly, those who asserted that Europe's spring debt crisis was over were wrong—as, I think, most people recognised at the time. The solutions adopted earlier this year bought time for troubled countries, and especially Greece, to begin closing their fiscal gaps while the global economy recovered. But they did not solve the underlying problems, and it is no surprise that fears have returned. While bond yields have risen in a number of countries, the action has been concentrated in Ireland and Portugal. Ireland's troubles stem from the poor state of the economy. Continued contraction has been hard on Irish businesses, which has been bad for Irish banks, which has been bad for Ireland's fiscal situation, which has been bad for Irish bond yields. In Portugal, the problem is largely political. Unlike Greece and Ireland, Portugal has had trouble identifying ways to trim its fiscal gap.

Irish, Portuguese Bonds Slide on Bank-Debt Concern-- Irish and Portuguese bonds slid, sending yields on the debt to records relative to German bunds, on concern the cost of bailing out the region’s banks is rising. Stocks and U.S. futures fell and the euro weakened. The extra yield, or spread, investors demand to hold Ireland’s 10-year securities instead of similar-maturity benchmark German debt widened 22 basis points to 452 basis points as of 9:37 a.m. in London. The Portuguese-German spread increased 24 basis points to 439 basis points. The euro weakened against 12 of its 16 most-traded counterparts. Oil and copper dropped and cotton extended gains to a 15-year high. The cost of insuring Irish sovereign debt against default rose to a record, more than doubling in the past two months, as Standard & Poor’s said the bailout for Anglo Irish Bank Corp. may exceed its earlier forecast of 35 billion euros ($47 billion). Spreads on bonds of so-called euro-area peripheral nations have widened even after the European Union and International Monetary Fund put in place a $1 trillion financial backstop for the region’s most indebted nations.

Irish response to crisis will make economy stall - Ireland's most high-profile economist has claimed the country's response to its financial crisis is "like watching a slow car crash".  The economy contracted in the second quarter while a bond auction on Tuesday revealed how expensive the country's runaway deficit has become. Ireland's Central Statistics Office said GDP had dropped by 1.2 per cent between April and June.  The news added weight to the growing clamour within Ireland for the government to stop its harsh fiscal tightening measures and focus on increasing liquidity and stimulating the flagging economy.

Why Ireland can't afford to punish reckless lenders to its banks - Take a look at the latest figures from the central bankers’ bank, the Bank for International Settlements, on just the exposure of overseas banks to Ireland (in other words, credit provided by pension funds, hedge funds and wealthy individuals would be on top of this). Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively. To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it? As for direct bank-to-bank lending, overseas banks have provided Ireland’s banks with €169bn of loans, which is also greater than Irish GDP. Here’s the point: an economy as open and as dependent on foreign finance as Ireland’s cannot afford to alienate its creditors. If those overseas lenders asked for their money back now, Ireland’s recent fall back into a modest economic contraction could spiral into dark deep prolonged recession or even depression.

Ireland Faces Double Dip, Mulls Restructuring Of Junior Bank Debt - Irish borrowing costs have surged to a post-EMU record after Ireland's recovery buckled over the summer and Dublin said creditors of Anglo Irish Bank may be asked to "share" losses, a warning to bondholders that the dam may at last be breaking on debt restructuring in the eurozone. The Irish economy contracted at a 1.2pc rate in the second quarter, making Ireland the first country since the Great Recession to face a double-dip downturn.  The setback is a blow for hopes that Ireland can slowly grow its way out of debt, and may renew concerns that fiscal austerity without other forms of relief risks tipping the economy into a self-reinforcing spiral.

Anglo Irish Bank downgrade raises pressure on Ireland - A critical week for the Irish economy started badly today after a ratings agency issued a deep downgrade on Anglo Irish Bank, the most troubled bank in the former "Celtic Tiger" economy, hitting the euro and increasing the price the country must pay to borrow on the money markets. As speculation mounted that the embattled Irish government is poised to admit that it has cost €35bn (£30bn) to bail out Anglo Irish – more than a fifth of the country's GDP – the main opposition party seized the moment by claiming it would try to force a snap election. While Ireland batted off concerns about its economy, the UK's coalition government was basking in support from the International Monetary Fund, which concluded that the planned cuts in public spending would not derail growth.

Finally, the Irish are forcing the banks’ bondholders to take losses - Ordinary bondholders will get paid, but the Irish are now ready to bleed the subordinate bond holders; S&P downgraded the subordinate bonds ahead of today’s decision on the recapitalisation of Anglo-Irish Bank; Lenihan defends decision to bail out Anglo-Irish, as failure to act would “bring down” Ireland; Ireland also expected to take majority stake in Allied Irish Bank; Berlusconi wins confidence vote, but must rely on splinter groups to be able to government; Umberto Bossi presses for new elections; France is embracing a super-soft version of austerity; anti-austerity protesters descended on Brussels; demand in the ECB’s three month tender was lower than expected; ECB warns that Basel III may actually increase systemic risk; the ECB said macroeconomic surveillance will be done behind closed doors (in other words, there won’t be any); Paul Krugman gets really depressed about central bankers who advocate monetary exit strategies; Wolfgang Schauble, meanwhile, is back in hospital, for another four weeks.

Cost of borrowing hits another record high - THE GOVERNMENT’S borrowing costs hit a record high again yesterday after two credit rating agencies warned that Irish State debt faces further downgrades. The cost of State borrowing jumped as the yield or interest rate on 10-year Government bonds jumped by a quarter of a percentage point to 6.72 per cent. The bond yields are now trading at levels similar to Greece at the start of April – only a month before the Athens government sought international support. The yield premium investors demand to hold Irish 10-year bonds instead of benchmark 10-year German bonds reached a record 453 basis points (4.53 percentage points) before narrowing to 448 basis points.

Irish Woes Get Worse - McArdle - It's hard to know what to say about Ireland's revelation that it expects the cost of cleaning up Anglo Irish Bank to come to a staggering 21% of GDP.  Profanity is too weak, really.  The total cost of the bank bailouts looks as if it will be well over a quarter of GDP.  Needless to say, as Tyler Cowen notes, this rather calls into question the notion that austerity is making Ireland's problems worse.  The size of the bank rescue may well turn out to be too large for the government to handle.  Yet the government has little choice.  Ireland is massively dependent on foreign credit, and if it flees--well, the second letter in the country's name might as well be a "c".  That means cutting the budget elsewhere to send a credible signal to the bond market--because without that credible signal, an even worse financial crisis seems like the most likely outcome.

Can Ireland's big bank bailout defuse its debt crisis? - In an attempt to reverse a recent, rapid deterioration of investor confidence, the government of Ireland today released new estimates of the costs of rescuing its sickened banking sector. You might want to sit down because the numbers are pretty ugly. Nationalized Anglo Irish Bank, the biggest source of investor concern, will require, in total, as much as $47 billion in capital, in a worst-case scenario, significantly more than earlier projections (though the bank has received most of that sum already.) In all, the government's support for the banks will reach 20% of GDP this year. That's going to slaughter the nation's financial position, propelling the budget deficit to 32% of GDP in 2010 and government debt to almost 99% of GDP. The announcement comes at an especially sensitive moment for Ireland. The yields on its sovereign bonds have been rising for weeks, setting new record after new record, as investors continue to fret over the government's future solvency. Yet the hope of the Irish government is that coming clean on the extent of its banking bailout will remove uncertainty and bolster investor confidence. Finance Minister Brian Lenihan was clearly using the announcement as an opportunity to show the government's firm resolve to fix its financial house. Here's what he said in a statement:

Irish Bank Funding Boosts Budget Deficit To 32% GDP - Ireland's financial crisis loomed large again Thursday as the government said additional costs of propping up the country's banks could stretch its government budget deficit to nearly a third of the country's total economy -- a record for any eurozone member. The Central Bank of Ireland announced early Thursday that the state-owned Anglo Irish Bank Corp., Ireland's most troubled financial institution, will need total capital of EUR29.3 billion and then an additional EUR5 billion in a "stress scenario." The central bank also said Allied Irish Banks PLC (AIB) will need an additional EUR3 billion by year-end. It was originally charged with raising EUR7.4 billion in capital by the end of 2010. Lenihan said the state will become the majority shareholder in the bank

Ireland's Central Bank Puts Final Price On Anglo Irish Rescue - ANGLO Irish Bank needs 29.3 billion euros to prop itself up and another 5 billion euros in a "stress scenario", it was revealed today. The announcement was made by the Central Bank of Ireland. The fate of the troubled bank - nationalised in January 2009 and today Ireland's most troubled financial institution - has weighed heavily on international bond markets. The spread between the yields on 10-year government bonds issued by the German and Irish governments widened to a fresh high this week, as investor confidence in Ireland wavers. But putting a so called “final” price tag on the cost of bailing out Ireland's diseased banking system is hoped to clear a major black cloud hanging over the Irish economy. Anglo previously indicated it would cost about €25bn ($35.17bn) to restructure the bank.

The bailout to end all bailout - Ireland outlines the final bailout, with a bill that takes the 2010 budget deficit to 32% of GDP; government also includes a worst-case stress test scenario under which property price would not recover; Ecofin applauds the measures, and Klaus Regling says Ireland will not need to tap EFSF now; Lenihan remains committed to reaching 3% deficit target by 2014, and promise massive austerity measures, but hopes that schools and hospitals might be spared; Reuters Breakingviews says the exercise reveals deep flaws in the European stress tests; EU pledges to do more stress tests in the future; in all this turmoil, European money market interest rates effectively doubled, as demand for ECB funds is softening; Christine Lagarde effectively vetoes deal on hedge funds; EU to reveal its proposals on a revamp of the IMF’s voting structures today; Spain outlines new austerity measures in the budget legislation today; Moody’s has now also downgraded Spain’s sovereign rating; BoE’s Tucker calls for G20 action on resolution policies for large cross border banks; Sebastian Dullien and Daniela Schwarzer, meanwhile, welcome the European Commission’s proposals to deal with macroeconomic imbalances. [more]

Ireland will pay up to $70B to clean up banking mess - Ireland revealed it faces a bill of up to €50-billion ($70-billion) to clean up its banks, equating to €11,000 ($15,437) per person in a recession-ravaged country already reeling under savage budget cuts. The latest bill will send Ireland’s budget deficit to 32% of its economic output this year. Unveiling the latest in a string of bank bailouts, Finance Minister Brian Lenihan promised Thursday that Ireland had arrived at the endgame for dealing with massive property losses but warned years of pain lay ahead for taxpayers. “We have to bring closure to this matter and that is what we have done today,” said Mr. Lenihan, charged with picking up the pieces of Ireland’s property-fuelled “Celtic Tiger” economic boom. “Of course these figures are horrendous but they can be managed over a 10-year period.”

State can no longer borrow money, claims Noonan - IRELAND CAN no longer borrow on the international markets because its “sovereign creditworthiness is gone”, Fine Gael finance spokesman Michael Noonan has said. He said that “Anglo Irish Bank was supposed to be too big to fail”, but “it was too big to save. That is the real position.”Mr Noonan warned that “we have almost reached the point of the rescue of Anglo Irish Bank bringing down this country with the Minister being forced this morning to announce the closure of the bond markets. “The closure of the bond market means the sovereign State is in deep trouble because it cannot borrow money.”

What I don't understand about Ireland - What does anyone keep his or her money, in any sizable amount, in an Irish bank when you can have a euro-denominated account in a German or English bank?  Admittedly the interest rate on Irish deposits may be higher, but that has to be matched by a comparable rate of return on bank assets, which right now doesn't seem possible for Ireland.  (One fear I have is simply that it isn't and that Irish banks are falling more deeply under.)  No matter what bailout is promised, at the end of the day your "euro" might no longer be a true euro. Yet once deposits flee Irish banks in large enough numbers, the Irish government has to suspend convertibility into the euro or in other words restrict capital movements, whether that is legal or not under EU law.  And then suddenly Ireland has a new currency, whether they admit it or not. There is also a contagion effect.  Let's say that Portugal, Spain, Ireland, and Greece are the weak members of the eurozone.  A pending bank run in any one of these countries could trigger a convertibility suspension in the others.

Ireland: A problem soon to be shared - Small countries shouldn't make gigantic bets. That's the lesson that Iceland learned early. When the crisis hit, the country's three largest banks had foreign debts worth more than six times the country's GDP. There was never any prospect of Iceland's taxpayers covering that lot - and they didn't.  In Ireland, the decision was less clear-cut. There was always the possibility - however slim - that the Irish economy would be able to come through the crisis without stiffing the foreign creditors that lent the country the equivalent of five times its annual GDP. So, Dublin has had a slow-motion crisis rather than an Icelandic bonfire of the creditors - and Ireland's roughly 2 million taxpayers are picking up the tab for tens of billions of misplaced private bets. But, as the finance minister Brian Lenihan knows well, Ireland has one crucial advantage which Iceland lacked. It is a member of the euro. That means its problems are also the eurozone's. It also means that the European Central Bank (ECB) - and other eurozone governments - will have a big say in where Ireland goes from here.

Cement Mixer Used in Irish Bank Protest, and Workers Strike in Spain-- A cement mixer has rammed into the gates of the Irish parliament in an apparent protest at the country's  catastrophically expensive bank bailout. Police said they had arrested a 41-year-old man at the scene
Wednesday but gave few other details. The truck hit the guarded gates of Ireland's legislature around 7:15 a.m.(0615GMT). Written across the truck's barrel in red  letters were the words: "Toxic Bank Anglo." It is an apparent reference to Anglo Irish Bank, which was nationalized last year to save it from collapse. The bank owes some euro72 billion ($97 billion) to depositors worldwide, leaving Irish taxpayers with a mammoth bill at a time when people are suffering through high unemployment, tax hikes and heavy budget cuts. The truck is still being removed.

Spanish spectres in the market -You know that when the market rumours of sovereign downgrades have started up again, the crisis really is back to bother Europe. First on Tuesday — Spanish business daily Expansión reports that the market is expecting Moody’s to downgrade Spain below AAA this week — when it concludes the review it announced back in June. The rating agency has had Spain on AAA since 2001, but both Fitch and Standard & Poor’s have already cut the country to AA. A Moody’s downgrade would be interesting timing — Spain’s government has only just issued its ‘austerity’ budget for 2011, which was reasonably tough, but perhaps over-optimistic on its growth projections, as the FT noted. Still, according to Expansión (Google translated from the Spanish):

Spain Has First General Strike Since 2002 as Europe Marches (Bloomberg) -- Spanish workers disrupted transport and television broadcasts in the first general strike in eight years as demonstrators marched in a dozen European cities against government spending cuts.  More than 100,000 protesters descended on Brussels before a meeting between union members and European Commission President Jose Barroso, organizers said. In Athens, rail, communications and port workers struck. Police in Dublin made an arrest after a truck damaged the front gates of the parliament building.  Spain’s two biggest unions said 72 percent of workers joined the strike, including 65 percent in the energy sector and 82 percent in the airline industry, according to Jose Javier Cubillo of the UGT union. Labor Minister Celestino Corbacho said the strike had a “moderate” impact, with 7.5 percent of state workers and “almost 100 percent” of auto workers joining the walkout. Power demand was 17 percent below a forecast made by grid operator Red Electrica Corp. SA based on usual demand, as of 6:20 p.m.

Nationwide Strike Cripples Spain - Much of Spanish industry ground to halt, shops closed and transportation services slowed Wednesday during Spain's first nationwide strike in eight years as unions challenge Prime Minister José Luis Rodriguez Zapatero's austerity push and labor-market overhaul.  Comisiones Obreras, Spain's largest union, calculated that around or 70% of Spanish workers have walked off their jobs. "The strike has been an undoubted success," At a separate event, Spanish Labor Minister Celestino Corbacho responded that the strike "is having a different impact on different industries and regions." He said the government won't have overall data until the end of the day, but that while 86% of workers for the Madrid bus company had participated in the strike, just 17% of metro workers had.

Spain's Credit Rating Set for Moody's Cut as Economy Suffers-- Spain’s top Aaa credit rating, held since 2001, probably will be cut one level by Moody’s Investors Service as the euro region’s fourth-biggest economy struggles to grow, according to investors managing about $700 billion.  Five out of eight money managers surveyed predicted a one- step reduction to Aa1, with the rest forecasting a two-level cut to Aa2. The decision may come this week after Moody’s put Spain’s debt on review for a possible downgrade on June 30, saying it would conclude the analysis within three months.  Moody’s said then it will take several years for Spain’s economy to recover from the collapse of its real estate boom, predicting gross domestic product will expand an average of “slightly above” 1 percent between 2010 and 2014. A one-step cut would put Moody’s ranking on par with Fitch Ratings, which has a AA+ classification for the Iberian nation, while a two- level reduction would equal Standard & Poor’s.

Moody's cuts Spain debt rating to Aa1 — Moody’s Investors Service became Thursday the last of the three big ratings agencies to downgrade Spanish sovereign debt, cutting the rating to Aa1 from Aaa, with a stable outlook. Moody’s cited weak growth prospects, a “considerable deterioration” in government finances and worsening debt affordability as key reasons for the downgrade. The move, though widely expected, comes a day after the first general strike for the country since 2002, with thousands of protestors taking to the streets across the country to protest austerity measures.

Spain Cooking the Books? - An anonymous blogger is apparently accusing Spain of massively distorting its GDP figures, turning a 17% decline since the recession began into a more modest 3%.   If true, this would explain a few things, like how Spain's relatively modest decline in GDP has managed to coincide with an unemployment rate of 20%, which is near what the US experienced in the deepest depths of the Great Depression.  (Although since Spain had a very high baseline unemployment rate of around 8% in 2007, that's not quite as bad as it sounds.)  It would also, of course, seriously weaken the argumentum ad Hispania for stimulus. More seriously, however, it would indicate a fairly massive fraud on the part of the government, and would very likely trigger another round of frightened bondholders demanding huge premiums to hold Spanish debt.  That would be very bad news for both Spain, and the euro.

A moment of truth in Italy - Berlusconi calls confidence vote tonight, as Italy’s political drama reaches its next climax; analysts expect him to win, while a loss would either trigger new elections, or the imposition of a caretaker administration; Italian and Portuguese spreads reach new highs, as investors are concerned about further downgrading; DSK warns of a jobless recovery; DSK also says he expects a European proposal for IMF reform next week; German government takes steps to discuss the future of the Landesbanken – but with no results yet; Irish central bank governor says euro was part of the illusion that sustained the credit bubble; German consumption reaches pre-crisis levels, with further increases projected in 2011; Wolfgang Munchau says Hartz reforms have made German workers more risk-averse, placing job security over wage increases; Laurence Boone says EU proposals for macroeconomic surveillance are insufficient to prevent the next crisis; Dominique Moisi says Sarkozy may well drown in his political troubles; Martin Wolf, meanwhile, explains why current global capital flows will lead to a devaluation of emerging market currencies.[more]

French Public Sector Debt Grows To 82.9% Of GDP At End 2Q --France's public-sector debt grew sharply by the end of the second quarter to EUR1.592 trillion, representing 82.9% of gross domestic product, as lingering economic stimulus spending from the recent global recession and expenditures for social programs, especially due to high unemployment, swelled government expenditure. The closely watched debt-to-GDP ratio was bigger than the 80.4% at the end of the first quarter and substantially above the 74.2% at the end of last year's second quarter. But that increase had generally been expected. The government Wednesday published its draft 2011 budget, which sharply narrows the public-sector budget deficit, but leaves debt-to-GDP ratio around current levels. The debt data were published under the so-called Maastricht guidelines regulating debt in the European single currency zone. The Maastricht rules call for euro-zone members to keep their public debt at 60% of GDP or less. However, most euro-zone countries are well beyond that level due to heavy stimulus spending during the recession

BBC News – EU austerity drive country by country - A new austerity drive has been sweeping across Europe, as governments struggle to trim huge budget deficits and the 16-nation eurozone races to reassure sceptical markets.  Some of the biggest protests have been seen in France but industrial action is making headlines elsewhere too. With all EU governments aiming for maximum budget deficits of 3% of GDP by 2013, what belt-tightening measures are they taking?

The IMF’s foolish praise for austerity -“The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery.” Thus does the staff of the International Monetary Fund assess the UK’s fiscal strategy. George Osborne, the chancellor of the exchequer, must be ecstatic. This is more than an evaluation. It is a love letter. Yet it is also hardly a surprise. It would be extraordinary for the IMF to attack a sharp fiscal tightening by a member of the group of seven leading high-income countries with a large structural fiscal deficit. IMF is often thought to stand for “it’s mostly fiscal”. Dog bites man.

Our Acute Case of Fiscal Madness - Krugman - Future historians will marvel at the austerity madness that gripped policy elites in the spring of 2010. In a flurry of blind panic and irrational exuberance, organizations from the European Central Bank to the Organization for Economic Cooperation and Development suddenly abandoned everything we had learned, at a bitter cost, about economics during recessions and decided that fiscal austerity was the way to go while the world was in the depths of a slump — indeed, many claimed that spending cuts would actually be expansionary. Not only was there an illogical push for austerity, but there also emerged a widespread demand for central banks to raise interest rates in the face of falling inflation and high unemployment. This madness was exemplified by the O.E.C.D.’s economic outlook report in May, which supported these ideas. But the O.E.C.D. has suddenly changed its tune. “In the short term, the weakness can be dealt with [through] the prolongation of some of the monetary accommodation in some countries,” the O.E.C.D.’s secretary general, Angel Gurria, told Reuters on Sept. 17. This is as close as such organizations ever get to admitting that they were wrong. And speaking of the rewards of austerity, I think it’s worth checking to see whether there have been any.

Austerity Protests Across Europe (slide show) People demonstrate against austerity measures on Wednesday, Sept. 29, 2010 in Brussels. Police erected a ring of steel around the EU headquarters as tens of thousands of protestors took to the streets in a worker backlash against painful spending cuts. It was the biggest such march since 2001 when 80,000 people walked in the Belgian capital against an EU plan to fine governments running up deficits.

Europe's Austerity Anger Grows - More than 100,000 marchers converged on Brussels from across the EU to protest austerity measures on Wednesday, while Spanish unions took the extraordinary step of breaking ranks with Spain's socialist government by launching a general strike. "Workers are on the streets today with a clear message to Europe's leaders," said John Monks, head of the European Trade Union Confederation. "There is a great danger that workers are going to pay the price for the reckless speculation that took place in financial markets. You have to reschedule these debts so that they are not a huge burden and cause Europe to plunge down into recession," he said, reflecting growing bitterness among ordinary people that they are bearing the brunt of austerity while bondholders have been shielded from losses.

Austerity whips up anger, protests mount in Europe - Painful cuts by overspending EU countries come head to a head with mounting social anger on Wednesday when labour leaders call angry workers onto streets right across the continent. Set for its largest Europe-wide protest for a decade is Brussels where labour leaders are planning to bring 100,000 people from 30 countries to say "No to austerity!" "We will demonstrate to voice our concern over the economic and social context, which will be compounded by austerity measures," John Monks, general secretary of the European Trade Union Confederation. The protest, the biggest such march since 2001 when 80,000 people spilled into the EU capital, is being held to coincide with a plan to fine governments running up deficits.

Brussels braces for huge anti-austerity protest - Thousands of protesters from across Europe are taking part in a mass demonstration in Brussels against spending cuts by some EU governments.  Other protests against austerity measures are being held in Greece, Italy, Ireland and Latvia.  A general strike is also taking place in Spain, hitting transport and other public services. Trade unions say EU workers may become the biggest victims of a financial crisis set off by bankers and traders.Many governments across the 27-member bloc have imposed punishing cuts in wages, pensions and employment to deal with spiralling debts. In Greece and the Republic of Ireland unemployment figures are at their highest level in 10 years, while Spain's unemployment has doubled in just three years.In Britain the government is planning to slash spending by up to 25% in some areas, while France has seen angry protests against a planned increase in the minimum retirement age. The European Trade Union Confederation (Etuc) said it hoped that about 100,000 people would march on EU institution buildings in the Belgian capital.

Is Belgium next? - Belgian bond spreads have been rises at the fastest rate since the break-down of talks to form a government, as yield premium is now 90bp; there is no sign of agreement at van Rompuy’s task force, as some countries reject the tough new penalty rules; Peter Praet calls for a resolution regime that applies specifically to cross-border banks; European banks will have to rollover some €225bn this week; German warning strikes signal an end to excess wage moderation; El Pais wonders whether the Spanish growth projections are too optimistic; Wolfgang Munchau takes a closer look at the EFSF, and countries that use it will most likely end up defaulting; it emerged, meanwhile, that the eurozone had set up a crisis task force – the problem was that it could agree on anything.[more]

Germany Shocked by 'Disproportionate' Police Action in Stuttgart - A hardline police operation against demonstrators protesting against a new railway station project in Stuttgart has shocked Germany, after more than 100 people were injured by tear gas and water cannon. German commentators argue that the police went overboard and warn of more violence to come. Around 600 police used water cannon, tear gas, pepper spray and batons in an operation against over 1,000 demonstrators in the southwestern city of Stuttgart on Thursday. The activists had tried to use a sit-down protest to prevent the city's Schlossgarten park from being cleared so that work could begin on felling trees in the park as part of construction work on the new station. Thursday's protests were attended by a broad cross-section of society, including pensioners and children.

UN Agency Warns of Unemployment-Related Unrest through 2015 - Yves Smith - The specter of demonstrations in Europe are not only likely to become a regular news item, but other economies have high odds of similar social stresses, a UN agency forecasts. The International Labour Organisation has pushed back its estimate of when global employment will return to pre-crisis levels back to 2015. Given the widespread signs of discontent, pressures can only intensify. From the Guardian: The United Nations work agency today warned of a long “labour market recession” and noted that social unrest related to the crisis had already been reported in at least 25 countries, including some recovering emerging economies. Crisis-hit Spain faced its first general strike in eight years this week as unions protested against the government’s austerity measures and labour reforms. The strike on Wednesday coincided with protests in Greece, Portugal, Ireland, Slovenia and Lithuania, as well as demonstrations in Brussels by tens of thousands of workers from across Europe as part of a European day of action against public spending cuts.

Riksbank’s Svensson Warns Against Interest-Rate Rises (Bloomberg) -- The Swedish Riksbank’s most outspoken board member on the risks of deflation said central banks shouldn’t raise rates to curb asset-price growth when inflation is low -- a path his own bank is pursuing.  “The policy rate is an ineffective instrument for influencing financial stability,” Riksbank Deputy Governor Lars E. O. Svensson said in a speech delivered in Tokyo and published on the bank’s website yesterday. “The use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development.”  Sweden’s central bank on Sept. 2 raised its benchmark repo rate a second time in as many months in part, it said, to cool the housing market. Inflation, which has lagged behind the bank’s 2 percent target since December 2008, slipped 0.2 point to 0.9 percent last month.

Das on Eurozone Outlook - Yves Smith - I’m running this clip of Satyajit Das for several reasons. First, it gives a very good big picture view of the problems with the Eurozone rescue fund, and is germane given that those concerns are coming to the fore (witness our post earlier today). Second, more generally, it gives readers a chance to see him in action (since he is based in Sydney, he doesn’t get the play he deserves). He’s direct and able to cut to the heart of an issue quickly (and he is used to good advantage in Inside Job). Third, this serves as an excuse to tell you to buy his book, Traders, Guns, and Money: Knowns and Unknowns in the Dazzling World of Derivatives, if you haven’t done so already. It’s a classic precisely because it accomplishes the difficult task of making a complex subject accessible to laypeople, in this case the netherworld of derivatives.

Doubts About Eurobailouts Come to the Fore -- Yves Smith - A brief recap of a couple of useful sighting on the “rising anxieties in Europe” front. Edward Hugh has a very thorough update (bond spread trends, underlying drivers, an astute discussion of politics) leavened by a great deal of wry humor (”So, like former US Treasury Secretary Hank Paulson before them, Europe’s leaders, having armed their bazooka may soon need to fire it.”). Wolfgang Munchau at the Financial Times takes a hard look at a piece of the puzzle most have avoided, namely the CDO structure that the Eurozone members used for their €440 billion bailout fund. He’s pushed some numbers around, and as far as he can tell, it will only be able to offer costly funding, and in much smaller amounts than advertised:

Satyajit Das: A CDO Cure for Europe? - Yves Smith - Increasingly attention may focus on the European Financial Stability Facility (”EFSF”), a key component of Europe’s financial contingency plan. Klaus Regling, the head of the EFSF and known informally as the CEBO (”Chief European Bailout Officer”), had a brief stint at Moore Capital, a macro-hedge fund, consistent with the fact that the EFSF is placing a historical macro-economic bet. In order to finance member countries as needed, the EFSF will need to issue debt. The major rating agencies have awarded the fund the highest possible credit rating AAA. The EFSF structure echoes the ill-fated Collateralised Debt Obligations (”CDOs”) and Structured Investment Vehicles (”SIV”). The Moody’s rating approach explicitly draws the analogy and uses CDO rating methodology in arriving at the rating.

The biggest losers of the financial crisis - Most of the countries and regions that had a “good” crisis had lived through near-death experiences — in Asia in the late 1990s and in Sweden in the early 1990s. They cleaned house and changed their behavior. Read about the countries that were the big winners from the crisis on The countries that have lost the most lived way beyond their means — subsidized by speculative capital or the umbrella of a strong currency (the euro) to give their citizens a lifestyle they hadn’t earned in competitive world markets. Government entitlements grew, along with complacency. Eventually, the merry-go-round stopped and the horses came crashing down. The biggest losers came from the European periphery, whose worst basket cases — Greece, Ireland, Iceland, and so on — have become to this decade what Brazil, Argentina, and Mexico were to the 1980s and early 1990s. In fact, some of the European walking wounded already have gotten the same kinds of massive international rescue efforts their Asian and Latin American counterparts received back in the day.

The truth behind the EFSF - I spent the best part of last week trying to figure out the mechanics of the eurozone’s €440bn bail-out fund. The exercise reminded me of my research into the credit market, with its promises of credit enhancement and other logic-defying concepts. The European Financial Stability Facility is in many respects like a gigantic collateralised debt obligation and uses much of the machinery of modern finance.  But there is one important difference. In the days of the credit bubble, there was some ultra-cheap credit at the other end of a long CDO cash flow chain – subprime mortgages, for example. In the case of the EFSF, the situation could not be more different. Greece was very lucky to get into trouble before the EFSF was set up and was able to obtain its first €20bn loan tranche at an interest rate of about 5 per cent. This was calculated on the basis of a cheap money market rate, plus a small administration fee and a lending margin.

Out Now: Proposed EC Changes to Budget Rules - I just wanted to post the legislative proposals the European Commission has come up with regarding economic governance to (hopefully) prevent the recurrence of future Greek or Irish episodes. As they are just proposals to, among other things, tweak the stability and growth pact, we have to see if there are some not-so-conscientious objectors out there who did not reveal themselves just yet. Remember, these proposals must now clear the European Council (the "upper house") and the European Parliament (the "lower house"). Aside from budgetary considerations, there's also new stuff being proposed that deal with "macroeconomic imbalances." Without further ado, here they are:

The Van Rompuy task force: Unambitious and Vague -  Von Rompuy presents his task force’ conclusion to the eurogroup, but nothing much concrete, and nothing new; there seems agreement in principle to widen the remit for sanctions from deficits to include overall debt levels; the full report is due by end-October; Trichet makes five demands on governance reforms, including action on current account imbalances; Germany also supports EU policies on imbalances, but focused solely on deficit countries (it seems the European Commission agrees with that position now); Draghi favours tougher rules than Basel III for large cross-border banks; IMF executive boards decides to include financial stability as part of its regular surveillance of member state economies; ECB was on the verge of triggering the EFSF for Ireland, but pulled out at the last minute; Irish government to outline the full rescue costs for Anglo-Irish; Analysts deplore lack of ambition of France’s budget consolidation strategy; Germany reforms Hartz IV, but base subsistence level remains very low; FT Alphaville reports on Barclays Capital critical calculations for the EFSF; Padoa Schioppa, Enderlein, Bofinger and Sapir, meanwhile, make the case for a permanent EFSF. [more]

Swiss big bank rules to go further than Basel III: report (Reuters) - Swiss regulators will ask big banks UBS and Credit Suisse to go one step further than their international competitors in the amounts of core capital they hold, a newspaper reported on Sunday. A commission of experts on the "too-big-to-fail" issue would hand a report on Thursday to the Swiss Finance Ministry proposing Switzerland's two largest banks should hold core capital of around 12 percent -- 2.5 to 5 percent more than foreign competitors -- SonntagsZeitung reported, citing commission sources. Details of the report could be made public as early as Monday and the Swiss government was expected to discuss the proposals on Friday, the paper said. Under new, international "Basel III" rules agreed earlier this month, banks will be required to hold top-quality capital -- known as "core Tier 1" capital, and consisting of equity or retained earnings -- worth at least 4.5 percent of assets and a "capital conservation buffer" of common equity equaling 2.5 percent of assets, bringing the total top-quality capital requirement to 7 percent.

End the Credit Rating Addiction - IMFdirect - One of the earliest take aways from the global financial crisis was the importance of access to information for effectively functioning financial markets. And, in that regard, credit ratings can serve an incredibly useful role in global and domestic financial markets—in theory In practice, credit ratings have inadvertently contributed to financial instability—in financial markets during the recent global crisis and more recently with regard to sovereign debt. To be fair, the problem does not lie entirely with the ratings themselves, but with overreliance on ratings by both borrowers and creditors.In one of the background papers for the Fall 2010 Global Financial Stability Report that I prepared with IMF colleagues, we recommend that regulators should reduce their reliance on credit ratings. Markets need to end their addiction to credit ratings

Banks Could Leave Europe Over Regulation, Warns Goldman Sachs Chief Lloyd Blankfein - Lloyd Blankfein, the Goldman Sachs chief executive, has warned that banks could relocate some of their operations out of Europe if regulation becomes too onerous.  Speaking in Brussels, Mr Blankfein said that "mismatched regulation" could force banks to look for more welcoming homes for their international businesses.  "Operations can be moved globally and capital can be accessed globally," Mr Blankfein told a banking conference. "It's not arbitrage to thwart [regulation]. It's about a need to compete with rivals." His warnings raised fears that Goldman Sachs, which employs 5,500 staff in London and pays more than £2.5bn to the UK exchequer, could scale back its British operations.

The Transparent Effect of Foreign Interest Rates on Central Bank Decisions - Last June the central bank of Norway hosted a fascinating conference in Oslo on the use of monetary policy rules in small open economies. The Norges Bank is a remarkably transparent central bank. As with the Swedish Riksbank, it announces not only its most recent interest rate decision, but also the likely path for its interest rate decisions in the future. While some have criticized publishing future interest rate forecasts, the experiences in Norway and Sweden show that there are advantages of such increased transparency. For example, consider the debate at the Risksbank earlier this month about the path of interest rates in the next two years. The Riksbank minutes (which provide much more detail than FOMC minutes) reveal a substantive debate between some, such as Deputy Governor Lars Svensson, who preferred an interest rate path in which rates were held low for a long time and others who wanted to increase rates more rapidly.

Posen pleads for new stimulus to save economy and democracy - A leading Bank of England policymaker has issued an unprecedented call for the Bank "aggressively" to print money and buy mortgage books from the banks to save the economy and protect democracy itself from the dire consequences of a long slump.  With none of the usual temporising, Adam Posen, an American academic who serves as an external member of the Monetary Policy Committee (MPC), said: "The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken."  Citing Japan's decades of post-bubble stagnation after 1990 and the pre-war rise of fascism in Europe, Mr Posen cautioned that such low growth might "erode political moderation and the liberal governments we also must pass on to future generations".

Bank of England's Adam Posen Calls For More Quantitative Easing - The Bank of England should restart the printing presses and pump more money into the economy to prevent a "lost decade" of low growth and high unemployment, one of its senior policymakers Adam Posen has said.  Mr Posen, an external member of the Bank's nine-strong Monetary Policy Committee, has called for a second round of quantitative easing (QE), on top of the £200bn already injected into the economy, to stave off the threat of a period of deflation to rival Japan and the Great Depression.  His downbeat comments in a speech to the Hull and Humber Chamber of Commerce, Industry and Shipping came despite confirmation from the Office for National Statistics that the economy grew at 1.2pc for the three months to June, its fastest pace in nine years, and strong high street sales. The CBI distributive trades survey for September showed the balance of retailers reporting an increase in sales had climbed to a six-year high at plus 49pc.

UK debt hits a trillion: Britain paying as much in interest as for defence - Britain's debt has grown to a hitherto unimaginable level, it emerged yesterday – smashing the £1trillion barrier for the first time. Government borrowing hit £1,000,389,000,000 at the end of March – or £40,000 per household – the Office for National Statistics said. The figure is so enormous, equivalent to more than one million million pounds, that the country must pay £40billion interest on it in this year alone – roughly what is spent on the entire defence budget. It follows unprecedented levels of spending under Labour which saw the Government borrow nearly £450million a day under Gordon Brown.

Savers told to stop moaning and start spending - Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today.  Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.  They should "not expect" to live off interest, he added, admitting that low returns were part of a strategy.  His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.  The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.

Bank of England Tells Old People to Eat Their Seed Corn, Um, Principal - Well, at least you have to give the mandarins at the Bank of England points for honesty. They’ve actually admitted they don’t give a rat’s ass for the welfare of old people who had prudently hoped to live off income from their investments. Admittedly, the retirees might have been kidding themselves a wee bit, since the pre-bust interest rates had an modest inflation component built into their nominal yield, which served to compensate for gradual erosion of principal. But savers are now suffering because we’ve had not just a reduction in yields due to lower inflation but an even bigger fall due to central banks going into ZIRP-land, with the result that savers get paltry yields that are clearly in negative real interest rate territory. This is the Bank of England’s version of the Charlie Munger “banks get theirs first, the rest of you suck it up and cope” message, courtesy the Telegraph: Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested. They should “not expect” to live off interest, he added, admitting that low returns were part of a strategy.

Empowering women economically (VoxEU) Women’s economic empowerment has been a defining feature of the last century. Yet while women today comprise more than half of the global workforce, their wages and economic opportunities still lag behind those of men. This column takes a closer look at the economic landscape for women and how it compares across countries, using the Economist Intelligence Unit’s new Women’s Economic Opportunity Index as a guide.

Unemployment Rates, an International Apples to Apples Comparison - One of the things we all know about America is that labor laws are more flexible here than in other developed countries, so we have lower unemployment rates than in other countries with relatively more rigid labor laws. Its one of those facts we are told over and over again, like cutting taxes spurs economic growth or that the folks benefiting the most from our largess in Iraq and Afghanistan, not to say an assortment of tin pot dictators throughout Central Asia, are pro-democracy and pro-America.  A lesser known fact is that unemployment rates are computed differently from country to country. (So is GDP, but that's a topic for another post.) The Bureau of Labor Statistics, the folks who compute the unemployment rates here in the land of the (relatively) free market went through the effort of adjusting the unemployment rates of the US and nine other countries (Canada, Australia, Japan, France, Germany, Italy, Netherlands, Sweden, and the UK) between to allow for an apples to apples comparison. I think the most interesting data - the comparison of overall unemployment rates from 1970 to 2009 - is in table 1-2, which I've imported into Excel and graphed below.

Global Debt And Parallel Universe - They approach with comments like, "I know the economy is bad I don't need you to remind me every day."  But in my opinion to see this crisis as merely a "bad economy" is to miss the bigger picture.  We live in an economic world that is completely detached from reality.  If the figures that were recently posted on CNBC are accurate and there is really $188 trillion in global outstanding debt then there is really no doubt.  $188 trillion works out to be just under $28,000 in debt for every human being on the planet (using more recent figures for world population).  This includes the 2 billion or so in India and China that make less than $1000 a year as well as the 700 million or so in Africa that often are so impoverished as to be on the brink of starvation.  This also includes all of the children and the elderly and the decrepit of all countries including the developed world.  They all have $28,000 in debt hanging over them (figuratively, when aggregated), accruing interest.  The debt will never be repaid and we may be near a breaking point where worldwide interest expense sufficiently saps any productivity growth from the economy. 

Global debt comparisons - Economist interactive

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