week ending Nov 13

US Fed Total Discount Window Borrowings Wed $46.68 Billion‎ - The U.S. Federal Reserve's balance sheet expanded slightly in the latest week as the central bank's holdings of U.S. Treasury securities rose and borrowing by commercial banks fell. The Fed's asset holdings in the week ended Nov. 10 rose to $2.316 trillion from $2.303 trillion a week earlier, the Fed said in a report released Friday. The report is typically released Thursday but was delayed due to Veteran's Day.The Fed's Treasury holdings on Wednesday rose to $853.04 billion, Thursday's report said. That compares with $842.01 billion in the prior week. The Fed's holdings of mortgage-backed securities were again steady at $1.051 trillion. Meanwhile, total borrowing from the Fed's discount lending window slid to $ 46.68 billion on Wednesday from $47.17 billion a week earlier. Borrowing by commercial banks through the Fed's discount window slid to $10 million on Wednesday from $31 million a week earlier.

QE2 Details - As was promised by the Fed, details of the first month of QE2 purchases are spelled out here. This is a bit like what the Fed does in normal times on a daily basis. In pre-crisis mode, the Fed would make a prediction about what would affect reserves on a daily basis, and then intervene in the overnight market in an attempt to hit the fed funds rate target. Now, they plan to buy $75 billion in Treasury securities each month, and a prediction is made concerning how mortgage prepayments will affect the stock of agency securities and mortgage-backed securities (MBS) in the Fed's portfolio. The open market desk then attempts to offset that. For the next month, the forecast is that $30 billion in agency securities and MBS will run off.

Fed Hopes to Draw a Virtuous Economic Circle - NYTimes - Wednesday, the Federal Reserve announced the start of a second round of quantitative easing — unconventional purchases of hundreds of billions of dollars worth of longer-term Treasuries. Anticipation of that move had sent the markets rising since late August, and the actual announcement provided an extra boost.  This kind of exuberant market reaction was exactly what Ben S. Bernanke, the Fed chairman, had intended all along: on Thursday, in an op-ed article in The Washington Post, Mr. Bernanke said as much. Mr. Bernanke took direct issue with inflation hawks by asserting that the Fed’s unconventional policy would not “lead to excessive increases in the money supply and ultimately to significant increases in inflation.” Rather, he said he envisioned a “virtuous circle” of “higher incomes and profits” that would “support economic expansion” and “promote increased employment and sustain price stability.”  What would propel this virtuous circle into motion? “Higher stock prices,” Mr. Bernanke said. They “will boost consumer wealth and help increase confidence, which can also spur spending,” he added.

Fed’s Bullard: Benefits of QE2 Outweigh Risks - The benefits of the Federal Reserve’s second large scale bond buying program will outweigh the risks, Federal Reserve Bank of St. Louis President James Bullard said Monday, noting positive effects of past purchases. Bullard said that typically the maximum effects of monetary policy can be seen with a lag of six to 12 months and that the effects from bond buying should be conventional as well. The real effects of bond buying will be hard to disentangle from other factors though, he said. Less than a week after the Fed launched its second quantitative easing effort, or QE2, Bullard noted that the pace of the recovery has slowed, creating a disinflationary trend that the Fed had to address. Labor markets also continue to be weak, he said, and he believes they will lag the recovery as has been the case in the last two recessions. “U.S. policy should strive to avoid the possibility of a Japanese-sytle deflation,” said Bullard, a voting member of the rate setting Federal Open Market Committee. The Japanese experience indicates that a near-zero nominal interest rate, mildly deflationary equilibrium exists, and is difficult to escape, he said.

Fed's Warsh Says Asset Buying Deliberately Limited - Continued dollar weakness and the run up in commodities prices could give the U.S. Federal Reserve reason to review its policy path if they prove inflationary, Kevin Warsh, a board governor, suggested on Monday.  In an opinion column for the Wall Street Journal, Warsh said last week's decision by the U.S. central bank to buy an additional $75 billion of long-term Treasury securities per month through the second quarter of 2011 was not made unconditional or open ended.  "I consider the FOMC's action as necessarily limited, circumscribed and subject to regular review," he wrote. "Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize."

Fed’s Warsh Skeptical Bond Purchases Can Boost Economy - A top Federal Reserve official raised doubts about the central bank’s ability to boost the U.S. economy by buying more government debt, just days after the Fed took the step. Speaking at the annual meeting of the Securities Industry and Financial Markets Association, Fed Board governor Kevin M. Warsh said the plan should be reconsidered if the U.S. dollar continues to fall or commodity prices rise, pushing inflation higher. “I consider the FOMC’s action as necessarily limited, circumscribed and subject to regular review,” Warsh said in remarks that were very similar to an opinion piece published in Monday’s Wall Street Journal. The Federal Open Market Committee last week said it would buy $600 billion of U.S. Treasurys through June in an effort to keep borrowing rates low and help a disappointingly slow recovery. Anticipating the move, the dollar has been falling against other major currencies over the past two months. Several countries, including U.S. allies Germany and Japan, have recently criticized the move, which risks hurting their export-driven economies.

Fed's Fisher Says Purchases May Be 'Wrong Medicine' For Economy (Bloomberg) -- The Federal Reserve's decision to undertake a second round of large-scale treasury purchases may be prescribing the "wrong medicine" to the economy's ailments, said Richard Fisher, president of the Fed bank of Dallas. The 61-year-old regional bank chief, who votes on the rate- setting Federal Open Market Committee next year, identified a number of costs to the Nov. 3 decision, including a weaker dollar and perception the Fed is "monetizing" the government's debt by effectively printing money to finance the shortfall. "I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering," Fisher said in the text of a speech today in San Antonio. "The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed."

QE: Greg Ip answers my questions - Are you still confused about quantitative easing, what it is and how it works? I certainly was, and so I asked a genuine expert on the matter — Greg Ip.  Greg’s been writing some great blog entries on this subject at the Economist, like the one I linked to this morning, but sometimes you need to take a few steps back to clear up some very basic questions first. FS: Does the Fed print money? If so, how? GI: Yes, and I’m surprised to see Pragmatic Capitalist dispute this. It’s true that the Fed is not literally printing the $20 bills that end up in your wallet. As a commenter on your own blog has noted, that’s the job of the Bureau of Printing and Engraving. But money includes both currency in circulation and the reserves that commercial banks keep on deposit at the Fed. By that definition, the Fed is indeed printing it. Here’s how QE works. The Fed buys a $100 bond from Bank of America. The bond gets added to the Fed’s assets. Bank of America has an account at the Fed. The Fed, with a keystroke, puts a $100 into B of A’s account. Where did the money come from? Thin air. Bank of America can visit its friendly neighborhood Fed branch and withdraw that $100 in the form of bills and coins. So for practical purposes the distinction between currency and reserves is meaningless; the monetary base includes both.

Friedman Casts Long Shadow as Economists Meet - The Federal Reserve is portraying its $600 billion plan to prop up the economic recovery as a difficult but needed step to promote growth by lifting stock prices and making long-term borrowing even cheaper. But there is another way to look at it. The central bank will indirectly be financing the government’s deficits on a scale not seen since World War II. It will buy the equivalent of most of the new Treasury debt issued through next June. The portfolio of federal bonds it amassed as a result of the 2008 crisis will swell further, just about doubling. As the magnitude of the Fed’s plan, announced on Wednesday, sank in, a weekend gathering here of top Fed officials and economists took on the air of an awkward family reunion, with rivalries for the affections of an ancestor. That ancestor would be Milton Friedman, the economist and Nobel laureate who died in 2006. Mr. Friedman argued that the Fed could have prevented the Depression, and he rejected the Keynesian doctrine of using government spending to stimulate demand. But he was also wary of the Fed and called for limiting the growth of the supply of money to avoid high inflation — an idea known as monetarism.

WWFD? WSWC? - Krugman - So our monetary policy gurus are framing their debate in theological terms: What Would Friedman Do? How sad. For one thing, this isn’t how you’re supposed to do economics. Economics, at least the way I learned it, is about analytical frameworks and data, not authority figures. Actually, that’s one barrier one has to cross with some students – to get them past the point of believing that one must not criticize Great Men.  Beyond that, it happens to be the case that Friedman was quite bad at diagnosing monetary policy in real time. As David Warsh once pointed out,  Friedman blunted his lance forecasting inflation in the 1980s, when he was deeply, frequently wrong.  More broadly: the core of monetarism was the claim that steady growth in monetary aggregates, M2 in particular, was the key to a stable economy. But after a brief flirtation with monetarism from 1979-82, the Fed turned to a more discretionary approach, which led to wild fluctuations in M2 growth:

Doing It Again, by Paul Krugman - Eight years ago Ben Bernanke spoke at a conference honoring Milton Friedman. He closed his talk by addressing Friedman’s famous claim that the Fed was responsible for the Great Depression, because it failed to do what was necessary to save the economy. “You’re right,” said Mr. Bernanke, “we did it. We’re very sorry. But thanks to you, we won’t do it again.” Famous last words. For we are, in fact, doing it again.It’s true that things aren’t as bad as they were during the worst of the Depression. But that’s not saying much. And as in the 1930s, every proposal to do something to improve the situation is met with a firestorm of opposition and criticism. As a result, by the time the actual policy emerges, it’s watered down to such an extent that it’s almost guaranteed to fail. We’ve already seen this happen with fiscal policy: fearing opposition in Congress, the Obama administration offered an inadequate plan, only to see the plan weakened further in the Senate. In the end, the small rise in federal spending was effectively offset by cuts at the state and local level, so that there was no real stimulus to the economy.  Now the same thing is happening to monetary policy.

Auerback: Amateur Hour at the Federal Reserve - As any student of Economics 101 realises, you can control the price of something, or the quantity, but not both simultaneously. In announcing its decision to purchase an additional $600bn of treasuries last week, the Federal Reserve presumably intended to create additional stimulus to an economy, since tepid growth has failed to make a dent in unemployment. Even Friday’s “good” unemployment numbers, where the US economy added 151,000 jobs, were not enough to reduce the current jobless rate of 9.6%.  So is a new round of “QE2” going to do the trick? It would be interesting to figure out how the Fed came to the magic number of $600 billion. Why not a trillion? Why not $250bn? Why $75bn a month? There’s an element of sticking one’s finger in the air and hoping for the best. The Bernanke Fed is slowly reaching Greenspan-like levels of incompetence. Let’s go back to first principles: Quantitative easing involves the central bank buying financial assets from the private sector – government bonds and maybe high quality corporate debt. In this particular instance, the Fed has announced it will buy $75bn of treasuries a month. So what the central bank is doing is swapping financial assets with the banks – they sell their financial assets and receive back in return extra reserve balances. So the central bank is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the central bank). The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.

Fed's QE2 programme could grow to US$1.5 trillion, say analysts - Analysts expect the US Federal Reserve to pump more cash into the economy if its US$600 billion bond-buying plan fails to prevent deflation.Some market watchers said the Fed's so-called quantitative easing (QE2) programme could eventually grow to as much as US$1.5 trillion. High unemployment and fear of deflation have already prompted the US Federal Reserve to take action. Some market watchers said the use of quantitative easing to stimulate growth may last for some time - despite the criticism levied at the US by other countries, including China. Kevin Logan, Chief US Economist with HSBC, likened the Fed's move to a leaky bucket. "It's almost as if the Federal Reserve is trying to put out a fire with a leaky bucket, but it's the only bucket it has. So they're going to try and continue to throw water on that fire, but meanwhile the liquidity leaks out.

Fed Watch: Will the Fed Scale Up QE2? -  I often feel caught between two complementary yet seemingly contradictory narratives regarding the US economy, one that sounds very optimistic while the other, in my opinion, pessimistic. Nevertheless, I think both narratives can be embraced, at least to a certain extent. And which narrative the Federal Reserve embraces will determine the dominate monetary policy question: Will the Fed scale up quantitative easing, or scale down? It is reasonable to conclude that the US economy possess the basis for sustained growth in the quarters ahead. Indeed, the signs of a cyclical upturn are all over the data - manufacturing, investment, retail sales, inventories, take your pick, they are generally moving in the right direction. And my take on the recent spate of data is that economic conditions firmed somewhat as we entered the fourth quarter. The ISM reports, both manufacturing and service sectors, were looking much more solid than the previous months. Initial unemployment claims have drifted downward, possibly even poised to make a sustained break below the 450k mark. And the all important employment report did surprise on the upside.

Academic Economists Skeptical QE2 Will Work - The Federal Reserve’s decision to restart a government bond buying program — known as QE2, shorthand for the second round of quantitative easing — is controversial in large part because its so unconventional. The idea is that buying up bonds should push the U.S.’s currently low inflation rate slightly upwards, so that real, or inflation-adjusted, interest rates are lowered. That should stimulate growth and hiring. Here’s a sampling of responses by economists who gathered yesterday and today at the Federal Reserve Bank of Atlanta for a conference about the problems of the job market to the question: Will QE2 work?

Thoughts on Liquidity Traps - Dr. Lacy Hunt offers us a few cogent thoughts on the unemployment numbers. The headline establishment survey came in much better than expected, but the household survey was much weaker. In addition, Dr. John Hussman wrote a piece last week that I thought was one of his best, on liquidity traps and quantitative easing, and that’s included here, too. We are embarking on a course through uncharted waters. No one (including the Fed) has any idea what the unintended consequences will be. I remarked a few weeks ago that the Fed is throwing an inflation party and not sure whether anyone will come. Last night at dinner, Albert Edwards of Societe Generale noted that not only do they not know whether anyone will come, they do not know what they will do if they do come, how much they will drink, or when they will leave. My quick takeaway is the $600 billion is not all that much, and the buying is concentrated in the middle of the curve, where it is likely to do the least in terms of lowering rates (they are already low!), so also likely to do the least damage. Mohammed El-Erian thinks that if nothing happens the Fed will be forced to continue, which is a dangerous thing. I wonder whether they might just shrug their shoulders and say, “We tried, and now it is up to the fiscal side of the equation.” We shall see.

Is there a zero bound? The “mysterious” world of negative nominal interest rates. - Yesterday I attended a Federal Open Market Committee (FOMC) simulation at Reed College in Portland, OR. At the beginning of the simulation the President of the College jokingly asked participants to find a way to make the policy rate negative, so that we (the FOMC members) could pay banks who borrow reserves. Of course everybody in the audience laughed but let’s take a look at this more carefully: Could the Federal Reserve set the nominal federal funds rate and the nominal discount rate in negative territory? Yes. The discount rate is the most straightforward to grasp: the Board of Governor has perfect control over the discount rate and can set it wherever it wants whenever it wants. There is no operational constraint that prevents the Board from setting a discount rate at -1%, -10% or even -100%, it just needs to announce tomorrow that this is what it is and that is it. The federal funds rate is slightly more complicated but not that much. To set a negative fed fund rate, the Fed just has to do overnight repos on securities at a premium.

Greenlight Capital's Einhorn Says Fed's QE 'perverse' - Hedge-fund manager David Einhorn said he continues to hold gold as he lambasted the Federal Reserve's unconventional monetary easing as "perverse" and inflationary. In his latest investment letter to clients, obtained by Reuters on Tuesday, Einhorn reiterated his views from one year ago that the U.S. government's financial chiefs are adopting short-sighted policy decisions. "Quantitative Easing or QE is a euphemism for monetization of government debt or simply the electronic equivalent of 'printing money,'" Einhorn wrote.

John Hussman on QE2, Bernanke’s Recklessness, and the Fed’s Constitution-Abusing Quasi-Fiscal Role - John Hussman is always worth reading, and his current missive is a hum-dinger. I’m extracting some key bits below, and urge you to read it in full. Note that Hussman is far from alone in chiding the Fed for encroaching on Constitutionally-mandated budget processes, including former central bankers. From Willem Buiter: As regards democratic accountability for the use of public funds, even if the central bank has sufficient capital to weather the capital losses it suffers on its holdings of private securities, the central bank should never put itself into the position of becoming an active quasi-fiscal player, nor a debt collector. The ex-post transfers or subsidies involved in writing down or writing off private assets are (quasi-) fiscal actions that ought to be decided by and accounted for by the fiscal authorities. The central bank can act as a fiscal agent for the government. It should not act as a fiscal principal, outside the normal accountability framework. The Fed can deny and has denied information to the Congress and to the public that US government departments like the Treasury cannot withold . The Fed has been stonewalling requests for information about the terms and conditions on which it makes its myriad facilities available to banks and other financial institutions. It even at first refused to reveal which counterparties of AIG had benefited from the rescue packages (now around$170 bn with more to come) granted this rogue investment bank masquerading as an insurance company. The toxic waste from Bear Stearns balance sheet has been hidden in some SPV in Delaware.

Could QE2 Cause the Fed to Go Broke? - The Fed's new program of quantitative easing, QE2, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says no, or at least, hardly ever. However, when we look closely, the conventional analysis is not altogether reassuring. Although the Fed most assuredly is not going to go broke, preventing that from happening could raise difficult political issues and perhaps even threaten the Fed's independence. We can start by noting that the Fed, like most central central banks, is rather thinly capitalized. As of November 3, 2010, it had capital of some $56 billion, about 2.5% of its assets of $2,303 billion. By comparison, Bank of America, with approximately the same total assets, had 7.8% Tier 1 common equity at the end of 2009. If the Fed were a commercial bank, its financial condition would not be dire, but it would be on the watch list. Of course, the Fed is not a commercial bank. As the conventional analysis is quick to point out, the unique nature of its assets and liabilities normally allows it to operate safely with just a sliver of capital. Normally, the Fed's assets have consisted largely of short-term Treasury securities, which are as close to risk-free as you can get. As for liabilities, as recently as the end of 2007, 90% of them consisted of Federal Reserve currency. Currency is a truly marvelous thing to have on the right-hand side of your balance sheet, since it is neither interest-bearing nor redeemable. With a assets and liabilities like that, who needs capital?

Sinkhole - Lets look at some numbers on our turf. Not the real precise numbers because I am lazy and in a rush for you to contemplate my point before hurling insults back at me, but rough back-of-envelope numbers will do for illustrative purposes. US GDP is $14 trillion. Equities have quadrupled over twenty years. US public market aggregate Market Cap is, I don't know $14 trillion? And private unlisted values - maybe quarter to half as much again? US Bond Market values - combined Federal, corporate, mortgage, municipal, are probably close enough to $30 Trillion, and who knows what the size of privately extended loans are on US bank balance sheets, but it must be a couple of trillion. Net real estate equity value - the unencumbered portion NOT accounted for in market cap of listed and private companies, must be several trillion. These values reflect money already out there. Asset values that already inflated by the massive credit binge during more optimistic times. These, like Japan, are likely compressing in a very long term move. The aggregate net worth of $40, $50 maybe $60 trillion, could be compressing to $30, $40 and $50 trillion respectively. Or, like Japan, lower, and over a longer period. So, one trillion of QE has no bearing on anything (unless you are the guy who has sold them duff assets for real money that you can transform quite easily into a large edible Philadelphia Hoagie. For more or less the same price as one transformed it ten years ago. Would two trillion do anything? In the scheme of things, it would seem, probably not. .

QE2 Will Not Usher in the Apocalypse - Though some folks would have you believe so.  It is far from perfect--it needs an explicit nominal target to make it truly effective--but it is a step in the right direction. Martin Wolf agrees: The sky is falling, scream the hysterics: the Federal Reserve is pouring forth dollars in such quantities that they will soon be worthless. Nothing could be further from the truth. As in Japan, the policy known as “quantitative easing” is far more likely to prove ineffective than lethal. It is a leaky hose, not a monetary Noah’s Flood.In other words, Wolf believes QE2 may not pack a real economic punch in the absence of price level target. Michael Woodford, William Dudley, Charles Evans, and  Paul Krugman agree with this assessment.  I too am a fan of level targeting (versus growth rate targeting), but would prefer to see it done by targeting some measure of aggregate spending such as final sales of domestic product or nominal GDP.  There are good reasons to favor an aggregate spending level target over a price level target, but either approach would bring the nominal economy closer to its trend and in turn spur real economic growth.  Unfortunately, though, the FOMC for some reason has chosen not to adopt a level target. This decision may amount to keeping the United Sates in economic purgatory.  So, rather than worrying about QE2 ushering in the apocalypse worry about it being much ado about nothing

Alford: The Fed Tests The Thesis That Two Wrongs Don’t Make A Right, But Three Do -Richard Alford, a former economist at the New York Fed. Since at least the early 1990s, the US has experienced a positive long-lived external positive supply shock. Globalization and a semi-fixed dollar exchange rate led to imported disinflationary pressures. Employment and capital utilization rates came under pressure as US manufactured goods were replaced by lower-cost alternatives in the US and world markets. The Fed uses so-called Taylor rules to evaluate where to set interest rates, and those lead it to focus on unemployment, inflation and inflationary expectations. It set interest rates policy as if the downward pressure on inflation and employment stemmed from declines in demand by US based economic agents and were not the result of increased external supply. To put it more simply, its implicit US-only focus meant it ignored how a rising level of cheap imports was keeping US prices lower than they would be otherwise.  This incomplete assessment in turn led it to set an overly expansive monetary policy and convince itself that all was well when imbalances were building up in the US and with our trade partners. The Fed succeeded in temporarily stabilizing inflation and US GDP (the Great Moderation). However, it failed to exercise its regulatory and supervisory responsibilities even as monetary policy encouraged the buildup of leverage and maturity mismatches. Of equal importance, monetary policy promoted growth via asset price inflation and debt-financed spending even as purchases of final goods and services by US based economic agents exceeded US potential output by as much as 6% and the trade deficit- to-GDP ratio exceeded levels associated with crises. In short, expansionary Fed policy (largely driven by the impact of globalization) contributed to financial instability, depressed private savings and encouraged the unsustainable trade deficit. Once again, unintended consequences of monetary policy were very costly.

Fed Easing Seen Ineffective by 75% in Global Poll Favoring ECB - Global investors doubt the Federal Reserve’s plan to buy more Treasury securities will boost the U.S. economy or bring down unemployment and say they believe the government is pursuing a weak-dollar policy, a poll shows.  Three-quarters of those surveyed say the central bank’s securities purchases -- or quantitative easing -- will have little or no effect on joblessness, according to the latest quarterly Bloomberg Global Poll of 1,030 investors, analysts and traders who are Bloomberg subscribers. More than half say the Fed’s action won’t increase U.S. growth over the next year.  Global investors do think the Fed will have some success in lifting inflation, another goal. Half expect inflation to rise modestly as a result of the central bank’s actions. One in five say the Fed will get more than it’s hoping for and that inflation will increase to dangerous levels.  Investors are more favorably disposed to the policies adopted by the European Central Bank than they are to the Fed’s. Two-thirds say the ECB acted wisely in deciding last week against taking additional action to stimulate the region’s economy. Fewer than half think the same of the Fed’s decision to buy more bonds.

Taleb Says Federal Reserve Doesn't Understand Risks of Quantitative Easing - The risks stemming from the Federal Reserve’s efforts to stimulate the economy through bond purchases are “humongous” and the central bank doesn’t fully understand the potential effects, said Nassim Taleb, author of “The Black Swan.”  “These people do not understand risk,” Taleb said in an interview on Bloomberg Television’s “InsideTrack” program with Erik Schatzker. He compared U.S. central bank policy makers to the managers of Long-Term Capital Management LP, the hedge fund that failed in 1998.

America will survive the errors of Ben Bernanke's trigger-happy Federal Reserve - America is a resilient nation, with far healthier demographics than China, Japan, Korea, Germany, Italy or Russia. The storm will blow over.   Yet after leading America and the world into calamity with this seductive mischief – which overlooked the well-documented risks of credit seizures once a debt bubble pops – we are now told by Bernanke that the purpose of printing more money is to push up house prices and feed Wall Street. “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,” he wrote in the Washington Post. So there we have it, the `Bernanke Put’ in open daylight, the affirmation of asymmetric monetary policy. Let booms run unchecked: shield investors from loss when things go wrong. This is at least honest, unlike Bernanke’s suggestion that US inflation is now so low that it may “morph into deflation” unless the Fed takes out insurance with $600bn of fresh bond purchases -- QE2 to you and me.

Don't flip out over QEII (repeating myself) - I'm not sure it will work, because it won't fix the housing market, may not restore the demands for wealth-elastic goods in a sustainable manner, may not restore the normal flow of credit to small businesses, may not lower subjective estimated risk premia, and may not fix the general disconnect between expectations and reality.  The effects on long-term interest rates are murky.  No one -- and I mean no one -- has a coherent story about how nominal stickiness of wages lies at the heart of our current dilemma. Still, QEII may do some good.  Money matters, even if we don't always understand how or why, and excessively tight money has never done market-oriented economics any favors.  Think of QEII as a make-up for some earlier monetary policy mistakes.  Some of the relevant alternatives include a trade war with China or direct government employment of the unemployed and with what endgame?  QEII is not some terrifying burst of potential hyperinflation.  The TIPS market is forecasting in the range of two percent inflation and it's gone up -- what -- sixty basis points since August?  That's hardly the end of the Republic.  During the Reagan recovery, inflation never fell below four percent.  I've thought through "trigger models" of rapidly escalating inflation, but they don't scare me much.  The Fed simply needs to be ready to unload its heavy balance sheet without delay.

QEII follow-up: why do people hate the idea? - I believe the price of gold is high because of "financial-existential risk," not because of inflation per se.  The U.S. dollar and debt are no longer unambiguously safe and is there any real solution to the triple menace of highly leveraged banks, moral hazard, and financial strategies of extreme negative skewness?  It remains to be seen.  Given the forthcoming flow of debt finance required to keep Uncle Sam up and running, lots of inflation today wouldn't maximize political rents to leaders or medium-term seigniorage. Third, the libertarian right is having a hard time seeing the Fed as a relative ally over the last three years, which it has been.  That admission implies an unappetizing shift in the goal posts for what is possible, and that sounds like a intellectual surrender to a lot of people I know.  I think they are in denial.  One alternative to acceptance is to view the Fed as sinister, which then leads you to fear anything they do, including QEII, their current major monetary policy initiative.   Fourth, trust in government is at an especially low level and so monetary policy is viewed through this lens.

QE2 is fooling you - Let's start off by repeating once again what I still don't think everyone acknowledges: in essence, quantitative easing is a measure that is entirely experimental at best.   If there is any proof regarding its effectiveness, that proof is negative.  Japan's early millennium QE didn't revive its economy. Far from it. The Fed's QE1, initiated in early 2009 and subsequently vastly expanded, never solved the problems it was alleged to be able to solve.  One may argue that it kept the economy from sliding downward even further, but one can claim that, and many of those with skin in the various games do, for a litany of stimulus measures such as TARP and the "Obama stimulus" as well.  The success of all these measures added together surely can't be seen as anything but ephemeral (re: unemployment and foreclosures), and the claim, if one were indeed made, that QE1 all by itself even just managed to keep the US economy in its present prolonged and drawn-out Wile E. Coyote moment, has no substance at all that is based on actual fact. Or, to put it another way, if QE1 achieved such a thing, which we don’t and can't know, the TARP and other stimulus measures were even grosser failures than we already recognize them to be.

The rest of the world goes West when America prints more money – Last Wednesday was a hinge point in history. The United States decided to drop all pretence of being interested in leading – or even being part of – a coordinated global policy response to the most serious economic crisis in more than 70 years.  America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago. The Federal Reserve's words may have been anodyne. "We will adjust the programme as needed to best foster maximum employment and price stability," said the US central bank's Open Market Committee. But by announcing another round of "quantitative easing", America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too. The US had hoped China would use the forthcoming G20 summit in Seoul to accept America's proposal that net exporters should limit their current account surpluses to 4pc of GDP. Any prospect of that is now gone. In the aftermath of the Fed's QE2 announcement, rather than agreeing to measures that would ease pressure on the US economy, China gave the States a public tongue-lashing. Measures to cap trade surpluses would "hark back to the days of planned economies", said Cui Tiankai, who will be one of China's lead negotiators in Seoul.

European Panic Over QE2 - Jean-Claude Juncker weighs in against QE2, saying it was a bad policy to fight a debt crisis with debt; he also warns of capital flows into emerging markets, and says the issue will come up at the G20 summit this week; Merkel rejects quantitative ceilings for current account surpluses, but favours a G20 agreement on exchange rates; Obama tells Europeans to shut up, and enjoy the fruits of higher US growth; Tim Geithner says G20 had reached consensus on an early warning mechanism on current account imbalances; European sovereign CDS reach new hights, as investors become increasingly concerned about Portugal and Ireland; the German government approves proposals for a two-step crisis resolution mechanism for the eurozone; El Pais says Germany’s crisis resolution ideas are the true driver of the most recent outbreak of the European sovereign debt crisis; the ECB does not step up bond purchases after all; the Irish government considers new taxes to meet budget plan; Paul Taylor, meanwhile, writes that the Zoellick BW2 plan is not primarily about gold., but about drawing China in to a system of international policy coordination. [more]

China and Russia to US: Stop Printing Money - U.S. President Barack Obama defended the Federal Reserve's policy of printing dollars on Monday after China and Russia stepped up criticism ahead of this week's Group of 20 meeting. The G20 summit has been pitched as a chance for leaders of the countries that account for 85 percent of world output to prevent a currency row escalating into a rush to protectionism that could imperil the global recovery.   But there is little sign of consensus. The summit has been overshadowed by disagreements over the U.S. Federal Reserve's quantitative easing (QE) policy under which it will print money to buy $600 billion of government bonds, a move that could depress the dollar and cause a potentially destabilising flow of money into emerging economies.

PBOC Adviser: US QE Effect Similar To 'Rampantly Issuing Currency' (Dow Jones)--China's central bank adviser Xia Bin Wednesday said the effect of the U.S.'s monetary policy is similar to "rampantly issuing currency," and called for emerging economies to step up oversight of capital accounts. The U.S. Federal Reserve's quantitative easing policy could affect international commodities prices, Xia said on the sidelines of a forum. Under the QE policy, the Fed buys bonds to inject cash into the U.S. economy

United States receive criticism from all sides because the decision to print money - U.S. decision to pump 600 billion dollars into the economy has sparked a wave of strong disapproval. World leaders, who are preparing for the G20 summit in Seoul this week, warns that the move will complicate U.S. global economic recovery. Officials of major countries such as China, Brazil and Germany have criticized the decision of U.S. central bank (Fed) to launch a program of acquisitions of government securities worth 600 billion dollars, while several East Asian central banks have announced that they are preparing measures to protect local economies by massive capital flows, Financial Times. “I have great doubts about the usefulness infusion of unlimited quantities of money market,” said German Finance Minister Wolfgang Schäuble, noting that last week’s Fed decision undermines U.S. credibility and create uncertainty. “There is a lack of liquidity in the U.S. economy. I do not understand is the economic rationale for this move,” said Schaub. Brazilian Finance Minister Guido Mantegna, the same one who first warned about the possibility of a “currency war”, said that “everybody wants the U.S. economy to recover, but will not throw money from helicopters do anyone any good. ” On the other side of the world, one of China’s central bank advisers, Xia Bin, warned that excessive printing of dollars is the main risk to the global economy and that his country sees the need to use foreign exchange policy and control of capital flows to protect against external shocks.

Barack Obama And Ben Bernanke Continue To Defend Quantitative Easing, But For The Rest Of The World The Verdict Is In: They Hate It - Even as Barack Obama and Ben Bernanke publicly defend the Federal Reserve's new $600 billion quantitative easing program, top finance officials around the globe are expressing alarm and outrage.  But what did Obama and Bernanke expect?  "Quantitative easing" is little more than legalized cheating.  For a moment, imagine that the global economy is a giant game of Monopoly.  Essentially what Bernanke has done is that he has just reached under the table and has slipped another $600 billion on to his pile of money, hoping that the rest of the players will not call him out on it.  The rest of the world has heavily invested in the U.S. dollar and in U.S. Treasuries, and this new quantitative easing program is going to devalue all of those holdings.  If the Federal Reserve continues to go down the road of monetizing U.S. government debt, other nations are rapidly going to get spooked and will soon refuse to invest in U.S. dollars and U.S. Treasuries.  When that day arrives, it is going to cause mass panic in the world financial system.

Stephen Roach: QE represents ‘what got us into the mess’ - I am on-board with Roach’s sentiments. This is certainly what I take away from the U.S. policy mix. Now, a lot of economists of the Keynesian variety are telling us that the problems in the US are cyclical i.e. an aggregate demand (AD) problem.  Certainly, this is true if you are using a flow model that disregards the effect of a particular industrial organization on debt accumulation. We could gin up some more AD and be back to the future. However, flow models are cyclical in nature; they have no real understanding of the secular trends that devotees of Minsky or the Austrian School talk about. The secular problems in the US are mostly structural: overly large financial sector, excess consumption, low savings rate, hollowed out manufacturing sector, declining relative education scores, increasingly unequal income distribution, crumbling infrastructure. And when you look at this in regards to Germany or China, this is significant. Marshall recently posted on the incongruence between Germany’s G-20 rhetoric and the imbalances they have created intra-Eurozone. I have made similar arguments in the past. See here, for example.

The Fed vs. the G-20 - When President Obama arrives in Seoul, South Korea, on Thursday for the summit of the Group of 20 leading economies, he will be met by blistering criticism of the Federal Reserve’s plan for “quantitative easing” — pumping $600 billion into the weak American economy over the next eight months.  Many nations are worried that a weaker American dollar would harm their export sectors and overheat their economies as more capital flows in, in search of better returns. Their fears are understandable but shortsighted. The Fed’s move is a much-needed attempt to stimulate the American economy and head off deflation here. Prolonged stagnation, or worse, in the United States would turn off one of the main sources of global demand and global growth.  By buying Treasury securities, the Fed aims to lower long-term interest rates and increase expectations of future inflation. This would spur households and businesses to spend and invest rather than hold on to money that will fall in value.

G20 showdown likely over US Federal Reserve’s quantitative easing - President Barack Obama can expect a rough ride at the G20 summit in South Korea this week after China and Germany denounced proposals by the Federal Reserve to flood the US economy with cheap money.Ben Bernanke, the Federal Reserve chairman, was this weekend forced to mount a fresh defence of the US policy to pump an extra $600bn (£372bn) into the ailing US economy over the next eight months in an attempt to accelerate growth."We're not in the business of trying to create inflation," said Bernanke, to counter criticism that the flood of money will fuel price rises."Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree would be a worse outcome," he said. "I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy," he said at an economic forum in the US."We've had a very significant disinflation since the beginning of the crisis. We should not be satisfied with a situation where we have both a large amount of slack on the employment side and inflation which is below our generally agreed upon level and seems to be declining over time," the Fed chairman added.

EU's Barroso says G20 should question Obama over Fed policy (Reuters) - G20 leaders need to use their summit to question U.S. President Barack Obama on why the Federal Reserve launched a second round of monetary easing, European Commission President Jose Manuel Barroso said on Thursday. Leaders begin their meeting in Seoul with many countries unhappy over the Fed's decision to buy $600 billion of government debt. They contend it is generating global instability by strengthening their currencies against the dollar, inflating asset bubbles and fuelling inflation in their economies. "I think it is important during the G20 summit to listen to President Obama and get a better understanding of the different aspects behind the decision of the Federal Reserve," Barroso told reporters. He said he believed growth of the United States is important but he understood the concerns other countries had about the Federal Reserve's move.

Obama Challenged to Defend Fed Policy - U.S. president Barack Obama is in the awkward position Thursday and Friday of having to defend recent moves by the U.S. Federal Reserve, in a reflection of how an uproar by several countries has altered the global economic debate. Brazilian President Luiz Inacio Lula da Silva said on Thursday he would press Mr. Obama to explain recent moves by the Federal Reserve that Brazilians believe could have negative implications on several countries. “We are going to force a reflection about what is going on,” Mr. da Silva said, referring to a move by the Fed to buy as much as $600 billion in Federal bonds and other assets in an effort to stimulate the U.S. economy. “If each (country moves) only in its own interest, I fear we will go back to protectionism,” he said.

Is the Fed engaging in currency war? - After the Fed formally announced its new bout of quantitative easing, the CFR’s Sebastian Mallaby lost little time in declaring the move a “foreign policy misstep”: Mallaby concedes that “the Federal Reserve’s mandate does not require it to consider the foreign policy implications of its actions” — but that’s a bug, not a feature, from his point of view. Indeed, he says, QE “threatens to create a glut of liquidity reminiscent of the mid-2000s savings glut” which was diagnosed and criticized by none other than Ben Bernanke. It didn’t take long for veteran Fed watcher Greg Ip to push back, cheered from the sidelines by the WSJ’s David Wessel: Now Paul Krugman is weighing in: The Pain Caucus — my term for those who have opposed every effort to break out of our economic trap — is going wild. This time, much of the noise is coming from foreign governments, many of which are complaining vociferously that the Fed’s actions have weakened the dollar. All I can say about this line of criticism is that the hypocrisy is so thick you could cut it with a knife.And in a very welcome development, an actual member of the FOMC, Kevin Warsh, has an op-ed in today’s WSJ in which he talks about the “nontrivial risks” of embarking on QE.

Thoughts on the G-20 given the so-called currency war - The heads of state of the world’s twenty largest economies are set to meet in Seoul, South Korea to discuss the global economy. The so-called currency war will be of particular interest during this session because of an escalation in rhetoric regarding trade and currency tensions. I don’t believe anything successful will be achieved at this meeting. Rather, the escalation of rhetoric is likely to continue unless we see a more robust economic outcome in the U.S. and western Europe.Here’s the problem. The U.S. was particularly blameworthy for creating the financial crisis through two decades of easy money and anti-regulatory policies which allowed its financial sector to lever up, creating a credit bubble in the private sector. Every time there has been a crisis, the prescription has been the same, more cowbell – lower interest rates and liquidity in the form of purchasing Treasury securities. The result – predictably, for anyone watching debt stocks – has been a systemic crisis. In fact, the higher the private sector debt levels went, the more severe the crises became. The question for policy makers was how to respond in this particular crisis. The answer? More cowbell.For most non-US observers, the policy mix of zero rates and quantitative easing is seen as exporting inflation in a bid to ‘steal growth’ by bidding up asset prices in the U.S. and abroad via a speculative move into risk assets.  The Fed Chair Ben Bernanke has admitted this is his aim, writing in the Washington Post this past week.

G20 finds common ground opposing U.S. (Reuters) - The Group of 20 is beginning to look more like the G19 plus 1 as emerging and rich countries alike accuse the United States of breaking a vow of unity.This week's G20 summit will require every bit of President Barack Obama's diplomacy skills after the Federal Reserve embarked on a new $600 billion bond-buying spree, sparking criticism from four continents that the U.S. central bank was ignoring the global repercussions. Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.If the G20 fails to defuse these global tensions, it may heighten investor concerns that policymakers are drifting further apart, leaving the world economy vulnerable to another bout of upheaval.Domestic politics and policies make Obama's job tougher.He arrives in Seoul for the November 11-12 summit weakened by a crushing congressional election defeat for his Democratic Party. His primary task will be to convince his peers the Fed's actions do not run counter to a U.S.-led push for global cooperation to even out economic imbalances.

Germany Criticizes Fed Move - German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week's Group of 20 summit. Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve's decision last week to pump an additional $600 billion into government securities won't help the U.S. economy or its global partners. The Fed's decisions are "undermining the credibility of U.S. financial policy," Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend

Interview With German Finance Minister Schäuble - "The US Has Lived on Borrowed Money for Too Long" -  In an interview with SPIEGEL, German Finance Minister Wolfgang Schäuble, 68, criticizes US calls for Germany to reduce exports, outlines his plans for an insolvency framework for indebted European nations and the emphasizes the significance of the German-French axis for Europe

Germany attacks US economic policy - Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a “deep crisis,” he also warned over the weekend. His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week’s US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through “quantitative easing”.  On Friday, Mr Schäuble described US policy as “clueless”. In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed “increase the insecurity in the world economy”. “ They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking.”

Dominic Lawson: What the Germans can teach America -When a politician prefaces a remark with the phrase "with all due respect", you know that he's about to say something designed to communicate the full extent of his contempt for the views and intelligence of the recipient of this "respect". Seldom can this rhetorical device have been used to more effect than by Germany's finance minister, in his remarks last week about the conduct of America's economic policy. "With all due respect," said Wolfgang Schäuble, "the US policy is clueless". Dr Schäuble – whose verbal vigour has not been in the least impaired by being hospitalised for much of this year, the legacy of the devastating injuries caused by a would-be assassin's bullets – was speaking after the US Federal Reserve's decision to throw a further $600bn like confetti to stimulate its flagging economy. "They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless." That was last Friday, at a speech in Berlin. If the Americans had made any back-door diplomatic attempts to get the German Finance Minister to ease off, then they were not successful. Yesterday Schäuble gave an interview for Der Spiegel in which he declared that America should learn some lessons from Germany's recipe for economic recovery growth: "[Our] successes are not the result of some sort of currency manipulation ... The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily."

Germany’s beef with QE - Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble. Two quotes in particular from Schäuble stand out. Here’s the first: “They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless.” And here’s the second: “[Our] successes are not the result of some sort of currency manipulation … The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily.” Essentially what Schäuble is saying here is that we can’t hope to cure America’s deep-seated economic problems with monetary policy. The arguments over QE versus old-fashioned interest-rate cuts are beside the point: both of them try to boost the economy by lowering interest rates and increasing the supply of credit. But we’ve already gone far too far in that direction: America has too much debt, especially in housing. Adding to that pile of debt is only going to make matters worse, and the primary beneficiary is going to be our bloated and overgrown financial sector.

Germany's Finance Minister Doesn't Understand Basic Economics - This should have been the headline of an article in which Germany's finance minister both complained about the United States credit led model of growth and the decline in the value of the dollar. A falling dollar is the mechanism through which the United States would get off its credit led model of growth. It will make imports more expensive in the United States, leading us to buy fewer imports. It will also make our exports cheaper, leading us to increase exports. This will reduce the U.S. trade deficit and therefore its foreign borrowing.Complaining about both the credit led model of growth and then complaining about the decline in the currency is like complaining that the room is too hot and then complaining when someone turns on the air conditioner. Germany's finance minister apparently does not understand economics, which should have been the main point of this article.

Auerback: How Do You Say “Hypocrite” in German? - Okay, I did a few years of German language study, so I know that the real word for hypocrite is “Heuchler”. But when I read the latest guff from Germany’s Finance Minister criticizing America’s economic policies, I’m afraid that Wolfgang Schauble’s name immediately sprung to mind for a substitute. In an unusually undiplomatic manner, German Finance Minister Schauble criticized the U.S. Federal Reserve’s recent decision to undertake another round of quantitative easing, arguing that it wouldn’t help the U.S. economy or its global partners. He could well be right. We’ve argued much the same against “QE2″. Where we draw the line is Schauble’s subsequent comments from the same article: Germany’s exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis… The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America’s problems-German export surpluses aren’t one of them. No crisis in Europe? The threat to the euro, the establishment of a bailout facility, the involvement of the IMF, these were all figments of the market’s collective imagination? Even Goethe is unworthy of such flights of imagination!

Greece Hits Out At Money-Printing Nations - Greece's finance minister has spoken out on Sky News about countries printing money to boost their ailing economies. Speaking on Jeff Randall Live, George Papaconstantinou warned quantitative easing only serves to stoke up inflation."You get inflation. You get a situation that's out of control. People lose their purchasing power. It doesn't get you very far," he said. Since the 2008 financial crisis the UK and the US have tried to reinvigorate their economies by pumping hundreds of billions of pounds into them

Meyer's Musings: Foreign Backlash to Fed Policy: A Rant! - Backlash from foreign governments to the restart of large-scale asset purchases (LSAPs, also referred to as QE2) has been intense. Concerns include the charge that the Fed is engaged in “competitive devaluation,” and that it is feeding asset bubbles around the world.

• An article published earlier this week in the Wall Street Journal was a “Who’s Who” of the backlash crowd: This includes key government figures in Brazil, China, Germany, and Russia—the list has since expanded to include others, such as Turkey. To my knowledge, however, major foreign central bank officials have not joined in.[1]
• The government officials are all are disturbed that the FOMC is not thinking about their interests when it sets policy. In effect, they are saying that the Fed is the central bank of the world, given the role of the dollar as a reserve currency.
• Foreign government officials are also lecturing the Fed about the outlook, suggesting that the FOMC is “misreading” the strength of the recovery and is “over-reacting.”
• They are also sounding off a theme of the hawks on the FOMC: They are saying that the asset purchase program “won’t work.”
• Frankly, we never knew that foreign officials were so knowledgeable about the U.S. outlook and the effects of U.S. monetary policy!

 Ben Bernanke's too timid QE2 - The Fed's $600bn bond spree is not wrong, just not enough. The US economy needs a target of 3-4% inflation to get moving.  The recent economic data leaves little doubt that the economic recovery in the United States is anaemic at best. There was much celebration over the October jobs report, which showed a gain of 151,000 jobs. This was better than the near-zero number anticipated by most economists, but should hardly provoke cries of joke. The economy must create 100,000 jobs a month just to keep even with the growth of the labour force, which means that it will take more than a decade at this pace to get back the 7.5m jobs lost to date.The picture painted by the data on third-quarter GDP, which was released the prior week, was even bleaker. Most reports focused on the 2.0% growth number, which was slightly higher than had been expected. However, these reports missed the fact that most of this growth was due to the extraordinary pace of inventory accumulation in the quarter. The rate of accumulation in the third quarter was the second highest ever, adding 1.4 percentage points to growth for the quarter. Excluding this jump in inventories, the economy grew at just a 0.6% annual rate in the third quarter. If inventory growth returns to a more normal level, fourth-quarter growth will likely be negative.The Fed's decision to try another round of quantitative easing must be understood in this context. The US economy is operating far below capacity and is not likely to return to potential output any time soon without some outside boost. The Fed's decision to buy $600bn in government bonds over the next eight months is a step in this direction.

Fed Global Backlash Grows - Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism. Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed's decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.  The Fed is independent, and the White House by longstanding tradition has strained to avoid any appearance of collusion or conflict.  The prospects of the Fed flooding the financial system with money helped drive gold above $1,400 an ounce on Monday. The precious metal, which investors often buy as protection against inflation, settled at a record $1,402.80 per troy ounce. Other assets, such as U.S. stocks and oil, drifted back slightly on Monday after getting a big boost from the Fed's announcement last week. The dollar fell against the yen, while rising against the euro as worries about Europe's debt problems returned.

Fed Action Gets an Unexpected Endorsement From India - When the Federal Reserve announced last week that it would buy $600 billion in U.S. Treasury bonds to help the economy, it quickly came under attack from German, Brazilian and Chinese officials, who said the United States was trying to depreciate the dollar.  On Monday, the plans earned a hearty endorsement from President Barack Obama in his first public comment on the Fed action, and support also came from an unexpected source — India. “The worst thing that could happen to the world economy — not just ours, but the entire world’s economy — is if we end up being stuck with no growth or very limited growth,” Mr. Obama said.  Prime Minister Manmohan Singh backed the Federal Reserve’s position.  Mr. Singh, an economist by training, offered a rare foreign endorsement of the Fed’s plan to buy $600 billion in Treasury bonds, which has mostly attracted criticism from other countries. His support could help the United States deflect criticism of Washington’s economic policies at the G-20 summit meeting in Seoul this week.

FOMC composition and future monetary policy - FT Alphaville - Just a few things to note, somewhat belatedly, about the latest reservations expressed by three FOMC members — Kevin Warsh, Richard Fisher, and Thomas Hoenig — towards further QE measures. But first, remember this chart from RBS? We bring it to your attention because of the changes that will take place in the composition of the FOMC’s voting membership next year. According to this categorisation, among those who vote there are five doves, four neutrals, one soft hawk, and one outright hawk (and a partridge in a pear tree). Because of the annual rotation of Fed presidents who vote, next year’s voting membership will look like this: Doves – Bernanke, Dudley, Evans, Yellen Neutral – Duke, Bloom Raskin, Tarullo Soft Hawks — Kocherlakota, Warsh Hawks – Fisher, Plosser, This is a somewhat wider distribution of stances than exists now, with the losses coming from the doves and neutral members. In other words, if these stances are the same for newly contemplated easing measures in the future, there will be more voting members who are at least a bit skeptical of big new moves.

Nobel Prize In Hand, Diamond Gets Another Shot at Fed Slot - Will a Nobel Prize put Peter Diamond over the finish line?  The Massachusetts Institute of Technology economist, rebuffed by Senate Republicans in September for a slot as a Federal Reserve governor, will get another shot soon. The Senate Banking Committee plans to vote next Tuesday afternoon on Diamond’s nomination to the Fed. The White House first nominated him in April, along with Janet Yellen and Sarah Bloom Raskin, who were both confirmed by the full Senate in late September.  Diamond, however, was held back due to opposition from some GOP senators who said he does not have the appropriate monetary policy background to join the central bank. While he waited, Diamond picked up the Nobel Prize in economics last month. That may not win him many more votes on the Senate Banking Committee, which he cleared 16-7 in July. The panel’s ranking member, Sen. Richard Shelby (R., Ala.), said after the Nobel Prize announcement that while it’s “a significant recognition, the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the Board of Governors.”

The coming right-wing front on monetary policy - What a bizarre time for monetary policy and the conservative right. First Ron Paul, who wants to "End the Fed," is put in charge of Federal Reserve oversight with the GOP taking over the House.  Sara Palin attacks inflation, quoting Reagan as saying it is “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." World Bank President Robert Zoellick wants to return to a gold standard. Kansas City Federal Reserve Bank President Thomas Hoenig, who wants to raise interest rates because he is worried unemployment might come down too quickly, will be advising the House GOP. The conservative guns are now moving from fiscal policy toward monetary policy. Palin is a savvy reader of where the grass-roots conservative mind is going, so if she is starting to move the goalposts on attacking Bernanke, there's probably a larger move going on. And I'm curious to watch this battle unfold between the far right and the center right. The center right has been building fortifications in sensible thinking about monetary policy during 2010, in advance of this wave election. Back in February, David Frum wrote against Ron Paul's crusade against the gold standard, an argument he's been having since at least 2007 with the Paul team.

Beating up on the Fed used to make you an oddball. Does it still? Sen.-elect Rand Paul, R-Ky.According to a pre-election Bloomberg poll, 60 percent of likely voters who self-identified as Tea Party members said they want to see the Federal Reserve either reined in or abolished. Rand Paul, the Republican senator-elect from Kentucky, campaigned in part on an anti-Fed platform. Fed-bashing is often shrugged off as something that oddballs do whenever the country hits hard economic times. But if that's the case, then why is Jeremy Grantham railing against the Fed too? Grantham, the chief investment officer of the big Boston money management firm GMO, is nobody's idea of an oddball; he is a well-respected longtime professional. Yet he just wrote a report titled "Night of the Living Fed." The cover page resembles a poster for a horror flick, complete with a subhead—"Something Unbelievably Terrifying!"—and scary captions: "Homes Destroyed! Runaway Commodities! Currency Wars!"  The thought process behind the anger at the Fed isn't uniform. If Dante had nine circles of hell, then the Fed has three circles of doubters. The first circle is critical of the Fed's current policies. The second circle thinks that the Fed has been a menace for a long time. The third circle wants to seriously curtail or even get rid of the Fed.

Ron Paul in charge of Federal Reserve oversight? – Here's a little irony in the House GOP sweep: The next chairman of the monetary policy subcommittee -- overseeing the Federal Reserve?  None other than Ron Paul (R-Texas), who'd just as soon abolish the Fed.  Paul is the ranking member of the Subcommittee on Domestic Monetary Policy and Technology on the Financial Services , which oversees the Federal Reserve, the U.S. Mint and American involvement with international development groups like the World Bank. Unless someone bumps him, he's next in line for the subcommittee gavel.  Paul is critical of all the institutions he would oversee. He's long called for killing the Federal Reserve, and this year tried to get an audit of the Fed into the Wall Street reform bill. He's asserted that the dollar should be tied to the gold standard in order to keep it from losing its value.

When Monetary Policy Pushes Hard - With the recent announcement of QEII (quantitative easing II), the Federal Reserve’s new round of long-maturity asset purchases, it is worth looking at some of the effects of QEI. In November 2008, the Fed announced large-scale purchases of mortgage-backed securities and debt issued by the GSEs. Its securities holdings began to climb sharply in early 2009. As shown in blue, the monetary base (a broad measure of the Fed’s liabilities) had already begun to rise several months earlier. New asset purchases for QEI ended earlier this year.  But notably, the green line shows that a trade-weighted index of the dollar’s value against a basket of foreign currencies has declined quite a bit. Some world leaders are unhappy about this development, but it may have helped to spur U.S. exports, shown in red. The orange line shows the interest rate on a 10-year inflation-indexed Treasury security, which can be used as a measure of the real (inflation-adjusted) interest rate. This rate has tumbled from well over 3.5 percent to negative levels. Some economists doubt that a monetary authority such as the Fed can succeed in reducing real long-term interest rates over a prolonged period, but this is a remarkably sustained trend. The interest rate series in the graph has been rescaled (actually, multiplied by 10), so that its movements can be seen more easily. Detailed information on the Fed’s asset purchases and its balance sheet can be found in this series of official reports.

Everyone expects inflation - The broader point on this argument is that so long as the dollar is the world's main reserve currency, a strong American economy is in the world's interest. American leaders might say, with good reason, that other countries are mistakenly emphasising short-term gains. A weaker dollar now will accelerate both recovery and rebalancing, putting the economy on a stronger footing down the road and ultimately benefitting American creditors. That leads to Buttonwood's second point: My more fundamental point is that the US is a debtor nation. It has committed to borrow money from other countries in the form of dollars. Printing money to repay those debts (which is what the Fed is doing by creating money to buy government bonds) is, in essence, a partial default. It is as if you tried to pay your supermarket bill with Monopoly money, on the grounds that it was the only paper money you could find in the house. I'm not sure this argument really holds up. A dollar is worth what people say it's worth. And we understand what a dollar is worth by observing what we can buy with it.

Bernanke: Not trying to increase inflation -— The chairman of the Federal Reserve denied Saturday that he’s trying to increase inflation as a means to help the U.S. economy grow.  Some Fed critics have accused the bank of pursuing an inflationary strategy by adding trillions of dollars of credit into the nation’s financial system. The Fed itself seemed to suggest inflation was too low in a policy statement two months ago.  Yet Fed Chairman Ben Bernanke said Saturday that the central bank’s decision this week to purchase $600 billion in Treasury bonds is solely aimed at keeping U.S. interest rates low so the economy can grow.  “We are not in the business of trying to create inflation,” Bernanke said at a forum in Georgia to discuss the role of the central bank in the U.S. economy.

The Fed Rejects Level Targeting - Remarks from Ben Bernanke indicate that the Fed is shooting itself in the foot: “I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy,” [Bernanke] said. In fact, the Fed should engage in level targeting, as I have been pushing in the last few posts. It should commit to a higher target for nominal expenditure in order to return to the previous trajectory from the Great Moderation. That requires a higher level of NGDP growth than is “normal” in order to catch up. One way to do this under the current monetary regime is to create higher inflation expectations. Do they need to be much higher? I don’t think so, but it’s not entirely unreasonable to disagree. So we know that most members of the FOMC view 2% as the preferred inflation target. We now also know that the Fed is holding true to that target, come hell or high water. 2% is better than 1%, but a temporarily higher target would produce a much more robust recovery. Arguably, the Fed is in the business of providing stable NGDP growth consistent with high employment and low inflation. It allowed NGDP to plummet and now they should be trying to make up that lost ground as quickly as possible. This statement is clearly against that goal. We’re in for a rocky road if our monetary authority sees it fit to tie its hands.

Commodity inflation - I guess now we know that the Fed has the tools to prevent deflation. Recent research by Ke Tang and Wei Xiong documents that the correlation between the price changes of different commodities has been increasing over time. Here for example is the correlation between the changes in oil and copper prices. These two prices were essentially uncorrelated in 2001. Back then, in a week when oil prices went up, the price of copper was just as likely to go up as down. Over the last few years, however, the two prices have been much more likely to move together.  The recent positive correlation of course does not mean that an increase in the price of oil is what's causing the price of copper to go up. Instead, it just signifies that there are some common factors affecting the two markets in a similar way. Another changing correlation over time is that between commodity prices and the exchange rate. Here for example is the correlation between the weekly change in the dollar price of oil and the weekly change in the number of dollars you'd need to buy one euro. In 2001, the correlation was actually negative for a while, because news of a weakening U.S. economy would cause both the dollar to depreciate and the dollar price of oil to fall. In recent years, however, the correlation is positive and quite strong.

Inflation Delusions – Krugman - Wow — so the official right-wing line seems to be that all the talk about falling inflation is a leftist plot — that real people know that prices of real things like groceries are soaring. I should have guessed that from the ravings of our resident troll (singular — internal evidence suggests that there is only one). Anyway, I thought it would interesting to see how much the price of groceries has diverged from other measures of inflation, in particular the core inflation whose logic, no matter how often explained, never seems to get across. So, the following figure shows inflation measured at different time horizons. It asks, what is the average inflation rate over the past 10 years, the past 9 years, etc., if you look at core prices versus looking at food consumed at home, aka groceries: What we see is that grocery prices have tended to rise faster than inflation as measured by the core CPI, but not by all that much: over the past 10 years the grocery inflation rate has been about half a point faster than the core inflation rate.

Inflation Fears and Measures of Expected Inflation - Recent news items have noted the fears of several individuals that QE2 will spark rapid inflation, e.g. [1]. For instance, Representative Paul Ryan, expected to become the Chairman of the House Budget Committee in January, stated: "I think it's going to give us a big inflation problem down the road."  Here are what various market-based indicators suggest. First, I show the daily observations on the break even rates for TIPS (and hence the expected inflation rates, under certain assumptions): Notice that, like the value of the dollar, there has been some movement over time as market participants ascribed a higher and higher likelihood of a QE2. That is, inflation expectations have trended higher. However, these movements have to be put into context. If the expectations hypothesis of the term structure (EHTS) holds, then these movements imply that as of 11/8, the average inflation rate over the next five years will be a breathtaking 1.6%! Further, it is useful to place these expected inflation rates in temporal perspective.

Growth without the effects of growth - JAMES HAMILTON writes: I feel that there is a pretty strong case for interpreting the recent surge in commodity prices as a monetary phenomenon. My view has been that the Fed needs to prevent a repeat of Japan's deflationary experience of the 1990s, but that it also needs to watch commodity prices as an early indicator that it's gone far enough in that objective. In terms of concrete advice, I would worry about the potential for the policy to do more harm than good if it results in the price of oil moving above $90 a barrel. And we're uncomfortably close to that point already. I find this to be a pretty unsatisfying way of looking at the issue. Mr Hamilton is writing as though it doesn't matter how QE is affecting prices, but presumably the Fed could be boosting commodity prices by facilitating faster global growth and an increased demand for commodities. What if the equilibrium price of a barrel of oil in a world growing at trend levels is above $90? Does that imply that governments should intervene to reduce growth below trend or potential levels?

Maybe economists should only have one hand - [T]he debate about whether inflation or deflation is more likely, and about whether the aggressive response of central banks is appropriate today is at the heart of some of the most basic issues in macroeconomics. One example that I always find interesting is the debate that one finds in the minutes of the monetary policy meetings at the Bank of Japan. When discussing the inflation outlook in Japan in recent years, you can always find views on both sides, those who are concerned with deflation and those who are concerned with inflation picking up. Here is a paragraph from the meeting back in April 2010. Regarding risks to prices, some members said that attention should continue to be paid to a possible decline in medium- to long-term inflation expectations. One member expressed the view that attention should also be paid to the upside risk that a surge in commodity prices due to an overheating of emerging and commodity-exporting economies could lead to a higher-than-expected rate of change in Japan's CPI. Of course, given the last 10 years of data in Japan, it seems awkward that some are concerned with the upside risk to inflation. While one cannot completely rule out this possibility maybe erring on the other side, making the mistake of letting inflation be "too high", for a few years would be good for the Japanese economy.

Memo to the Fed: Fix the Aggregate Demand Externality - Paul Krugman makes an important point in his NYT column: there is an excess money demand problem (my bold below): For the big concern about quantitative easing isn’t that it will do too much; it is that it will accomplish too little... The only way the Fed might accomplish more is by changing expectations — specifically, by leading people to believe that we will have somewhat above-normal inflation over the next few years, which would reduce the incentive to sit on cash. Yes, somewhere there are households and firms that are sitting on excess money balances.  And understand these are the households and firms that are creditors and thus the beneficiary of the debtors who are now saving more.  Instead of spending their growing stock of money they are sitting on it because they see an uncertain economic future.  Here is the rub: it doesn't have to be this way.  If these creditor household and firms all simultaneously started spending their excess money balances this would increase aggregate spending and in turn spur the real economy.* Moreover, knowing that the real economy would improve going forward would feed back and reinforce current aggregate spending. A virtuous cycle would take hold and push the economy back toward full employment.  But this not happening,  there is still an excess money demand problem.    This amounts to a negative aggregate demand (AD) externality

Fed Inability to Cut Rates Fuels Joblessness - American consumers borrowed and spent their way into today’s slow recovery, and the jobless rate is being held near 10% because the Federal Reserve is unable to cut interest rates below zero, says Stanford University economist Robert E. Hall. In a paper presented Thursday at a Federal Reserve Bank of Atlanta conference, Mr. Hall calculates that loose credit earlier in this decade resulted in consumers buying 14% more long-lasting items — from cars and dishwashers to houses — than they would have if credit conditions had remained as they were in the previous decade. The recession was marked by those overextended households cutting spending and saving more in the face of hard times. The problem now is that the normal tool used to revive consumer spending and hiring — cutting interest rates well below the inflation rate — isn’t available because rates are nearly at zero. So unemployment has remained stuck at a high level, currently 9.6%.

Ben Bernanke Doesn't Realize That America Is Facing A Brand New Type Of Credit Crisis - The Fed is desperately trying to incent banks to lend more money by reducing the yield on cash and reducing risk.  But it's clear now that lack of lending isn't the problem: lack of desire for credit is. Yesterday, two credit surveys were released by the Federal Reserve that told readers roughly the same thing: Americans now hate debt. How did this happen? Only 3 years ago, Americans were in love with their credit cards, holding massive mortgages, and finding new ways to take out loans for reckless purchases. Then, bang, the crisis hit and everyone is tapped out and retrenching. While some may see this as a responsible turn by Americans, it is evidence of the paradox of thrift, where consumers prefer to pay down debt and save rather than spend. And if people and businesses aren't spending, the economy isn't growing, and job growth can't take hold.

The Dukes of Moral Hazard: The Dangers of Quantitative Easing… Companies with junk bond ratings are flooding the markets with new issuance. If private equity firms bring a money-losing company saddled with debt to market, investors are eager to snap it up. Thank the Federal Reserve. The central bank has embarked on its program of “quantitative easing,” a second round of experimental monetary policy in which the Fed buys up assets — like longer term government bonds — to bring down interest rates, which is supposed to spur lending and borrowing, thus reigniting the economy. Nobody knows whether it will work to bring down the intractable rate of unemployment. But it has already worked in one significant way: the speculative juices of the markets are flowing. What’s going on? As a Fed official explained [1] it in a recent speech, one supposed benefit of the Fed policy is that it will add to “household wealth by keeping asset prices higher than they otherwise would be.” So it’s levitation-by-decree. When the Fed moves, financial assets receive the opposite of collateral damage: universal blessing, deserved or not. Lower rates may or may not help more people find work. But there’s no doubt that the central bank has already helped the Henry Kravises and Lloyd Blankfeins of the world.

Buttonwood: Accentuate the negative | The Economist - WHAT is the point of investing? For most people the aim is to earn a return that is at least higher than inflation. If you can’t achieve that, you may as well spend your money straight away. So it seems rather odd, at least on the surface, that the American government was able to sell inflation-linked bonds last month on a negative real yield. Those who bought the bonds were guaranteeing that their investment would lose purchasing power. Why on earth would investors—presumably sane ones—do that? There have been previous examples of investors earning negative real yields on conventional government bonds, particularly in the 1970s. But they have usually been attributed to a failure to anticipate an inflationary surge, rather than the result of a deliberate decision.  This time round, however, negative real yields arguably reflect optimism that the Federal Reserve, via the policy of quantitative easing, can deliver a good economic outcome and avoid the extremes of deflation or hyperinflation. The bond issue is also good news for the American government. There is no sign yet that investors are panicking over the size of the fiscal deficit or the lack of any medium-term austerity plan.

More On Shibboleths - A few more thoughts on the problem of shibboleths in the face of a depressed world economy:

• 1. Yes, I know what shibboleth meant in the Bible. I wrote about it a long time ago:
• 2. I’m not sure my point on the excess supply of savings even at a zero interest rate got through. The question is: suppose you concede that this is the situation we face; what do you want us to do? If you reject inflation, the only way to get a negative real interest rate, as immoral; if you say that deficit spending is unacceptable; then what is your proposal to close the gap? Are you saying that tens of millions of workers must remain jobless so that you feel comfortably orthodox?
• 3. Finally, the shibboleths are undermining actual policy. Even as Ben Bernanke moves to buy some unconventional assets, he feels compelled to deny any rise in the inflation target — thereby blocking one of the main channels through which his policy might actually work.

QE2 inflates commodities, threatens 70s-styled malaise – QE2 is a "rising tide that lifts all boats." The boats, in this case, refers to asset prices. Unfortunately, not all asset rallies are good for the real economy. Since the Federal Reserve first strongly telegraphed on September 21st that it will conducted a second round of large-scale asset purchases with newly-printed money, risk assets have jumped across the board.The S&P 500 has risen 4.5 percent, gold has climbed 8.2 percent, oil has gained 16.8 percent, and copper has rallied 14.1 percent. Rising equities is certainly helpful for the real economy. It helps households and institutions repair balance sheets and pay down debt. Overall confidence may also rise, although it is debatable how much confidence this reflation-based rally will generate. However, rising industrial and consumer commodity prices is harmful to the real economy. The average U.S. household spends about 10 percent of its income on gasoline and utilities, so rising commodity prices will crowd out spending in other areas, dampen confidence, and hamper the deleveraging process.

Sarah Palin Is Right About Food And Energy - In yesterday's The Idiot's Guide To Blowing Bubbles, I sarcastically fired a warning shot about rising commodity prices stemming from the Fed's QE2 initiative. Pick almost any commodity: the price is rising. The problem is that nobody representing the Powers That Be seems to give a damn, or they dismiss the problem out of hand.  Yet rising food and energy costs (included in the "non-core" Consumer Price Index, or CPI) are on track to ravage the balance sheets of most American households. Sarah Palin recently gave a speech criticizing money printing and warning of the dangers of inflation. There was nothing out of the ordinary in her remarks, but when she tried to point out that food and energy costs are rising, Sudeep Reddy at the Wall Street Journal and others were quick to discount her views because official government statistics say otherwise! --Unlike most U.S. economists and politicians, however, Palin tries to draw the concerns about quantitative easing to inflation today and falls short. She says, “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.”

Where the Bubbles Are - Across the world, there are booms. Chinese Internet companies are flourishing. Energy companies are finding new sources of power. Commercial real estate is coming back. Unfortunately, this isn’t happening in the real world, which is still crippled by sagging economies, but in the investing one. Thank the Federal Reserve. The central bank has embarked on its program of “quantitative easing,” a second round of experimental monetary policy in which the Fed buys up assets — like longer-term government bonds — to bring down interest rates, which is supposed to spur lending and borrowing, thus reigniting the economy.  What’s going on? As a Fed official explained it in a recent speech, one supposed benefit of the Fed policy is that it will add to “household wealth by keeping asset prices higher than they otherwise would be.”

We Are Not The World - Krugman - A bit more on commodity prices: among other things, all of those pointing to rising commodity prices as a sign of runaway U.S. inflation seem oddly oblivious to the fact that commodity prices are a global phenomenon, driven by world demand — that the United States doesn’t drive these things. In fact, the heart of the commodity story is that of the fall and rise of decoupling. At the beginning of the 2008 crisis, it was widely asserted that emerging markets would manage to keep growing right through the troubles of America and Europe. That turned out not to be true: the severity of the crisis was so great that nobody was exempt. But once the Oh-God-we’re-all-gonna-die phase was past, emerging economies did stage a strong recovery, much stronger than that in advanced economies: Data here. And this recovery in the emerging world has led to a recovery in commodity prices, which had plunged in 2008. How much does all this have to do with Ben Bernanke, or U.S. policy in general? Not much.

QE II Bet Starts to Unravel - Signs in the yield curve, municipal bonds, junk bonds, and commodities suggest the one-way "sure thing" QE II bet has started to unravel. Curve Watchers Anonymous is particularly interested in the yield curve. (click on any chart in this post to see a sharper image) A representative of Curve Watchers Anonymous said "I have never seen action like this before. The middle part of the curve is blowing up even as the long bond rallies. The action indicates that everyone who front-ran the Fed purchases is now unloading to the Fed. " The 5-year is off 14 basis points while the 30-year is up 8. This is quite unusual to say the least.

Goldman Says Bernanke Engineers `Substantial Pickup' - Goldman Sachs Group Inc. defended Federal Reserve Chairman Ben S. Bernanke’s decision to pump money into the U.S. economy after officials in Germany, China and Brazil criticized the plan.  The move will spur gross domestic product growth and reduce the risk of deflation, Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. Because the Fed’s target for overnight loans between banks is near zero, the central bank is doing “the next best thing,” according to Goldman, one of the 18 primary dealers that are authorized to trade directly with the central bank.  “The widespread hostility to the Fed’s actions is misplaced,” Hatzius wrote. “Downside risks to the economic outlook have declined significantly. U.S. inflation is unlikely to become a problem for years.”

Current economic conditions - Econbrowser (charts)Things look slightly cheerier than they did a month ago. But that's not saying much. U.S. auto sales for October were up 13% from a year ago, and about the same level as September.You might take that as reasonably good news, since October's usually a bit softer than September. Seasonally adjusted auto sales seem to have been edging modestly higher for a while now, and motor vehicles production contributed 0.42 percentage points to the nation's 2.0% Q3 real GDP growth rate (see BEA Table 1.2.2). The ISM manufacturing PMI climbed to 56.9 for October. Any reading above 50 signifies improving conditions, and all year long this index has been suggesting good gains for manufacturing. ISM nonmanufacturing PMI was also up. Marcelle Chauvet's recession indicator index, which had spiked up to 25% last month, is now back down to a more comforting 12%.But before you start to party, remember that the Chicago Fed National Activity Index is another pretty good indicator of broader economic conditions. Its 3-month average for September came in at -0.33, suggesting that overall growth remains weak.

Dave’s Top 10 Reasons Why QE Won’t Help the Economy

QE: Landing With a Thud - Caixin - The picture painted by the data on third quarter GDP, which was released the prior week, was even bleaker. Most reports focused on the 2 percent growth number, which was slightly higher than had been expected. However these reports missed the fact that most of this growth was due to the extraordinary pace of inventory accumulation in the quarter. The rate of accumulation in the 3rd quarter was the second highest ever, adding 1.4 percentage points to growth for the quarter. Excluding this jump in inventories, the economy grew at just a 0.6 percent annual rate in the third quarter. If inventory growth returns to a more normal level, 4th quarter growth will likely be negative. The Fed's decision to try another round of quantitative easing must be understood in this context. The U.S. economy is operating far below its potential and will not likely return to potential output any time soon without some outside boost. The Fed's decision to buy US$ 600 billion in government bonds over the next 8 months is a step in this direction.

Obama Warns of ‘New Normal’ for Economy - President Barack Obama warned in an interview on CBS’s 60 Minutes about the danger of a “new normal” taking hold of the economy – an environment in which businesses become accustomed to fewer employees and the U.S. job market never regains its footing. Here are his views on this potential phenomenon and other issues, from the interview taped on Thursday: “What is a danger is that we stay stuck in a new normal where unemployment rates stay high. People who have jobs see their incomes go up. Businesses make big profits, but they’ve learned to do more with less. And so they don’t hire. And, as a consequence, we keep on seeing growth that is just too slow to bring back the eight million jobs that were lost. That is a danger. So, that’s something that I’ve spent a lot of time thinking about.”

The New Malaise and How to End It - After a cyclical boost early this year, the current state of the U.S. economy is unimpressive: modest growth, high levels of unemployment, stagnant wages, low levels of consumer and business sentiment, and volatile financial markets. Extrapolating from recent data, many predict only a middling recovery in the next several years. They call it "the new normal." I call it the new malaise. The prevailing theory has it that U.S. policy makers should not deny our foregone fate. We should accept smaller improvements in output and employment and productivity. We should resign ourselves to the new normal and conduct policy accordingly. That is the last best hope, they argue, to preserve the remaining vestiges of a golden age that is no more.  I reject this view. I consider this emerging ethos to be dangerous and defeatist and debunked by America's own exceptional economic history. Our citizens are not unwitting victims of some unavoidable fate. The current period of subpar growth and high unemployment is real, but it need not persist. We should not lower our expectations. We should improve our policies.

The Empire's Decline — Where Do We Stand? - This is a good time to reassess how the Empire is faring. This blog's premise is that the United States is in permanent decline. Where do we stand? Is there a single shred of evidence that our premise is incorrect? Try as you might, you will not be able to point to a single achievement or turn-around indicating that America is on the rebound. Our politics is still dysfunctional and corrupt. The too-big-to-fail banks are still too big to fail, except now there are fewer of them. The Financial Reform package did not reform finance, putting most of the crucial decisions into the hands of malleable regulators at the Fed and elsewhere. The steep cost curve for health care entitlements (Medicare) got worse, not better, as a result of health care reform. And so on.

The End of Growth - The “growth” we are talking about consists of the expansion of the overall size of the economy (with more people being served and more money changing hands) and of the quantities of energy and material goods flowing through it. The economic crisis that began in 2007-2008 was both foreseeable and inevitable, and it marks a permanent, fundamental break from past decades—a period during which most economists adopted the unrealistic view that perpetual economic growth is necessary and also possible to achieve. There are now fundamental barriers to ongoing economic expansion, and the world is colliding with those barriers. This is not to say the U.S. or the world as a whole will never see another quarter or year of growth relative to the previous quarter or year. However, when the bumps are averaged out, the general trend-line of the economy (measured in terms of production and consumption of real goods) will be level or downward rather than upward from now on.

Are We There Yet? - With the US$ sinking and Gold setting new highs every few days those, like me, who have been waiting for the final collapse of the current $ based international financial system have one question on our minds- “are we there yet?” “Not yet. But we’re getting very close.”  Coincidentally, the Federal Reserve announced plans to buy, during the next 9 months, $600B of long dated US Treasuries- a policy they refer to as “quantitative easing”. I prefer “monetizing debt” to avoid confusion. While Big Finance in the US celebrated the return of Gridlock and the gift from the Fed, our foreign financiers most likely took a less sanguine view of the policy changes. US banks will soon be free to take even bigger risks while the Fed actively drives the value of the US$- the ultimate “asset” our financiers are promised- ever lower.

World Bank Chief Sparks Gold Standard Debate - Writing in the Financial Times, Robert Zoellick, the bank’s president since 2007, says a successor is needed to what he calls the “Bretton Woods II” system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.  Mr Zoellick, a former US Treasury official, calls for a system that “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account”. He adds: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.” His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.

In Which Bob Zoellick Makes His Play for the Stupidest Man Alive Crown » The last thing that the world economy needs right now is another source of deflation in a financial crisis. And attaching the world economy's price level to an anchor that central banks cannot augment at need is another source of deflation--we learned that in the fifteen years after World War I. Which is why Bob Zoellick says that we need it. Alan Beattie watches the intellectual train wreck: Zoellick seeks gold standard debate: Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank. Mr Zoellick, a former US Treasury official, calls for a system that: is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.... The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.... Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” They do not. They simply do not. That is not true. Markets are using gold as a speculative asset and a hedge. They are not using it is a medium of exchange, a unit of account, or a safe store of nominal value.

Barbarous Relic Watch - Krugman - So Robert Zoellick wants us to return to return to a modified gold standard. Brad DeLong pronounces him the stupidest man alive; that’s much too kind. I mean, look at our current situation. On one side, we’re witnessing a steady slide toward lower inflation, tracking almost perfectly Japan’s slide toward corrosive deflation: On the other, we have sharply rising gold prices, reflecting some combination of Chinese demand and Glenn Beck. So put this together: doesn’t this strongly suggest that we’d be facing very strong deflationary pressure if we had been on a gold standard? Yes, gold demand is endogenous – it might be lower if you knew that the Fed and the ECB were securely bound by golden fetters. On the other hand, there would be a lot more demand for gold reserves.  The question I’d ask is, what problem does Zoellick think gold would solve? The descent into a Dark Age of economics continues.

Fool's gold - I HAVE to say, I feel a little bad for Robert Zoellick. He has written a piece for the Financial Times that mostly consists of laying out the weaknesses of the global monetary system and proposing sensible reforms for it: things like an agenda of structural reforms to reduce imbalances, a general swearing off of currency market interventions, and an effort to move emerging markets toward floating exchange rates (with limited capital controls to avert destabilising surges of hot money). But no one is paying any attention to that. Instead, the FT has put Mr Zoellick's story on the front page with the banner headline, "Zoellick seeks gold standard debate". All because of this little bit, fifth in his plank of proposals: Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today

World Bank President: My Words Were Manipulated, I Don’t Support A Return To The Gold Standard - World Bank president Robert Zoellick has clarified recent comments about gold. No, the head of the World Bank isn't advocating a return to the gold standard. Reuters: "I don't believe you can return to a fixed exchange rate system and that is the gold standard," he later told the Foreign Correspondents Association.""Markets are already using gold as an alternative monetary asset because confidence is low...it is saying we have a problem that needs to be fixed."Gold prices have soared to record levels in recent weeks and are currently around $1,400 per ounce. "There is an elephant in the room and that is what I want people to recognise," Zoellick said.

Back to a Gold Standard? - Room for Debate - NYTimes - Robert Zoellick, the president of the World Bank, wrote an article in The Financial Times this week, arguing that it might be time for a new international system of adjustable exchange rates that would use gold as a reference point for inflation and currency values. "Although textbooks may view gold as the old money," Mr. Zoellick wrote, "markets are using gold as an alternative monetary asset today." Gold prices moved past $1,400 per troy ounce on Monday. (On Wednesday, Mr. Zoellick in clarifying his comment, said he was not advocating a gold standard, but described gold prices as "the elephant in the room" that policymakers needed to acknowledge.) As The Financial Times noted, "Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks." Would moving to a modified gold standard make sense in this global economic climate? Or would it make recovery more difficult? How might this work? Mark Thoma's response is here. There are other responses from Douglas Irwin, Jeffrey Frankel, Simon Johnson, James Hamilton, and Russ Roberts

Gold’s ‘Record High’ in Context -“Gold sets record high amid economic fears,” The Associated Press recently wrote. “Gold surges to record high,” CNN said. Gold closed Monday “at a record $1,402.80 per troy ounce,” the front page of The Wall Street Journal reported on Tuesday.  It’s a good story. Unfortunately, it’s not true, at least not in any meaningful sense.  Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation. Otherwise, you end up with meaningless records — Gold reaches record high! Oil reaches record high! Lettuce reaches record high! — that depend on the fact that a dollar in 2010 does not have the same value as a dollar did in, say, 1980.  More than a month ago, Ryan Chittum of The Columbia Journalism Review noticed the epidemic of supposed gold records and urged those of us in the news media to stop. The actual record was set 30 years ago, when the price of gold, in today’s dollars, hit $2,387, or 71 percent higher than it closed on Tuesday.

Pre Post Mortem - The poetry of dynamic forces does not lend itself to easy explication. Thought exercise: Imagine the vector of a Chevy Trailblazer and a CSX coal train of four 3000-horsepower diesel engines hauling 88 loaded hopper cars four miles north of Chugwater, Wyoming. The Chevy driver left his meth lab, say, fourteen minutes earlier after piping up and doing three tequila shots. The lead engineer on the coal train, a sturdy fellow, five-feet-ten-inches and 270 pounds, having finished his supper of double deluxe nachos (with two meats and extra cheese) is entering a less than blissful realm of myocardial infarction. Meanwhile, a meteor the size of a basketball has passed into the troposphere on a trajectory to strike the planet Earth at precisely the point where the CSX line crosses state road no. 44. That there would be a snapshot of your US political economy.    Of course, lying and doubletalk don't help none, either. Such as the widespread falsehood that a "recovery" to the consumer credit nirvana and rising house prices of yesteryear is underway. Or that a program called quantitative easing represents anything more than a national check-kiting scheme ramping up so many zeros that the goddess of infinity herself would run shrieking from the scene in embarrassment.

There Was A Fed Chairman Who Swallowed A Fly - While it’s true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today’s economic world, it seems the cycle can be counted in months. On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign, Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an “exit strategy.” In a response entitled “No Exit for Ben“, I called the Chairman’s bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization.Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity.

CLSA’s Chris Wood Says Bernanke Will Continue "Mad Experiment" Until He Kills US Dollar Paper Standard, Looks Toward QE3 - From CLSA's Fear and Greed: The announcement of QE2 has come in as expected, namely an incremental approach. Still, the approach is sufficiently gung-ho to continue to give the benefit of the doubt to the risk trade.  GREED & fear’s view on QE2 remains that it will not precipitate releveraging of the American economy, just like the first version did not. But it will probably take some time for the equity market to work that out reflecting the natural bullish bias. Still when the releveraging hopes are dashed attention will then turn to QE3, which next time may include a formal inflation target and purchases of private sector debt.  Billyboy will likely carry on with his mad experiment until he precipitates the collapse of the US dollar paper standard. The Fed’s attempt to combat the perceived problem of deflation will end up creating a far bigger problem. That is the systemic risk posed by the anticipated ratcheting up of QE. This is why the view here remains that America will turn out to be a case of “Japan-heavy” not “Japan-lite”.  GREED & fear continues to be surprised that US financial markets are not more concerned about the continuing foreclosure mess. There is also the separate but related issue of faulty representations and warranties made by originators of non-agency mortgage loans in the mortgage-backed securitisation process. The issue is whether this is institution specific or system wide.

Xinhua: G-20 Should Set Up Mechanism To Monitor Reserve Currency Issuers (Dow Jones)--China's state-run Xinhua News Agency published a commentary on Tuesday calling for the Group of 20 industrial and developing economies to supervise the issuance of international reserve currencies, and harshly criticized the U.S. Federal Reserve's new round of quantitative easing. The G-20 should "set up a new mechanism that effectively monitors the issuer of the international reserve currency, especially when it is not able to carry out responsible currency policies," Xinhua said, making an apparent reference to the U.S. as the issuer of the dominant reserve currency. "Considering the influence of the policy moves in the major international reserve currencies on the global economy, it is necessary for the issuer of the international reserve currency to report to and communicate with the G-20 Group before it makes major policy shifts."

US declared financial war to the world - economist - There is no possibility of agreement at the upcoming G20 summit because the U.S. is declaring financial war on other countries, believes American economist Michael Hudson. The American plan to devalue the dollar would flood the global economy with money that would be used to buy out everything that values at local markets, he believes. “Essentially, you’ll have America’s financial system and the banks acting as an army to raid foreign currencies.” The US will traditionally break any of its promises to other countries because ‘if there are no penalties – there is no agreement’, which has been the way of American diplomacy for the last 50 years, says the economist.

China newspaper warns of disaster over Fed move - The US Federal Reserve's decision to pour more money into the economy is a form of indirect currency manipulation that could spark a global collapse, a Chinese state-run newspaper said on Monday.  The Fed last week announced it would spend another 600 billion dollars buying government bonds to kickstart the US recovery, in a radical policy approach known as "quantitative easing".  The move follows a similar cash injection into the struggling US economy worth about 1.5 trillion dollars during the crisis.  In a front-page commentary, the overseas edition of the People's Daily, the Communist Party's mouthpiece, said the Fed's move would speed up the dollar's depreciation and possibly cause countries to put up trade barriers.

Germany Govt Says Fed's QE2 Is Indirect Currency Manipulation - German government members over the weekend renewed their attacks on the U.S. Federal Reserve for its new round of quantitative easing, arguing that it was an indirect manipulation of the dollar's foreign exchange rate. "The expansive monetary policy of the US is worrying me because an excessive increase of money supply is also an indirect manipulation of the dollar rate," German Economics Minister Rainer Bruederle said in an interview with German weekly Welt am Sonntag. German Finance Minister Wolfgang Schaeuble told German weekly Der Spiegel that "it doesn't fit together when the US is accusing China of foreign exchange rate manipulation and afterwards artificially pushes down the dollar rate by printing money."

France Lagarde:Dollar Can No Longer Be Only Reserve Currency-Report--The global monetary system needs to be rethought in order to reduce the size of fluctuations, and the dollar can no longer be the only reserve currency, French Finance Minister Christine Lagarde said in an interview published Monday in French regional daily Sud Ouest. "Monetary problems will be at the center of France's presidency of the G-20," Lagarde is quoted as saying. "The dollar can no longer be the only reserve currency." Lagarde also said Chinese President Hu Jintao told France on a state visit last week that he is ready to contribute to global monetary stability, the paper says. In the coming years, China will also increase the weight of domestic consumer demand compared with exports, Lagarde is cited as saying.

UPDATE: Sarkozy Urges New Monetary System After China Talks - French President Nicolas Sarkozy, after a meeting with his Chinese counterpart, on Friday called for world economic powers to stop squabbling and hammer out a new international monetary system. France has set reform of the international monetary system as its chief priority for its upcoming presidency of the G-20 group of leading nations. The country's ambition is for all countries "to accept to sit around a table to lay the foundations of a new system that guarantees the stability of the world," Sarkozy said after a meeting with China's Hu Jintao. Sarkozy's push for a new monetary system comes at a time of widespread unease about the status quo, with its large pools of currency reserves, worldwide exposure to U.S. monetary policy due to the dollar's preeminence, and concerns over the volatitly of exchange rates. "We are up against subjects of very great complexity," Sarkozy said. Rising tensions of late have raised fears of a currency war. But rather than " everyone hurling abuse at each other," nations should come together to build " the system of the 21st Century," said the French president.

PBOC Adviser: Should Promote Adding Yuan To IMF's Special Drawing Rights Basket - The global currency system needs further reform, including the possibility of adding the Chinese yuan to the International Monetary Fund's Special Drawing Rights basket of currencies, Xia Bin, an academic adviser to the People's Bank of China, said Wednesday. SDRs were created by the IMF in 1969 to supplement its members' official reserves. Each SDR represents a claim to foreign currencies for which it may be exchanged in times of need. Although SDRs are denominated in U.S. dollars, their nominal value is derived from a basket of currencies, namely the Japanese Yen, U.S. dollar, U.K. pound and euro. Speaking at a forum, Xia said the dollar-led international currency system was a cause of the recent global financial crisis. The U.S. should resolve its own structural problems and stop blaming other nations for its woes, he said, adding that over-printing the dollar isn't good for the U.S. itself

Renminbi will be world’s reserve currency (Financial Times) If there is to be a rival to the dollar as the world’s reserve currency in the 21st century, it must surely be the Chinese renminbi, says Qu Hongbin, chief China economist at HSBC. “China’s aim of internationalising the renminbi has no doubt been helped by America’s pursuit of quantitative easing, a policy that many emerging nations have interpreted as an attempt to export US economic problems via a weaker dollar. Whether or not this is so, it will surely only encourage governments, reserve managers and companies to think about alternatives to the dollar.” The increasingly important role in the global economy played by emerging markets will be crucial, he says. “Emerging markets now account for 55 per cent of China’s total trade, and this is likely to rise rapidly. A switch from the dollar to the renminbi for trade settlement would be an appealing option for EM nations – and we expect at least half China’s trade flows with EM countries to be settled in renminbi within five years, making it one of the top three global trading currencies. “The world is slowly, but surely, moving from greenbacks to redbacks.”

The Dollar: Every Man For Himself - The Federal Reserve’s (Fed’s) strategy of firing up its printing press may have the debasement of the U.S. dollar as its goal (see Fed Targets Weaker Dollar), but it’s important to note that the Fed does not act in a vacuum. In our humble opinion, Fed Chair Bernanke is wrong both on substance and politics – a potentially explosive mix. On substance, the Fed recently stated in the Federal Open Market Committee (FOMC) Minutes that businesses were holding back investments because of fiscal and regulatory uncertainties. In the FOMC’s own analysis, the economic recovery should strengthen in 2011, even without additional stimulus. Additionally, commonly followed metrics used to measure the market’s inflation expectations are, and have been, approximately 2%. Even if inflation expectations were to drop lower, the lone dissenting voice on the Fed, Thomas Hoenig, rightfully argues a little deflation may not be any worse than a little inflation. In our view, printing upwards of US$600 billion in fresh money may be the wrong prescription for the current situation.

Greenspan says US keeping dollar low, hurting others — Former Federal Reserve chairman Alan Greenspan says both the United States and China are pursuing a policy of weakening their currencies to the detriment of other economies. Greenspan published his views in Thursday's Financial Times hours before the start of a G20 summit in Seoul designed to protect the global economy from lingering crisis amid a growing risk of protectionism. "America is...pursuing a policy of currency weakening," Greenspan wrote. "The suppression of the (Chinese yuan) and the recent weakening of the dollar are, of necessity, producing firming exchange rates in the rest of the world to, as they see it, the rest of the world's competitive disadvantage"

'Geithner: Won't Ever Seek To Weaken Dollar For Competitive Advantage - CNBC --The dollar's movement is due to safe-haven flows into the U.S., not the Federal Reserve's easing policy which the U.S. would never use for competitive advantage, Treasury Secretary Timothy Geithner said in a television interview Thursday. The comments, made by Geithner to CNBC as leaders of the Group of 20 industrial and developing nations meet in Seoul to resolve the world's pressing economic issues, follow criticism that the U.S. was weakening its currency for economic advantage. "The U.S. will never do that. We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy," the Treasury secretary said. "It's not an effective strategy for any country."

Tim Geithner denies US is planning to weaken the dollar – Tim Geithner, US Treasury Secretary, has hit back at suggestions the US is using its latest $600bn (£370bn) round of quantitative easing to purposely weaken the dollar. Following claims from Wolfgang Schaeuble, the German finance minister, that “what the US accuses China of doing, the US is doing by different means,” Mr Geithner rejected the notion that decisions by the Federal Reserve earlier this week somehow contained an ulterior motive. He said that the US “won’t ever use our dollar as a tool for economic advantage” - noting that capital is flowing towards the emerging markets to fuel growth in those areas.  “You can have too much of a good thing, but it is fundamentally an encouraging thing,” said Mr Geithner in Kyoto, Japan, during a meeting of the finance ministers of the Asia-Pacific Economic Co-operation group. “What is driving the flows of capital you’re seeing into emerging markets is fundamentally a positive reflection of confidence in the likely trajectory of growth rates in those countries over time.” His comments on the greenback came as the latest salvo in an increasingly bitter currency war playing out between Washington and Beijing over each countries respective interventions.

The Fed’s Got POMO Fever! - Ben’s got POMO Fever, Tim’s got POMO Fever; They’ve got POMO fever, what a scam; Ben’s gone buying crazy, Tim’s budget plan is hazy; Debasing Dollars baby, that’s the plan!Actually, what this whole thing reminds me of it more of a scene from Jungle Fever where Samuel Jackson (Timmy), who is a proud crackhead needing a fix, corners his successful brother (Ben) in a park and says:

Tim (dancing): I’m a little light. Could you let me hold some change?
Ben: No. No, Timmy. That dancing shit ain’t gonna work. I ain’t giving you a red cent.
Tim: What? Come on, you can do me this one solid. Would you rather I go out and rob some elderly person? (raid the lock-box)
Ben: Steal?
Tim: Either way, I’m gonna get high. I hate to resort to knocking elderly people in the head for their money. But I’ll do it. I’ll do it. You know I’ll do it. I like getting high. ‘Cause I’m a… crackhead – I like to get high!

And of course Ben chooses the lesser of two evils and gives his brother enough money to get another fix but he knows he’ll be back tomorrow to do his little dance again. That’s exactly what’s going on in America these days as the Fed issues debt at a rate (as of October) of $140Bn PER MONTH and Ben does his best to match it by buying up notes and other toxic assets at a rate of $110Bn PER MONTH.

China Downgrades US Again, From AA To A+, Outlook Negative, Sees "Long-Term Recession", Blasts QE2, Expects Creditor Retaliation -  Dagong has downgraded the local and foreign currency long term sovereign credit rating of the United States of America (hereinafter referred to as “United States” ) from “AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment.The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency. The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar, and the continuation and deepening of credit crisis in the U.S. Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment. Analysis shows that the crisis confronting the U.S. cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the U.S. government’s policy to continuously depreciate the U.S. dollar against the will of creditors. Full report (pdf):

China's Dagong Downgrades U.S. to A+ on Quantitative Easing, Xinhua Says - China’s Dagong Global Credit Rating Co. cut its credit rating for the U.S. to A+ from AA because of a Federal Reserve plan to purchase bonds to spur growth and inflation, according to Xinhua News Agency. The credit outlook for the U.S. is negative amid deteriorating debt repayment capability and a “drastic” drop in the government’s intention to repay debt, Dagong said, as cited by the state-controlled news agency. The Fed’s quantitative easing policy will erode the value of the dollar and is against the interests of creditors, the company said. “Serious defects in the U.S. economy will lead to long- term recession and fundamentally lower national solvency,” Dagong said, as cited by Xinhua. Dagong, seeking to become an alternative to Standard & Poor’s Corp., Moody’s Investors Service and Fitch Ratings, ranks China’s debt higher than that of the U.S. and Japan, citing widening deficits in the developed world. Global ratings methodology is “irrational,” Dagong Chairman Guan Jianzhong said in July, and “cannot truly reflect repayment ability.”

China Says U.S. Does Not Intend to Repay Debt - China ramped up its rhetoric against the United States on Tuesday, with a Chinese credit ratings agency accusing the United States of the intent not to repay its debt by deliberately weakening its currency. The China and the United States have exchanged words in recent years about the strength of the Chinese currency against the U.S. dollar and the U.S. trade deficit with China. The United States relies heavily on capital inflows to finance its deficit. The Dagong Global Credit Rating Co, Ltd, in an English language release from on its website, cut the United States' local and foreign currency long-term sovereign credit rating to A-plus from AA to reflect what it called the United States' "deteriorating debt repayment capability and drastic decline of the government's intention of debt repayment."

Alert: QE II Has Lit the Fuse - by cmartenson - For a very long time, I have been calling for, expecting, and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. Intellectually knew the day would come, but in my heart I hoped it wouldn't. But with the Fed's recent decision to directly monetize the next eight months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it. In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation.How is this Quantitative Easing (QE) different from the prior QE? There are two main points of departure between the two QE programs:

• The level of global support for such efforts
• Where the money was/is targeted

QE2: It's the Federal Debt, Stupid!‎ - The inflation hawks are circling, warning of the dire consequences of the Fed's new QE2 scheme. It might be argued, however - and will be argued here - that QE2 not only will NOT produce these dire effects, but that it is NOT actually about saving the banks, OR devaluing the dollar, OR saving the housing market. It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it could well be an effective tool. Interest rates cannot be raised again to reasonable levels until this interest tab is reduced. And, today, that can be done most expeditiously through QE2 - "monetizing" the debt through the government's own central bank. Only its own central bank will advance credit to the government interest free. Congress also has a computer keyboard and could issue the money not just debt free but interest free, but Congress has not been so bold since the Civil War. The Fed has, therefore, had to step in. Fed Chairman Ben Bernanke did not want to step in. In January 2010, he admonished Congress:"We're not going to monetize the debt. It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position."

Government debt: In the red | The Economist - GOVERNMENTS have been indebted for centuries, running ongoing Ponzi schemes involving tax-payers, investors and future generations. But data sets on debt levels over time are rare (the most comprehensive ones only begin in the 1970s). A new paper from the IMF seeks to resolve this. Data gathered from a number of different sources allow the fund to give a historical perspective on today's mounting debt. Over the 218 years for which data on America are available, government debt has averaged just 28% of GDP, peaking at 121% in 1946. The maps below compare debt levels in 1932 and 2009. Most countries have become more indebted in the intervening years. In 1932 US debt amounted to 33% of GDP, compared with 84% in 2009. But some, including South Africa, Australia and New Zealand, have gone the other way.

Bonds Tumble After Anemic 30-Year Auction - InvestmentWatch - Bond investors predictably shied away from a sale of long bonds Wednesday, following the Fed away from the long end of the curve and into shorter maturities. A $16 million sale of the 30-year bond awarded a yield of 4.32 percent, far above expectations of about 4.275 as anemic demand weighed on the auction. There was just $2.31 bid for each dollar auctioned, a measure  known as the bid-to-cover ratio that was the worst for the long bond in a year. Foreign demand as measured through indirect bidding also was weak, coming in at 38 percent of the total sale. Treasury prices plunged after the auction results at 1 pm ET, sending yields on the 30-year to 4.32 percent, their highest since May 18 as prices fell 1-3/32. Several factors made the 30-year sale grim. The Federal Reserve is not planning to buy 30-year bonds as part of its $600 billion Treasury purchasing program. The Treasury Department recently said it has no plans to cut 30-year issuance. And inflation worries have made the 30-year look unattractive to investors.

Treasurys slide ahead of Fed buyback - Treasury prices fell Friday, pushing short-term yields to the highest level in almost two months, after the initial Federal Reserve buyback of government debt under the U.S. central bank’s second round of so-called quantitative easing.  Yields on benchmark 10-year notes rose 5 basis points to 2.70%. A basis point is 0.01%. The Fed expects to buy $6 billion to $8 billion in debt maturing between 2014 and 2016. See the U.S. central bank’s buyback schedule. Also, the extra yield on Treasurys compared to German bunds “may provoke some interest,” they said. Germany’s 10-year bunds yield 2.49%.

Digging oneself into a hole? - THERE are few universal truths in economics. One is if you put some of the best economists in a room together, you’re guaranteed to get wildly different opinions. A few weeks ago I heard Robert Solow, Nobel Laureate for his work on economic growth, say fiscal stimulus via government spending was necessary and the most effective tool we currently have to reduce unemployment. Paul Krugman has not been shy about advocating a similar position. At last week's Buttonwood gathering Joe Stiglitz also favoured a Keynesian style push. Chicago’s Ragu Rajan was more sceptical, and thought it would be better to focus on long-term structural problems like a labour force that lacks globally competitive skills and income inequality. The Minneapolis Fed’s Narayana Kocherlakota also doubts how effective stimulus will be when it seems that much of unemployment is structural and not easily remedied by government expansion. In a world of Keynesian crosses where economic models are a near perfect description of reality, I am inclined to agree with fiscal spending fans.

An Economic Growth and Deficit Reduction Agenda for Congress and the President- What follows is a partial agenda to raise economic growth and reduce the long run fiscal deficit. The most important step in raising the growth rate is not to increase but rather to lower taxes on capital and entrepreneurship. This implies maintaining essentially all the Bush tax cuts, including those on capital gains and dividends, and those on incomes at all levels, including quite high incomes. The estate tax on very high levels of wealth could be reinstated if politically necessary, but it will only bring in a very small amount of tax revenue, and will be more costly than it is worth. Tax reform also implies a reduction in the corporate income tax, and especially reductions in taxes on incomes of small businesses. Successful small businesses that grow to become large companies, such as Wal-Mart, Starbucks, Microsoft, and Apple, form the foundation of the American economy. They should be strongly encouraged. One goal of such tax reform is to eliminate as much as possible taxes on capital since economic theory basically implies that economic efficiency requires that capital not be taxed in the long run. For the supply of capital in the long run is highly responsive to after-tax rates of return on capital.

Deficit Reduction Commission Having Problems. Is Anyone Really Surprised? - I started saying exactly a year ago that a deficit reduction commission was highly unlikely to be successful, so this quote from a story today in The Fiscal Times anything but a shock: But whether the rise of the Tea Party and voter repudiation of congressional Democrats will be enough to jolt President Obama’s bipartisan fiscal commission into action remains much in doubt. On Tuesday, Senate Budget Committee Chairman Kent Conrad, D-N.D., offered a tepid prognosis of the chances the 18-member commission will deliver a package of spending savings and revenue raisers by Dec. 1 for Congress to act before adjourning. “The bipartisan task force is hard at work, but it’s going to be very difficult to get 14 of 18 members to agree,” Conrad, a commission member, told reporters during an event Tuesday at the Newseum in Washington, D.C....  To all of those in CG&G land who gave me such grief about my reading of the commission tea leaves...Are you really surprised?

The Economy's Current Problem Has Nothing To Do With Deficits… Senator Alan Simpson, the chairman of the bipartisan deficit commission, spent much of his life scolding people for being dependent on Social Security and Medicare and complaining that they didn’t save enough. Now, based on the draft proposal released yesterday, it appears that he and his co-chairman Erskine Bowles never departed from this attitude in steering their thinking. Given the state of the economy, the co-chairs’ report reads like a document from Mars. We did not get here because of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs’ press conference today. We got here because of the bursting of an $8 trillion housing bubble. This bubble was fueled by the reckless and possibly unlawful practices of the Wall Street banks, like Morgan Stanley, the bank on whose board Mr. Bowles sits.

Debt commission puts out preliminary proposals - In a surprise move Wednesday, the co-chairmen of President Obama's fiscal commission released their preliminary proposals to curb growth in U.S. debt.  The report from Erskine Bowles and Alan Simpson recommends spending cuts beginning in 2012, as well as tax reform and other ways to reduce the deficit by $4 trillion over the next decade.  Three quarters of the $4 trillion would be achieved through spending cuts -- including defense -- and the rest from more tax revenue. Among the proposed defense cuts: Freeze noncombat military pay at 2011 levels for three years to save $9.2 billion and reduce overseas bases by one-third to save $8.5 billion. It would also direct $28 billion in cuts already proposed by Defense Secretary Robert Gates toward deficit reduction. Outside of defense, the report recommends eliminating 250,000 contractors, saving $18.4 billion, and freezing federal pay for three years, saving $15.1 billion

Panel Weighs Deep Cuts in Tax Breaks and Spending - A draft proposal released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.  The plan would reduce projected Social Security benefits to most retirees in later decades — low-income people would get higher benefits — and slowly raise the retirement age for full benefits to 69 from 67, with a “hardship exemption” for people who physically cannot work past 62. And it would subject higher levels of income to payroll taxes, to ensure Social Security’s solvency for the next 75 years.  The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security’s solvency for at least the next 75 years.  The federal tax on gasoline, now 14.8 cents a gallon, would more than double between 2013 and 2015, so that revenue from the tax and similar user fees could cover all transportation and highway spending programs, and the funds set up for that purpose would no longer require money from the general treasury.  The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.

Deficit Commission’s $200 Billion in Proposed Spending Cuts - tables - The co-chairs of a deficit commission established by the White House released a draft plan for reducing the federal debt that included $200 billion in spending cuts by 2015. The following is an itemization provided by the committee. See a full explanation here.

Ten Flash Points In The Fiscal Commission Chairmen's Proposal - The two deficit-hawk extremists President Obama put in charge of his fiscal commission released their personal suggestions for cutting the federal budget deficit on Wednesday. And while it's quite possible that not a one of them will make it into the commission's official recommendations, which require the approval of 14 of the 18 commissioners (not just two), the document will inevitably be welcomed as a "serious" contribution to the debate - at least by Republicans and conservative Democrats. But taken as a whole, the plan authored by Erskine Bowles and Alan Simpson would have devastating effects on the government and its ability to help the most vulnerable in our society, and it would put the squeeze on the middle class, veterans, the elderly and the sick - all in the name of an abstract goal that ultimately only a bond-trader could love. Here are the top 10 flash points:

A Bipartisan and Reality-Based Way to Cut Tax Rates AND Reduce the Deficit. Really - As first reported by the New York Times’ Jackie Calmes, the President’s fiscal commission has just released a proposal endorsed by the commission’s co-chairs, Democrat Erskine Bowles and Republican Alan Simpson.  The New York Times provides a link to the pdf of the co-chairs’ presentation slides here. The plan achieves the commission’s “medium-term” goal of getting deficits under 3 percent of GDP by 2015 (the co-chairs actually hit 2.2 percent) with a mix of spending cuts and revenue increases, eventually converging the spending and revenue lines at around 21-22 percent of GDP by 2025-30.  The plan is heavier on spending cuts than tax increases, at a ratio of about 3-to-1 according to the Times article, although that calculation no doubt depends on the starting reference point, or “baseline.”  Note that relative to CBO’s official current-law baseline, revenues under the co-chairs’ plan are actually lower, not higher.  (Under current law, revenues are 20.1 and 21.0 percent of GDP in 2015 and 2020, respectively, from table 1-2 on page 4 of the CBO report.  Under the co-chairs’ plan, they are 19.3 and 20.5 percent; see page 13 of the presentation slides.)  Relative to President Obama’s budget proposals, however, revenues do come up, although by only less than 1 percent of GDP by 2020.

The Simpson-Bowles Deficit Reduction Plan - With regard to the Simpson-Bowles deficit plan, my reaction is negative. There are bits and pieces of the plan that are good ideas, but in its totality it does not add up, and some of pieces of the proposal are puzzling. Why, for example, are tax cuts included in a proposal to reduce the national debt? That makes no sense at all except as an attempt to impose a particular ideology on the tax code. I have a similar response to revenue caps. Why are revenue caps part of the proposal? Wouldn’t revenues higher than the cap close the deficit sooner? Isn’t that what the commission is supposed to figure out how to do? I assume the answer to the question about caps would be that this is an attempt to prevent spending growth. Unfortunately, there’s no evidence that such attempts to “starve the beast” do anything to restrain revenue growth. Instead, the caps limit the options to pay for spending and make the budget problems worse. If Simpson and Bowles want to restrain spending growth, then they should be explicit about how that will be done instead of pretending to solve the problem with revenue caps.

Deficit commission leaders are not addressing the root causes of the long-term deficit - Today the National Commission on Fiscal Responsibility and Reform released a preliminary proposal as devised by co-chairs Alan Simpson and Erskine Bowles.  While the specifics of the proposal are not yet set in stone, the report shows that the commission is running severely off track. In particular, nearly half of the adjustments come from cuts to discretionary spending – a portion of the budget that is not responsible for long-term deficits. The suggested reductions include a wide range of cuts that would cost jobs and increase financial burdens on working families. For example, the report suggests cutting the federal workforce by 10%, or 200,000 jobs, by 2020. The proposal suggests increasing health care fees on low-income veterans.  It proposes budget cuts to national parks, the Smithsonian, water programs and airports. It even suggests eliminating funding for the Corporation for Public Broadcasting (sorry, Elmo). In total, the reductions in discretionary spending would be 16% below the president’s request in his 2011 budget, and 18.5% below the 2020 levels.

One reader's reaction to the fiscal deficit drama to begin - There will be plenty of reactions to the draft release of the fiscal draft proposal, but one caught my eye as I just came home. Reader HW at TPM has this reaction I took a very quick look at this document and what's amazing to me is that they came up with these draconian cuts in Social Security, which is off-budget and currently in the black, but have barely anything for Medicare, where the government is hemorrhaging money. They have several pages of material with almost no concrete ideas that adds up to minor savings (they claim savings that rise to $47 billion in 2020, but $13 billion of that comes from vague promises like "reform the sustainable growth rate" and "enact tort reform.") If you look at the spending side of the federal budget, Medicare is the single item that drives growth out of proportion with the nation's population and income growth. Yet these guys seem to be hacking away at every other part of the federal budget more to make room for Medicare rather than contain it.

The fiscal commission reports -- sort of  - The fiscal commission is not going to manage to get 14 of its 18 members to agree on a plan to balance the budget, as was the original intent. That means, among other things, that it isn't assured a vote in Congress. But it doesn't have any intention of going quietly into the night. Today, the commission's co-chairs, Erskine Bowles and Alan Simpson, are releasing their chairman's mark. What's the chairman's mark, exactly? In Congress, the chairman's mark is somewhere between a discussion document and a piece of legislation that the chairman of a committee releases to give the members a sense of where his or her thinking is. This seems to be much the same: It's a full plan to balance the budget, but it doesn't have the votes of the commission's members, much less the force of law or congressional process, behind it. The recommendations are fairly radical: The co-chairs freeze 2012's discretionary spending at 2010's levels -- and then start cutting it back further. By 2015, they project discretionary spending will be more than $200 billion less than the president's budget currently envisions. They raise taxes, but rather unexpectedly, cap the revenues the tax system can generate at 21 percent of GDP. They also offer a number of options for tax reform, including one that eliminates all tax expenditures.

There is no report from the fiscal commission - Here is the most important fact about the proposal released by the co-chairmen of the National Commission on Fiscal Responsibility and Reform: It is not the commission's report. And here is the second most important fact to remember: The commission itself does not have any actual power. So what we're looking at is a discussion draft of a proposal to balance the budget authored by two people who don't have a vote in either the House or the Senate. In a town thick with proposals for balancing the budget but thin on votes for actually passing such proposals, it's not clear what the purpose of this one is.  It's worth taking a moment to consider how we got here: The fiscal commission we have is not the fiscal commission we were supposed to have. The fiscal commission we were supposed to have was the brainchild of Kent Conrad and Judd Gregg, the two senior members of the Senate Budget Committee. "The inability of the regular legislative process to meaningfully act on [the deficit] couldn't be clearer," they wrote. Their proposal would have set up a commission dominated by members of Congress and able to fast-track its consensus recommendations through the congressional process -- no delays, no amendments. But that proposal was filibustered in the Senate, mainly by Republicans who worried it would end in tax increases. So the president stepped in and created a fiscal commission of his own

A truly radical debt reduction scheme - How do you evaluate a proposal that has zero chance of ever becoming reality? The release today of a draft report from President Obama's Fiscal Deficit Commission poses just such a question. It is pure fantasy -- a blueprint for reducing health care costs, rejiggering Social Security, completely revamping the tax code, shrinking government, cutting defense spending and guaranteeing that each and every American gets a pony. Progressives are predictably outraged at the cuts to social welfare programs but there is something here for everyone to hate. Which, in theory, in an alternative universe might be almost OK. Getting the federal budget under control will require shared sacrifice. Everybody should hate something recommended in the report. The fact that, according to Bloomberg, the only members of the 18 person commission willing to endorse the draft are the two co-chairs, Erskine Bowles and Alan Simpson, is weirdly encouraging in that regard.

Unserious People - OK, let’s say goodbye to the deficit commission. If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent. I mean, what’s this about? There is no — zero — evidence that income taxes at current rates are an important drag on growth.  Oh, and they’re talking about raising the retirement age, because people live longer — except that the people who really depend on Social Security, those in the bottom half of the distribution, aren’t living much longer. So you’re going to tell janitors to work until they’re 70 because lawyers are living longer than ever. Still, I guess this is what it takes to get compromise, if by compromise you mean something the center-right and the hard right can agree on.

So, About That Deficit Commission . . . The chairmen of the deficit commission have released a proposal as to what we should do about our fiscal future. It's not the commission's final report; rather, it's a starting place for negotiations. The broad outlines:

• 1) Tax revenues capped at 21% of GDP.
• 2) Substantial renovation of the Social Security program which will make it substantially more progressive, gradually raising the percentage of payrolls that are subject to Social Security tax to about 90%, and altering the formulas for calculating and indexing benefits so that those whose lifetime earnings are above the median will see much less in the way of benefits.

• 3) A hundred billion or so in defense cuts, including closing 1/3 of our overseas bases, forcing military retirees to wait until age 60 to collect their pensions, and reducing procurement expenditures.

• 4) A like cut in domestic discretionary spending, including reducing foreign aid, a 10% reduction of the federal workforce, and the elimination of all earmarks.

• 5) Tax simplification and top rate reduction. This proposal is complicated, and is being oversimplified by many commentators.
• 6) Big cuts to health care and an alteration of the IPAB mechanism for recommending further cuts.

Sins of commission - BACK at the beginning of the year, there was a real concern (among some people, anyway) that deficits would be the big economic and political story of the year. The American economy seemed to be stabilising and as financial panic ebbed government bond yields were rising. Within Europe, deficits did become a major issue. Now as it happened, economic weakness was the year's big story. The episode did leave the country with the president's debt commission, a bipartisan group charged with delivering a report this month recommending ways to get America's government budget back to primary balance (that is, running a deficit of about 3% of GDP). Yesterday, the chairmen of the commission, Erskine Bowles and Alan Simpson, dropped a summary of their own recommendations. Havoc ensued. (You can see the summary here.) There's a little bit in their report for everyone to hate, and most people—including the commission's other members—haven't been shy about letting people know what those things are. The recommendations aren't particularly surprising. The chairmen suggest a cap on discretionary spending and cuts to both domestic and military budgets. They advocate an increase in the retirement age and other tweaks to Social Security. They would simplify the tax code, eliminating tax breaks and expenditures, increasing the base, and using some of the savings to cut rates...

Let the Adult Conversation Begin - Ronald Reagan’s budget director, David Stockman, was on CNN last night, telling it like it is about the tough choices necessary to rein in our nation’s currently-unsustainable budget deficits. (Here’s a related recent interview of him by 60 Minutes’ Lesley Stahl.)  He’s no sitting politician, nor a political hack, of course. Among those who are, we are already getting the “attack and cower” reaction to the Bowles-Simpson recommendations that came out yesterday, as described in Lori Montgomery’s story in today’s Washington Post: [T]he reaction was harsh in some quarters, particularly among liberals who have vowed to protect retirees from any reduction in benefits. House Speaker Nancy Pelosi (D-Calif.) called the plan “simply unacceptable.” Speaker-in-waiting John A. Boehner (R-Ohio) declined to comment, saying he would discuss the plan with his three representatives on the panel. But Republican anti-tax activist Grover Norquist was not happy and warned that Republicans who support the proposal would be breaking their pledge not to raise taxes. The “just say no” attitude is no longer acceptable. Bowles and Simpson confronted the real tradeoffs and made their tough but specific choices. People can legitimately disagree with the particular mix of policies they propose; for example, I think revenues need to come up by more than the 21 percent of GDP they allow, so that there would be more balance between the spending cuts and the revenue increases. But if people object to the plan, they need to suggest real alternatives.

On Deficit Proposals, a Failure of Will and Not Ideas - Forgive me if my expectations are low that Congress will soon adopt any of the latest recommendations for getting the country’s fiscal house in order. But we’ve seen all these ideas before. As Bruce Bartlett and others have documented, this is not nearly the first blue-ribbon, presidentially appointed panel tasked with coming up with ideas for fixing what fiscally ails us. In fact over the last several decades there have been at least a dozen such commissions. Yesterday, President Obama’s deficit reduction commission released some of its major proposals for reducing federal spending and raising tax receipts.  The blueprint is generally five-pronged:

1. Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.
2. Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.
3. Address the “Doc Fix” not through deficit spending but through savings from payment reforms, cost-sharing, and malpractice reform, and long-term measures to control health care cost growth.
4. Achieve mandatory savings from farm subsidies, military and civil service retirement.
5. Ensure Social Security solvency for the next 75 years while reducing poverty among seniors. [Specific tools include a higher retirement age.]

Let the Games Begin: Bowles-Stimson, Defense, and the Way Forward - The Presidential debt commission co-chairs (Erskine Bowles and Alan Simpson) decided to move forward yesterday and present the package they want the commission to discuss over the next two weeks.  In defense, it is a striking package, with a great deal of merit and no small amount of courage in tow.  It also has one critical weakness, which I will come to. The package puts defense squarely on the table in the overall effort to reduce the deficit and get the debt under control.  It lays out a very detailed set of options, including procurement savings from terminating or cutting back on major programs (like the V-22 and the F-35), a 3-year military and civlian pay freeze, and a variety of efficiency savings, many of which have been advanced for years by the Congressional Budget Office. The merit and importance of expanding the debate on future defense budgets this way is great.  Just one missing piece; none of the co-chairs proposals are explicitly derived from a different view on how the US engages the world and the missions we give to the armed forces.  They seemed to have set a budget cutting target, then grasped a variety of options to get there.  The options are great, the context is missing.

Deficit Plan Matches $3.8 Trillion Math With Tough Politics… A plan offered by the leaders of President Barack Obama’s commission to reduce the federal deficit might work. It just won’t happen.  The co-chairmen proposed a $3.8 trillion deficit-cutting plan yesterday that would trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction. It would reduce the annual deficit from $1.3 trillion this year to about $400 billion by 2015 and start reducing the $13.7 trillion national debt.  “Mathematically it apparently works,” said Stan Collender, a former Democratic House and Senate budget analyst. “Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”  The plan would raise the gas tax, slash defense spending and farm subsidies and bring down health-care costs by clamping down on medical malpractice suits. The Social Security retirement age would rise to 68 in about 2050 and 69 in about 2075.

The Hijacked Commission, by Paul Krugman - Count me among those who always believed that President Obama made a big mistake when he created the National Commission on Fiscal Responsibility and Reform — a supposedly bipartisan panel charged with coming up with solutions to the nation’s long-run fiscal problems. .My misgivings increased as we got a better feel for the views of the commission’s co-chairmen. It soon became clear that Erskine Bowles, the Democratic co-chairman, had a very Republican-sounding small-government agenda. Meanwhile, Alan Simpson, the Republican co-chairman, revealed the kind of honest broker he is by sending an abusive e-mail to the executive director of the National Older Women’s League in which he described Social Security as being “like a milk cow with 310 million tits.” We’ve known for a long time, then, that nothing good would come from the commission. But on Wednesday, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected. ... The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. “Lower Rates” is the first point; “Reduce the Deficit” is the seventh. So how, exactly, did a deficit-cutting commission become a commission whose first priority is cutting tax rates, with deficit reduction literally at the bottom of the list?

Why We Should Beware Budget-Deficit Mania - Robert Reich - We’re in for another round of budget-deficit mania.  The first draft of the President’s deficit commission, written by its co-chairmen Erskine Bowles and Alan Simpson, is a pastiche of ideas – some good, some dumb, some intriguing, some wacky. The only unifying principle behind their effort seems to be to throw enough at the wall that something’s bound to stick.At their best, presidential commissions focus the public’s attention — not only on the right solution to some important problem but also on the right problem. Sadly, this preliminary report does neither. As to solution, the report mentions but doesn’t emphasize the biggest driver of future deficits  – the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft. The report suffers a more fundamental error — the unquestioned assumption that America’s biggest economic challenge is to reduce the federal budget deficit.

Why Deficit Reduction Is Necessary and Need Not Hurt the Poor… We need to reduce our long-term deficits. We cannot forever spend more than we collect in taxes. And if we continue on our current path we risk another economic crisis that is likely to produce even more unemployment than we have now.  To be sure, we should not cut the deficit right now—that would be very bad for the economy. We should combine stimulus now with legislative initiatives that gradually rein in spending and raise taxes once the economy has recovered.  But if we continue to ignore the huge accumulation of debt in our future, or assume it can be addressed without cutting domestic spending, it is the least advantaged who are likely to suffer the most.  First, if we have another economic crisis that produces high rates of unemployment for an extended period, social programs will do no more than temporarily reduce the harm inflicted on the least advantaged. The safety net is no substitute for a job and a growing economy. Deficits matter because, in the longer term, they undermine the economy’s ability to produce the jobs that are especially critical to moving people out of poverty and into the middle class.

Liberals, Tea Party Seem United In Ire For Debt Commission Proposal - Not unexpectedly, the draft proposal put forward Wednesday by the Chairmen of the Debt Commission is drawing fire from both the left and the right: By putting deep spending cuts and substantial tax increases on the table, President Obama’s bipartisan debt-reduction commission has exposed fissures in both parties, underscoring the volatile nature and long odds of any attempt to address the nation’s long-term budget problems. Among Democrats, liberals are in near revolt against the White House over the issue, even as substantive and political forces push Mr. Obama to attack chronic deficits in a serious way. At the same time, Republicans face intense pressure from their conservative base and the Tea Party movement to reject any deal that includes tax increases, leaving their leaders with little room to maneuver in any negotiation and at risk of being blamed by voters for not doing their part.

Perfect Storm – February 2013? - I wish I could get a penny for every dollar that is going to be paid to lobbyist to fight the various recommendations of the Fiscal Commission. As advertised, they basically took no prisoners save a small portion of the older population that would starve without a monthly SS check. I think this exception was in response to the deficit panel being referred to as the “Cat Food Commission”. They may have dodged that bullet, but just about every other group in society is going to have a gripe.

• -The mortgage deduction would be largely gone. There are a dozen industry groups that will rain on that parade.
• -Social Security would be “socialized”. Some say SS is a third rail. We are about to see that in action. A big savings comes from a recalibration of COLA increases. So right away you have 60mm Americans apposed to this.
• -$1.1 Trillion of tax deductions would be done away with. Think of all the tax lawyers and accountants that will line up to cry about this one.
• -Get this. Federal workers would be required to put up half of their retirement contributions versus the 1/14 that they currently pony up for. You can imagine the howls we will get on that.
• -The military budget gets a hatchet job. So the entire military industrial complex will rise up with one voice to appose it.

Why the deficit commission's proposal is unlikely to go anywhere. - Everyone expected the White House's deficit commission—technically, the National Commission on Fiscal Responsibility and Reform—to release its recommendations on how to reduce the debt on Dec. 1. Instead, the panel's co-chairs released their proposal today. For deficit hawks, Christmas came early. The panel's co-chairs, former Sen. Alan Simpson, a Republican, and Erskine Bowles, former chief of staff to President Clinton, propose slashing the debt by $4 trillion by 2020. Of that, some $3 trillion—that's 75 percent, for those of you scoring at home—comes from spending cuts, which the co-chairs catalog with something approaching glee: They include a list of 58 suggestions, and one gets the feeling they could have recommended 58 more. (The remaining quarter comes from tax hikes and reduced interest payments.) Mathematically, the plan adds up. Politically, not so much. First, this is only a "proposal" to the rest of the commission—for it to become official, 14 of the panel's 18 members would have to agree to it. That seems far-fetched, given that the members of the commission have been at loggerheads since President Obama created it in February. And even if the commission does manage to issue a report, Congress is under no obligation to pass it. In fact, this deficit commission exists in the first place because a proposal to create a congressional deficit commission was filibustered in the Senate.

If the bipartisan deficit commission doesn't work, how about a partisan one? - Deficit commission co-chairman Alan SimpsonThe preliminary plan released by the co-chairs of President Obama's deficit commission Wednesday wasn't just dead-on-arrival. It was pre-dead. Its death can be dated to Jan. 26, 2010, when the Senate rejected the idea of a bipartisan commission that would have the power to bind Congress. Without that power, the commission's eventual report—set to be released by Dec. 1—is just another piece of paper.  But the commission's problem goes deeper than mere political irrelevance. It's working against the strongest force in Washington: partisanship. Any serious effort to do Something Important—eliminating the debt, for example—is more likely to succeed by exploiting partisanship than by trying to overcome it. The premise of the commission, chaired by Democrat Erskine Bowles and Republican Alan Simpson, was that 1) it would "depoliticize" the process by pulling it outside the bickering halls of Congress, and 2) it would allow Republicans and Democrats to trade compromises one by one until the economic forecast is back in the black.  That doesn't seem to be happening. Instead, the plan—which includes a mix of eliminating tax breaks, cutting military spending, and shrinking entitlements by, among other things, raising the retirement age—is drawing skepticism from both sides

The Deficit Reduction Plan Doesn't Add Up - I decided to wait 24 hours for the dust and the entirely predictable massive overreaction to specific proposals to settle down a bit before commenting on the deficit reduction plan released yesterday by commission co-chairs Erskine Bowles and Alan Simpson. My assessment after waiting: The plan definitely...and maddeningly...doesn't add up.What Bowles and Simpson released was really nothing more that their own version of the annual report the Congressional Budget Office publishes on deficit reduction options.  It's the co-chairs laundry list of spending and revenue alternatives. But, for the most part, it's not a coherent plan that embodies a vision of what the government should be and do to match the fiscal constraints.For example...The plan calls for a substantial reduction in federal employees.  A reduction in employees generally results in the government relying on more outside consultants to get the work done but, in addition to the recommended reductions-in-force, Bowles-Simpson also calls for a significant cuts in the use of contractors.

Our Political Insanity in Three Headlines: Tax Breaks for the Rich, More War, and Cuts to Social Security - To understand how ridiculous the “serious” people are in Washington, and how broken our political debate is, let me draw your attention to the three biggest political stories of the day. Together, they make the clear case that all this so-called concern about the “deficit” is simply a justification the powerful use to attack the middle class. We learn the Democrats and President Obama are likely going to fold to Republican demands and extend all the Bush tax cuts. A move that will cost the government hundreds of billions. From the Huffington Post, ”White House Gives In On Bush Tax Cuts” We also are hearing rumors Obama plans to spend hundreds of billions to keep troops in Afghanistan for several more years—because, for some reason, we need to prop up a deeply corrupt and unpopular government. From the New York Times, “U.S. Tweaks Message on Troops in Afghanistan". Finally while we are told by the “serious” people that we need to completely ignore those two massive expenditures, we are also told we must really consider Alan Simpson’s and Erskine Bowles’ plan to cut social security, Medicare, soldiers’ pay and veterans’ benefits to get “serious” about the deficit. From the New York Times Editorial page, ”Some Fiscal Reality”

The Soft Bigotry of Low Deficit Commission Expectations - Krugman - I’m not the first person to make this point, but those who are defending the deficit commission on the grounds that there are some potentially good ideas in there are missing what the purpose of the commission was supposed to be. After all, anyone can come up with some good deficit-reduction ideas; I can come up with a dozen even before I’ve had my morning coffee. Brainstorming is easy. What the commission was supposed to do was something much harder: it was supposed to produce a package that Congress would give an up and down vote. To do this, it would have to produce something much better than a package with some good stuff buried in among the bad stuff; it would have to produce a package good enough to accept as is. And it didn’t do that. Instead, it produced a package that may have had some good things in it, but also, remarkably, introduced a whole slew of new bad ideas that weren’t even in the debate before. A 21 percent of GDP limit on revenues? Cutting the top marginal rate to 23 percent? Sharp reductions in the government work force without, as far as anyone can tell, a commensurate reduction in the work to be done? Instead of cutting through the fog, the commission brought out an extra smoke machine.

Medicare and the deficit - The most clear-eyed view of the silliness of the deficit commission report comes from Kevin Drum, who points out that at heart it says much less about reducing the size of the deficit than it does about reducing the size of the government. The distinction is a crucial one, since the mathematics of the deficit are simple, and overwhelmingly a function of Medicare expenditures. “Medicare, and healthcare in general, is a huge problem,” says Drum: “It is, in fact, our only real long-term spending problem.” Medicare is a true fiscal nightmare. The population of the US is aging: the current Medicare enrollment of 47 million will soar to 71 million by 2025. Those people will be living longer, too, and their healthcare costs are certain to continue to rise not only faster than inflation, but also faster than the growth of the economy as a whole. So long as the U.S. commits to pay the healthcare costs of substantially everybody over the age of 65, nothing else really matters, in terms of the long-term fiscal deficit.

The Bowles-Simpson Plan: Tax Hike or a Tax Cut? - Fascinating to read the morning-after criticism of the tax provisions of the Bowles-Simpson deficit reduction plan. Many commentators on both the left and the right hate it—but for entirely contradictory reasons.  Many on the left are focusing on the across-the-board rate reductions, and they are furious that they’d benefit high-earners as well as everyone else. But they are ignoring both the provisions that would tax capital gains and dividends at ordinary income rates and, most importantly, the proposal’s overall impact: $750 billion in income tax hikes and additional increases and in the Social Security payroll tax for high-earners and ni the gas tax.  For instance, Paul Krugman, who really should know better, wrote, “If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes.” Joan McCarter over at Daily Kos calls the plan “massive tax cuts for wealthy, pain for the rest of us.”  By contrast, conservatives are furious exactly because the plan hikes taxes on investment income and raises overall taxes. They are completely ignoring the benefits of eliminating targeted tax subsidies and lowering rates

Open Letter To Alan Simpson & Erskine Bowles Chairmen Of The U.S. Deficit Commission – Regarding Proposed Changes To Social Security - Here’s my recommendation for you. The American people are willing to sacrifice as part of a shared effort at righting our budgetary path, but they are not prepared to be sacrificial lambs led to the ‘benefits and promises slaughterhouse’ while the Wall Street Banker Pigs gorge on trillions in stealth FED and FDIC bailouts, ZIRP giveaways and a record $144 billion in bonuses – an amount equivalent to the 49th largest GDP in the world – $144 billion in bonuses being paid by criminally insolvent banks that are only still operating due to a Wall Street financed K-Street lobbying tsunami that forced FASB to change the accounting rules that now allow these same insolvent institutions of usury and arrogance to apply Faustian valuations to complete shit assets all over their lying, godforsaken, Enron resembling, off-balanced, imbalanced, bs-balanced, sheets.

Cut Social Security Benefits? Yes, Some Say - There are three basic ways to save the Social Security. We can cut benefits, raise revenue, or do a combination of the two.  The bipartisan National Commission on Fiscal Responsibility and Reform, as part of a proposal to slash $3.8 trillion from the federal budget deficit, is taking the combo-and-then-some approach.  President Obama's deficit-reduction commission is proposing a slew of changes to Social Security, including benefit increases for some people. But most people in their 20s and younger today would see benefit cuts compared to what they'd get under current law, if the proposals are adopted. In its draft plan to rescue Social Security and prevent what some see as inevitable in the absence of action — a sudden 22% reduction in benefits for all beneficiaries in 2037 — the deficit commission wants to tax 90% of covered earnings by 2050, make the benefit formula more progressive so that high-income recipients receive relatively less, index the retirement age to longevity gains, and dampen COLAs, among other measures. See the commission's proposal on FiscalCommission.gov.

The Fight Over Social Security’s Future Is On — But Which Side Is Obama On? - The debate about the future of Social Security has opened, and how progressives respond will decide whether the United States is a civil society or a pirate state where the government’s primary role is to take from the poor and give to the rich. So far, the response has been mixed. The signals from the Obama White House are bad, with the president indicating openness to “compromises” that would compromise the legacies of the New Deal, the Fair Deal and the Great Society. In contrast, House Speaker Nancy Pelosi, key congressional Democrats, labor unions and activist groups are raising all the right objections. The spark for the debate was the release of a statement from the co-chairs of the president's Fiscal Commission – the high-powered committee charged by President Obama with developing strategies for balancing budgets and addressing deficits and debts – that indicates they are leaning toward implementing the sort of rigid austerity schemes that would ruin the U.S. economy.

Does Obama Really Want to Make Social Security Cuts Even the Tea Party Wouldn't Touch? - The president could be on the brink of making a serious mistake, one with grave implications for his political future and even graver implications for aging Americans. If he responds to this election by adopting the Deficit Commission's recommendation to cut Social Security, President Obama will be snatching catastrophe from the jaws of defeat. He'll be responding to the "voice of the people" by giving people something they really, really don't want. The Campaign for America's Future and Democracy Corps commissioned a poll from Greenberg Quinlan Rosner Research which showed that an overwhelming 69 percent of voters agreed that "politicians should keep their hands off Social Security and Medicare" when they address the deficit. Yet on 60 Minutes last night, the president said that we're "still confronted with the fact that the vast majority of the federal budget are things that people really think are important, like Social Security and Medicare and defense. And so, you then have to start making some tough decisions about how do we pay for those things that we think are important?  I mean, we're gonna have to, you know, tackle some big issues like entitlements that, you know, when you listen to the Tea Party or you listen to Republican candidates they promise we're not gonna touch."

Fairly Understanding the Simpson-Bowles Social Security Proposal - Co-chairs Alan Simpson and Erskine Bowles of President Obama’s Fiscal Responsibility Commission surprised the political world Wednesday when they publicly released their own (as opposed to a full commission) five-part plan for repairing the federal government’s dire fiscal outlook. The five components of the plan included proposed reductions in discretionary spending, fundamental tax reform, targeted savings in health care entitlements, savings in other mandatory spending, and comprehensive Social Security reform. The Social Security proposals in particular have produced the usual rash of practiced indignation. One union leader called the proposals “reckless attacks on working Americans,” while another alleged that the chairs were telling working Americans to “Drop Dead.” Perhaps we should all catch our breath for a moment and examine what the co-chairs’ proposals would actually do. What follows is my best objective analysis of their Social Security framework. In the spirit of full disclosure, I’ll remind readers that two former bosses of mine, including co-chair Simpson as well as Senator Judd Gregg, sit on the commission.

Bottom line score on Simpson-Bowles from SSA - The above though not yet widely released is a from a public document produced by the Social Security Office of the Chief Actuary. It shows the final results of the Simpson-Bowles Social Security proposal as percentage of benefits payable to various income levels compared to 'scheduled' and 'payable' benefits. Under current projections 'payable' benefits after Trust Fund Depletion will have to be reduced by 22% initially and 25% ultimately. On the other hand 'scheduled' benefits are payable in full up to the point of Depletion. So any payout less than 100% in the 'scheduled' column between now and 2037 is a loss compared to the status quo as is any payout less than 78% in 2037 or 75% in 2080. Coberly and I (and some others) have been warning for years about the dangers of turning Social Security from an insurance program with mild progressive transfers to a welfare system.  I can't imagine any scheme designed to more undermine support for Social Security than one that calls for earners in the top 50% taking a cut even from the projected cut. The answer to a 'crisis' defined as an ultimate 25% cut in scheduled benefit is for upper income folk to take a 35-41% cut? All in an effort to save them a phased in 0.1% of payroll per year increase over the next 20 years?

Debt panel Democrat takes shot at White House -Erskine Bowles, the ostensibly Democratic co-chair of Obama's debt reduction panel, says the White House hasn't been listening to Republicans enough. There are many reasons to criticize Obama, but not paying enough attention to Republican concerns isn't one of them. The White House has gone to great lengths to accommodate Republicans. That's why about 40 percent of the stimulus consisted of tax cuts. That's a big reason why the public option was never even on the table for healthcare reform. That's why the debt commission was formed in the first place!

GOP to Use Debt Cap as Leverage to Push Spending Cuts - Republicans are planning to demand major spending cuts next year before they would agree to raise the amount of federal debt that can be issued, setting up a clash between the Obama administration and a Congress stocked with lawmakers who campaigned as deficit hawks. The U.S. can't accrue debt above a certain ceiling set by lawmakers. In the most extreme scenario, the government would default on certain debts if the cap doesn't move. Republican lawmakers, including South Carolina Sen. Jim DeMint, and congressional aides have said major spending cuts are the primary demand they will make going into the discussions over whether to raise the limit.  It isn't clear whether the White House would agree to significant cuts so quickly, though, and Obama administration officials could try to portray the GOP as playing political games with the country's ability to borrow.

A Primer On The GOP Plan To Hold The Debt Ceiling Hostage…Fresh off their election day sweep, top Republicans in Congress are already threatening a high-stakes gambit to block what has traditionally been a fairly routine move: changing the law to increase the total amount of debt the federal government is allowed take on.  If the debt ceiling is not raised before the federal government uses up its current borrowing authority, then sometime in February the U.S. government will no longer be able to issue more debt -- at which point all hell will break loose. If the government can't issue new debt, first it must stop paying for things, resulting in furloughs and a tightening or suspension of federal services. This happened in 1995 (before the big government shutdown at the end of the year) when Congress failed to increase the debt ceiling and the government underwent a smaller shutdown -- to slow the drip drip of money out of the Treasury and avoid a default.

Debt limit impasse could drag on for months - A showdown over the federal debt limit looms in the first half of 2011. Some Republicans in the Senate are threatening to block a debt limit increase if President Obama does not agree to sharp reductions in spending. If we actually hit the debt limit, Talking Points Memo warns that "all hell will break loose." Even Americans for Tax Reform, whose president has previously expressed a desire to "drown government in a bathtub," is sending cautious notes about the debt limit, warning that "[n]o one regardless of who is in the majority wants to see the US default on its debt." The consensus view seems to be that a debt limit impasse will lead to an acute crisis: at least a government shutdown, possibly a failure to make interest payments on government bonds, and an ensuing spike in bond yields and fall in stock prices. The urgency of the crisis would make it self-limiting, one side would quickly cave, and Congress would approve a debt limit increase. I think another scenario is at least as plausible: failure to raise the debt limit could lead to a prolonged standoff, with the Obama Administration using financial strategies and accounting gimmicks to stay technically within the limit and continue operating the government..

The return of "starve the beast" nonsense - Back in 2001, President George W. Bush told reporters during a press conference that his first round of tax cuts weren't just designed as a "fiscal stimulus." They could also be thought of as a kind of "fiscal straitjacket for Congress."And that's good for the taxpayers, and it's incredibly positive news if you're worried about a federal government that has been growing at a dramatic pace over the past eight years and it has been.In other words, the tax cuts were an example of the classic "starve the beast" psychology -- most often associated with GOP strategist Grover Norquist. By depriving the federal government of revenue, the tax cuts would encourage Congress to be more thrifty.As everyone knows, Bush's straitjacket restricted nothing. Bush's tax cuts busted the budget, turned Clinton's surplus into a deficit, and left the government unprepared to pay for war, recession or spiraling healthcare costs. In fact, "starving the beast" has never worked -- if we're talking about the federal government. For the last 30 years, tax cuts have always been followed by increased government spending. The reason why, as explained by Cato Institute's William Niskinen, is simple. When you enjoy the benefit of services without paying their full cost, you end up consuming more services

Planning to fail - YOU can’t watch the circus that America calls its budget process without suspecting it plays some role in the country's fiscal mess. Congress for the first time has failed to send a budget resolution to the floor, its continuing resolution is about to expire, as are a bunch of tax cuts, and there’s a battle looming over raising the debt ceiling. This does not look like rational fiscal policy. I’ve never thought the process was the problem, but it clearly seems to contribute to it, so a better process should help with the solution. This morning, the Peterson-Pew Commission on Budget Reform, shepherded along by Maya MacGuineas of the Committee for a Responsible Federal Budget, released a thoughtful collection of ideas on improving this. I attended a press conference on the report, and while it's not about to change the consensus that the situation looks hopeless, I came away encouraged. Among the ideas:

Does the GOP Really Want to Slash Spending in a Weak Economy? - I asked a Washington consultant whether his Wall Street clients wanted Congress to cut federal spending by at least $100 billion next year, as House Speaker-to-be John Boehner promises. Although these financiers contributed big bucks to support the very GOP congressional candidates who campaigned on smaller government, they didn’t seem quite so enthusiastic about an immediate war on spending. Said my friend, “Not now. They are still very worried about the economy.”  Therein lies one of the great challenges for congressional Republicans. And it got me wondering whether spending cuts will be for the GOP what health reform was for President Obama: The right idea at the wrong time. And, like the health law, will small government look far better to voters at 30,000 feet than it does up close and personal?  No doubt the GOP wants to shrink government. And there isn’t much doubt that some voters agree with them. But is this the time? Will voters be quite so enthusiastic once they realize spending cuts mean more than eliminating ever-popular waste, fraud, and abuse? Will they embrace actual reductions to those government services and benefits that they have grown to love? And, most important, will they accept these government spending cuts in the teeth of a still-sluggish economy?

Austerity Road to 19th Century  Real News Network interview

The Misinformation That Matters - Evan Bayh thinks “Democrats should support a freeze on federal hiring and pay increases. Government isn’t a privileged class and cannot be immune to the times.”  Steve Benen asked a good question about this: Reading this, I’m wondering, “How would that help the economy?” Bayh is arguing that we’d be better off if fewer unemployed workers get jobs and federal workers have less money. I’m sure he can explain why this would help the economy — and I’m sure it’s very “moderate” — but I have no idea what that explanation might be. I think that Bayh is probably operating with an explicit model of the economy as a closed zero-sum system. A recession is a negative shock leading to bad times. Policymakers then have the opportunity to influence the course of the recession by allocating the badness around. Failure to cut public sector compensation creates a “privileged class” and increases the quantity of pain felt by people outside that class, whereas ensuring that members of that class experience pain reduces the pain felt by others. My view is that the Bayh Model is mistaken.

Faith-Based Economics – Maxine Udall - I had some spare time yesterday and spent it reading Adam Smith. It was prompted by this article by Brad DeLong, Making Religion of Economics, in which DeLong reports on pointless conversations with the "pointless pain caucus" a group that believes fervently that Americans must be punished with low wages, high unemployment, and reduced government services if the economic outlook is ever to brighten. The rationale for this belief — which requires cutting government spending at a time of consumer retrenchment, ensuring that demand remains low and joblessness high — is akin to those for donning hair shirts on religious holidays: If it hurts it must be good. After reviewing all the ways in which the PPC's beliefs are refuted by facts, DeLong concludes that ...it is ideological — nay, religious: The Market is good; the Market giveth; the Market taketh away; blessed be the name of the Market. Knowing that the market is good, their task is to figure out why a good market has decreed that employment in America needs to fall by 8 million relative to trend. (It's not unlike grappling with a just and all-powerful God who doesn't mind a tsunami every so often.) It turns out that Smith sheds some light on pointless pain in his discussion in Wealth of Nations of the effects of religious control of the curricula in European universities on philosophy and philosophical thought prior to and during his time.

Brad DeLong’s fiscal manifesto - Brad DeLong is fed up with vague hand-waving from technocrats, Bob Rubin very much included, who call for the government to make difficult decisions without being remotely explicit about what such decisions might entail. So he comes up with his own seven-point “platform for the bipartisan technocrats of the center”, which “everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today”. It’s a provocative and very useful contribution to the fiscal debate, if only because it has exactly zero probability of ever being enacted. But the thinking behind it is solid: The most striking part of DeLong’s plan is not the strict 10-year PAYGO, which would apply not only to extending middle-class tax cuts but also to a second stimulus. Instead, it’s the carbon tax. In contrast to most proposals out there, DeLong’s carbon tax would not be revenue-neutral: half of it — about $73 billion per year, or $635 per household — would go straight to deficit reduction, rather than being used to fund extra spending.

Tragedy of the technocrats -The good guys will always lose if they don’t have the courage to be the good guys. Brad DeLong writes: all the bipartisan technocrats of the center appear to be wringing their hands and calling for a plan without saying what it should be. DeLong tries to remedy this with a list of specific proposals. As advertised, they constitute a “platform for the bipartisan technocrats of the center”. In a seven point memorandum, the vexing issues of the day are simply fixed. The arithmetic is made to work. “[T]he best policy to provide American businesses with the incentives they need” is declared. No matters of controversy are noted. Why then, as Felix Salmon points out, does it have “exactly zero probability of ever being enacted”? Paul Krugman laments that we have been “mugged by the moralizers” and admonishes us that “economics is not a morality play“. But the thing is, human affairs are a morality play, and economics, if it is to be useful at all, must be an account of human affairs. I have my share of disagreements with both Krugman and DeLong, but on balance I view them as smart, well-meaning people who would do more good than harm if they had greater influence over policy. But they won’t, and they can’t, and they shouldn’t, if they exempt themselves from the moral fray.

One Quibble with Brad DeLong’s Platform - Let me endorse almost all of Brad’s platform for the bipartisan technocrats which is what he says Robert Rubin should be saying. It is classic Rubinomics endorsing long-term fiscal restraint with short-term fiscal stimulus: Accelerating government purchases is a no-brainer (except to those political fools who govern us by saying “no” to anything that comes from the Obama White House). Federal revenue sharing is another no-brainer.  My quibble is with Brad’s suggestion that half of the 2nd Recovery Act should be half from tax cuts. Why? Well in the standard Keynesian model, the impact effect from a dollar of tax cuts is dampened by the marginal propensity to consume as at least some of the tax cut is saved even by borrowing constrained households. For households that are not borrowing constrained, pushing taxes back has no effect on consumption demand today. In other words, the more of the supposed fiscal stimulus that comes from tax cuts – the less bang for the buck we get. Was not this one of the problems with the first Recovery Act?

On moral heuristics - EARLY this week, Brad DeLong laid out a platform of deficit cuts for "bipartisan technocrats of the center". The post prompted a very interesting response from Steve Waldman, who addressed not the content of the proposals but Mr DeLong's style in arguing for them. When economists (or those on the left, the main target of Mr Waldman's remarks) refuse to argue for their preferred policies in moral terms, they cede those powerful arguments to the populists and demagogues, reducing, in the process, the likelihood of their preferred policies being adopted: [E]ven in a challenging landscape it is better to fight than to preemptively surrender. There are ways to address, in explicitly moralistic terms, the arguments of the other side. It is not so effective to claim, for reasons described as “wonky”, that what’s bad is good in a liquidity trap and economics is not a morality play and in a better world policy would be driven by the models that one very smart economist prefers. Rather than eschewing moralism, Krugman could turn the table on “debt moralizers” and talk about the responsibilities of creditors, the evils of bad lending

Technocratic Solutions and Moral Dilemmas - Maxine Udall - Whether we like it or not, our technical solutions are competing in a morality play scripted by interest groups and mama grizzlies who in 25 words or less conflate small government and something they imagine to be "free markets" with individual liberty, a key justice principle. Most sound techocratic solutions are difficult to convey, must less motivate, in 25 words or less (and the motivation is often moral as well as technical: more for most, more for less, prices as reliable signals of marginal social cost, reducing unemployment, increasing inflation to discourage saving and stimulate spending ... you get the idea). But the larger problem, I think, is that allegedly "amoral" economists view the moral sequelae of sound economic policy, such as banksters' gains (at taxpayer expense), as "side issues" that are irrelevant to restoring the economy, while some of "we the people" view it as one of the most important issues. We end up with....the Tea Party (or, at least, with a large portion of the population who are extremely resentful and angry at being unemployed and underwater while the economy romps upward at least for those whom we bailed out).

Sometimes, We Need Big Government - Most of the coverage of President Obama’s interview on “60 Minutes” focused on his body language (glum, weary) or his message about legislative compromise (open to some, within reason). The part that got my attention was his discussion of government and whether, under his administration, it had gotten too big. While defending the component parts of his agenda, Obama acknowledged that opponents “were able to paint my governing philosophy as a classic, traditional, big government liberal. And that's not something that the American people want." No, it’s not. And, as my colleague Jonathan Chait has pointed out many times, it’s not exactly what liberals want, either. For conservatives, smaller government is an end in itself. For liberals, bigger government is more a means to other ends, like policing the banks or making health care available to everybody. If a market works fine on its own, liberals are happy not to meddle with it.  But sometimes addressing our society's needs really does require increasing the role and size of government. There is just no getting around that.

GOP Victory May End Government Economic Intervention: One of the oldest, most controversial issues in economics is how active government should be in managing the economy. Views on this have varied greatly through the ages, and we are in the middle of yet another large change in attitudes about the proper role of government. President Obama’s historic 2008 victory and the government’s response to the Great Recession seemed to augur a return to a brand of government activism not seen since the New Deal. But last week’s elections that swept Republicans back into power in the House, and narrowed the Democrats’ hold on the Senate, marked a stunning repudiation of Obama’s agenda – and an unmistakable rejection  of the government’s more muscular economic and regulatory policies. Why did the public reject the president’s economic policies and activist government more generally? Polling conducted before and after the midterm elections revealed a general perception that the administration’s $814 billion stimulus package of spending and tax breaks didn’t work. An October poll by the Pew Research Center showed that a vote in support of Obama’s stimulus package topped the list of reasons why Americans said they wouldn’t vote for a candidate.

Did the midterms kill Keynesianism? - Mark Thoma has a depressing column at the Fiscal Times today, saying that the Obama administration’s failed fiscal stimulus threatens the entire idea that the government has a role to play in smoothing economic shocks and protecting the vulnerable from the vagaries of unconstrained capitalism: We will be much less likely to use fiscal policy in the future, particularly government spending – much to the detriment of any future generations caught in a large downturn. As for the Fed, it still has considerable independence and a job to do in managing the economy, and it will continue to do that job. But the Fed will be far less willing to take bold steps to try to alter the direction of the economy, and far less likely to get the support from Congress it needs for another bailout to prevent a financial meltdown. And if the degree of independence the Fed currently enjoys is reduced through Congressional action, a very real possibility with people like Texas Rep. Ron Paul , a libertarian, as potential members of key oversight committees, even the routine management of the economy by the Fed could be affected.

Is This The Start Of The Don't-Cut-Military-Spending Campaign? - I realize that, like a cardiologist who thinks everything is related to heart issues, I trend to see federal budget implications no matter what the subject. But I can't help but wonder if this speech by Senator Lindsay Graham (R-SC) yesterday, is more about trying to make the Pentagon immune from any deficit reduction plan that is put on the table in the months ahead than eliminating Iran's nuclear capability.

 Tea Party Favorites Rand Paul & Jim DeMint Struggle To Name Specific Budget Cuts (VIDEO) - Signaling how difficult it will be for the Republican Party to live up to its campaign promises of cutting spending while preserving the Bush tax cuts and not cutting benefits for seniors, Tea Party favorites Sen. Jim DeMint (R-S.C.) and Sen.-elect Rand Paul (R-Ky.) struggled on Sunday to actually name any specific cuts they plan on making. On ABC's "This Week," Christiane Amanpour repeatedly pressed Paul to move beyond "slogans and platitudes" to "direct information" on how the Republican Party will balance the budget and cut the deficit.  Paul immediately reiterated that he was going to push for a balanced budget amendment and said that cuts needed to come from across the board -- including defense spending. Whenever Amanpour asked whether a specific program -- such as Medicare, Social Security and health care -- would be cut, Paul simply kept reiterating that he was going to be looking "across the board." He was unable, however, to actually name anything significant that would be on the chopping block:

House Republicans Name Program That Already Expired As First Spending Item They Would Cut - ThinkProgress has been documenting the struggles that House Republicans have been having as they attempt to claim the mantle of fiscal responsibility without laying out any real spending cuts to which anyone might object. Rep. Kevin McCarthy (R-CA) epitomized this dance, saying on PBS’ Newshour that he had a path to budget balance, and then outlined cuts that amounted to less than one half of one percent of the budget.  One program which House Republicans have consistently seized upon to bolster their budget-cutting bona fides is the Temporary Assistance for Needy Families Emergency Contingency Fund, a successful program that has created 250,000 jobs in 37 states via subsidized employment programs for low-income and unemployed workers. And according to National Journal, Republicans are once again railing against the program, selecting it as one of their first programs to cut:

Killing Expired Program Won’t Save Money - CBPP - Yesterday, the Republican Study Committee issued a press release announcing one of its first ideas for tackling spending:  eliminating the TANF Emergency Fund, which the RSC says would save $25 billion over the next decade “by restoring welfare reform.”  There are so many problems with this proposal that it’s hard to know where to begin.   Here are the facts:

• The TANF Emergency Fund no longer exists.  It expired on September 30.  You can’t achieve savings by ending a program that has already ended.
• Nobody has ever proposed spending $25 billion on the fund.  Earlier this year the House passed a bill to extend it for one year, at a cost of $2.5 billion — one-tenth of the savings that the RSC claims.
• The TANF Emergency Fund is welfare reform.  In fact, the fund represents welfare reform at its best:  it has enabled states to expand work-focused programs within TANF despite high unemployment and a weak economy.  Using the fund, states placed about 250,000 low-income parents and youth in subsidized jobs, mostly in the private sector.

Single Stimulus Program That GOP Wanted To Eliminate Has Created Hundreds Of Thousands Of Jobs - Back in May, House Republicans launched a gimmicky website called “YouCut,” which allows people to vote on which item, from a pre-determined list, they would nix from the federal budget. All the website really did was confirm that Republicans are totally uninterested in actually addressing the deficit, as all of the items they chose for their initial list, combined, amounted to 0.017 percent of the budget.  The very first YouCut “winner” was the Temporary Assistance for Needy Families Emergency Contingency Fund (TANF ECF), which was created as part of the stimulus package. Of course, the GOP’s claims about the program had little basis in reality, as the TANF ECF is actually a successful jobs program that helps needy families and subsidizes job creation, including placing young Americans in summer jobs. And, as it turns out, the program has created hundreds of thousands of jobs across the country. In fact, it is on pace to help 240,000 unemployed individuals find jobs by the end of September

Boehner under fire: First cut should be lawmakers' salaries… Soon-to-be Speaker John Boehner (Ohio) is being pressed by taxpayer groups to slash the salaries of House lawmakers. Cutting member pay would show voters the new GOP majority in the House is going to lead by example in their efforts to rein in spending and start with their own wallets, say officials with three prominent taxpayer advocacy groups in Washington, D.C.   “There has to be a visible gesture that people can immediately relate to,” said Pete Sepp, the executive vice president of the conservative National Taxpayers Union.   “And cutting pay would be one of the best symbols, because unlike virtually anything else the federal government does, when Congress spends money on its own salaries and benefits, people can make a direct comparison to their own situation,” Sepp said.

The Senate’s Most Conservative Member: Eliminating Earmarks Won’t Save One Dime - Oklahoma’s James Inhofe has been called the Senate’s most conservative member by National Journal, he has a lifetime rating of 97.66/100 from the American Conservative Union and gets an A from the National Taxpayers Union, and he’s telling the Tea Party that the war on earmarks is the wrong battle to fight: Tea party activists are stepping up their involvement in an internal Senate GOP battle over whether to ban earmarks – and Oklahoma Sen. Jim Inhofe is pushing back aggressively. Inhofe has engaged in a behind-the-scenes effort aimed at convincing tea party groups of the value of earmarks, including by circulating a 20-page document that makes the case that it’s Congress’ job to appropriate money and that a number of projects are rooted in the national and local interest.

Cantor: Obama shares blame if GOP shuts down government… In 1995, the federal government shut down because President Bill Clinton and the Republican Congress were not able to agree on a budget. With the Republicans set to take back over the House in 2011, history could be repeating itself. Eric Cantor, the number two Republican in the House, refused to take a federal government shutdown off the table Sunday and said that President Barack Obama shares responsibility in running the government.Think Progress noted: A “shutdown” occurs when Congress fails to appropriate money to fund the federal agencies. As a result, nearly every federal employee is sent home, including the officials who cut Social Security, Medicare and Medicaid checks. In other words, by threatening a shutdown, Cantor is holding the incomes of millions of American seniors hostage unless Obama complies with his petty demands.

Simon Johnson says it so I don’t have to - Paul Ryan is not a fiscal conservative... This is further confirmed by the following:

• 1. Paul Ryan’s main short-term suggestion in his FT piece today is: Cut taxes.  Anywhere else in the world you would be laughed out of the room for suggesting this as the first step towards bringing a government’s fiscal house to order.
• 2. For concrete proposals on spending cuts, Mr. Ryan refers us to the Republican “Pledge to America“.  But that Pledge has no such detail on anything that would make a first-order difference, i.e., add all their proposals together and it wouldn’t even make a noticeable dent in the government debt path.  If a politician can’t summarize his main suggestions in an op ed, there are no real suggestions.
• 3. Mr. Ryan is right to bring up the need to make small adjustments to Social Security; this has been done before and makes sense.  But the major budget buster in the CBO baseline, as you get out to 2030, is Medicare.  What exactly is Mr. Ryan proposing in terms of controlling those costs?  This will be a tough and emotional conversation – the lobbies here are almost as powerful as banks – but Mr. Ryan is not even starting us in the right direction.

Looking at the deficit commission’s tax plans - The WSJ does none of its readers any favors with its silly headline attempting to sum up the effects of the deficit commissions tax proposals. “Top Earners May Face Big Hit”, it says—which would surely be more accurate if the “May” was replaced with “Won’t”. The piece begins: A presidential panel’s draft overhaul of the tax system could hit higher earners hard, largely by wiping out deductions and investment breaks that tend to especially benefit those who make enough money to itemize their taxes. For one thing, the draft is coming from the panel chairmen, not from the panel itself. And more generally, while it’s true that most people who itemize their taxes are high earners, it doesn’t follow that most high earners itemize their taxes, or get a huge benefit from doing so. Some are better off with the standard deduction, especially if they don’t have a mortgage; others are subject to the phaseout rule, and others still get hit by the alternative minimum tax.

Deficit Reduction and Tax Policy - Mark Thoma writes, Why, for example, are tax cuts included in a proposal to reduce the national debt? That makes no sense at all except as an attempt to impose a particular ideology on the tax code. For decades, economists have suggested broadening the tax base while reducing marginal disincentives. Tax reform of this sort is typically popular with economists of all political persuasions. We see it as a "win, win." It can bring in more revenues (which the Bowles-Simpson plan would do) while promoting economic growth.  Thoma now characterizes this form of tax reform as ideologically charged. I would have thought that tax reform in order to reduce the deficit is about as centrist an economic policy as one could propose.  But the center is not what it used to be.

Why No Financial Transactions Tax? - Why wasn't a financial transaction tax part of the Bowles-Simpson deficit reduction proposal? It would raise substantial revenue and has desirable properties in terms of cooling speculative money flows. I guess the problem is that the tax falls largely on the wrong people -- those who can afford to pay it.

GOP: There'll be no compromise on tax cuts - Republican leaders in both the House and the Senate said Sunday there would be no compromise with Democrats on whether to extend Bush-era tax cuts for the nation's wealthiest taxpayers. President Barack Obama has said he wants to extend the tax cuts for taxpayers with a combined annual income of less than $250,000, but that the cuts should be eliminated for people making more than that. He's suggested there might be room for compromise in discussions with Republicans on other tax issues. But both Rep. Eric Cantor, R-Va., who's expected to become the majority leader in the House when the new Congress is sworn in next year, and Senate Minority Leader Mitch McConnell said on Sunday news programs that they'd insist on an extension of the tax cuts for wealthy. ... Cantor said Republicans plan to make spending cuts a priority when they take control of the House in January. "We're going to embark on a regular diet of spending cut bills being brought to the floor weekly," he said.

Tax-Cut Extension for Top Earners Shouldn’t Be Temporary, Eric Cantor Says – Representative Eric Cantor of Virginia, the House’s No. 2 Republican, said Congress should do more than approve just a short-term extension of current tax rates for top earners, as a battle looms in Congress over the expiration of the tax cuts enacted under former President George W. Bush.  Cantor said failing to extend the reduction for the highest-earners on the same terms as for other Americans would create uncertainty that would threaten economic recovery.  “I am not for decoupling the rates,” Cantor said yesterday on the “Fox News Sunday” program. “I am not for raising taxes in a recession, especially when it comes to job creators.”

Republicans To Raise Taxes On 98% Of Americans - One of the funniest parts of the political charade we’re all witnessing is that Republicans are adament about retaining tax cuts for the wealthiest among us while, simultaneously, allowing tax cuts for everyone else to expire.Huh?  Yep, that is what’s going to happen.  And here’s how, as explained over at the Tax Policy Center blog.“The Tax Increase No One’s Talking About" Congress and the administration have been arguing for months over extension of the Bush tax cuts: Should we extend them for everyone or only for the poorest 98.3 percent of Americans (which would also maintain some tax cuts for the rich)? Disagreement revolves around roughly $68 billion: the cost of covering the last 1.7 percent vs. the government pulling that much money out of the private sector and squelching economic recovery. But nobody’s talking about the nearly $80 billion hit that expiration of the 2009 stimulus bill will inflict.

Democrats Link Extension of Cuts, Tax-Code Rewrite - Two top Senate Democrats floated the idea Tuesday of extending the Bush-era income-tax rates for a limited time only, and tying that move to an overhaul of the U.S. tax code or passage of policies to address the budget deficit. The idea injects a new element into the ongoing political discussion about the tax breaks, which expire Dec. 31 unless they are extended, at a time of growing concerns about government deficits. The new proposals could lay the groundwork for a multi-year debate many experts say would be needed to overhaul the bulky tax code. Republican aides on Capitol Hill expressed cautious interest in the Democrats' idea. But they said they would be on guard against any measure, such as a fast-track procedure for passing a tax overhaul, that might put the GOP at a disadvantage in blocking future tax increases.

Obama's First Stand - Robert Reich -The President says a Republican proposal to extend the Bush tax cuts to everyone for two years is a “basis for conversation.” I hope this doesn’t mean another Obama cave-in. . Instead of limiting the extension to $250,000 of income (the bottom 98 percent of Americans), he should offer to extend it to all incomes under $500,000 (essentially the bottom 99 percent), for two years. The economics are clear: First, the top 1 percent spends a much smaller proportion of their income than everyone else, so there’s very little economic stimulus at these lofty heights. On the other hand, giving the top 1 percent a two-year extension would cost the Treasury $130 billion over two years, thereby blowing a giant hole in efforts to get the deficit under control. Alternatively, $130 billion would be enough to rehire every teacher, firefighter, and police officer laid off over the last two years and save the jobs of all of them now on the chopping block. Not only are these people critical to our security and the future of our children but, unlike the top 1 percent, they could be expected to spend all of their earnings and thereby stimulate the economy

White House Gives In On Bush Tax Cuts: President Barack Obama's top adviser suggested to The Huffington Post late Wednesday that the administration is ready to accept an across-the-board continuation of steep Bush-era tax cuts, including those for the wealthiest taxpayers. That appears to be the only way, said David Axelrod, that middle-class taxpayers can keep their tax cuts... "We have to deal with the world as we find it," Axelrod said. "The world of what it takes to get this done. "There are concerns," he added, that Congress will continue to kick the can down the road in the future by passing temporary extensions for the wealthy time and time again. "But I don't want to trade away security for the middle class in order to make that point." Also dealing "with the world as we find it," Axelrod declined repeatedly to comment on any of the controversial debt-reduction measures suggested by the chairs of the president's own commission -- even those, such as raising the Social Security retirement age, that go against Obama campaign pledges and strike at the heart of Democratic constituencies.

Obama's tax cut surrender -The Huffington Post is claiming that Obama's top adviser, David Axelrod has admitted surrender on tax cuts. As one might expect, the Huffington Post is making a big deal of this news, with screaming banner headlines. But Axelrod is now claiming he said nothing newsworthy. There is not one bit of news here. I simply re-stated what POTUS and [press secretary] Robert [Gibbs} have been saying. Our two strong principles are that we need to extend the tax cuts for the middle class, but we can't afford a permanent extension of the tax cuts for the wealthy.Axelrod protests too much. Notice the key difference? The Huffington Post reports the willingness to agree to temporary continuation of the tax cuts, while Axelrod maintains that the White House is still opposing a permanent distinction. There's no sugar-coating this: The White House has failed utterly on a goal that it tried to make its signature issue right before the midterms. Now the administration is clinging to a very slender thread -- the notion that if Congress makes tax cuts for the middle class permanent, while only allowing a temporary extension of tax cuts for the wealthy, it will force a vote further on down the line on whether or not to continue extending tax cuts for the richest Americans.

The “misoverestimated” surpluses and the tax-cuts debate - According to an MSNBC report, Bush writes: “Much of the surplus was an illusion, based on the mistaken assumption that the 1990s boom would continue. Once the recession and 9/11 hit, there was little surplus left.”The irony runs deep: Back in 2001, the projected “surpluses” had been the very premise underlying the Bush tax cuts, which, supporters argued, would serve to refund to Americans the over-charge on their taxes. But with the surplus premise now defunct even by the tax cuts’ own creator (let alone by the glaring misery of America’s fiscal outlook), are there any arguments left to support their extension beyond their scheduled expiry at year-end? First, because the stimulative effect of the Bush tax cuts—as designed—is not as obvious as their multi-billion dollar cost would suggest; and second, because the alternative does not have to be the absence of any other stimulus measure. Expanding on the first point, it is useful to consider the arguments made by William Gale and Peter Orszag in a 2004 paper, which assessed the impact of the Bush tax cuts, including as a stimulus against the 2001 recession.The authors argued that the tax cuts were poorly designed as a stimulus measure for a number of reasons, many of which continue to apply today: First, they had a regressive nature—i.e. they were not primarily targeted to the (lower-income) households with the highest marginal propensity to consume.

The Bush Tax Cuts and the Republican Cult of Economic Failure - There's no such thing as a free lunch, and there's no such thing as an honest case for extending the Bush tax cuts. Ten years of hard data prove they were a complete failure. They did not work while Bush was in office and they did not work during the first two years of the Obama administration. No wonder the Congressional Budget Office says that the GOP's proposed extension of tax cuts to the rich will reduce future economic growth.  To recap: In terms of promoting economic growth, the Bush tax cuts were a complete failure.  Under George W. Bush, U.S. GDP growth averaged about 2.1 percent a year. Since the end of World War II, the country has never experienced such low economic growth during an eight-year period. And if you exclude the war demobilization of 1946, when U.S. government spending fell by two-thirds and the GDP fell by 10.9 percent, Bush had the worst economic record since Herbert Hoover. During FDR's first two terms, when the country remained mired in a Depression, GDP growth averaged about 6.3 percent a year.

Simpson-Bowles: Should the mortgage interest deduction be eliminated? The Simpson-Bowles plan coming out of the deficit commission is in the headlines. There’s a lot to digest in it, but I’d like to focus particularly on the elimination of the home mortgage tax deduction. They present two possible plans for this deduction. One abolishes it entirely, and the other one eliminates it for second homes, home equity mortgages, and any mortgages over $500,000 in value. Is this a good idea?  The tax credit is part of the larger political project of encouraging homeownership. One might think at this point in the housing recession we’ve collectively moved beyond the point where this is thought to be a good idea, but our general anger at homeownership promoting policies doesn’t change the economic argument for them, which is based on externalities. The idea is that homeownership encourages investment in both the property and the community, and there is some evidence that both occur, and that there are positive spillovers. Others have argued that homeownership has had a positive effect on children. For example, Green and White argue that children of homeowners are 25% less likely to drop out of high school, and that there is a causal relationship.

Estate Tax Issue Offers Quick Test for Congress - After their election victory on Tuesday, Republican leaders in the House promised progress on many fronts, including a turn toward more fiscal discipline and less economic uncertainty. They have a chance to start work on these goals almost immediately, because the lame-duck Congress soon will face a pressing issue that directly concerns both themes: the estate tax. The uncertainty imbedded in this tax was actually written into the law in 2001 by a Republican-controlled Congress. In what some wags have called the “throw momma from the train” provision, the law stipulated that the estate tax would disappear in 2010, only to reappear in 2011 at the lower exemption level and higher rates that were in place in 2001. (To give proper credit, this provision should really be called the “planned Bush tax increase.”) The law has made 2010 the best time for tax-conscious rich people to die. Right now, no one has any idea what rules will be in place in January... What should Congress do? The most important step would be to end the uncertainty by legislating a permanent set of rules.

Letting the Estate Tax Die - The Obama administration’s proposal for the estate tax has all of the ingredients of a damaging tax – large exemptions and loopholes, confiscatory marginal tax rates and little revenue potential. The best reason for having such a tax, if there is one, is to tap into any punish-the-rich sentiment that may be in the electorate. The Obama administration has proposed an estate tax for 2011 and later years that is much like the one that was in place before to 2010. Writing in favor of the proposal, Prof. Richard Thaler of the University of Chicago acknowledged that the marginal estate tax rate “sounds high, almost confiscatory.” He then notes the $7 million exemption available last year, says that with it in place only 3 estates in 1,000 would have to pay an estate tax and adds that those with big-enough estates could afford a good lawyer to help them further increase the effective size of their exemption. But the huge potential for avoidance behavior is exactly why the proposal is so damaging from an economic point of view. Taxes affect behavior, because taxpayers take steps to pay less tax. As a result, every tax dollar brought into the public treasuries harms the private sector more than a dollar, and the amount of extra harm depends on the marginal tax rate.

The Estate Tax and the Laffer Curve -My Economic View column last Sunday was about the estate tax, a treacherous topic on two counts. First, it is hard to get all the details right, especially since some of them are not yet known.  Second, lots of people have strong opinions about this subject, and many of them write to you.  After digesting all the e-mails I have a few thoughts to add to my column.  First, let’s (try to) get the facts straight. An estate tax expert, Vince Lackner, wrote a nice note on some points I made about the estate tax that are open to interpretation: Did I mention that the estate tax is complicated?  And note that even experts are tempering their opinions with phrases like “as we understand it”.

Going Inside the VAT (video) Deep in an underground bunker at an undisclosed location in or near Washington D.C., the federal government maintains a secret facility containing a number of large vats filled with a mysterious liquefied effluvium.  In those vats, the U.S. government sustains the surgically-extracted brains of a number of former bureaucrats and politicians. The government does this for the purpose of extracting their accumulated knowledge and exploiting their lifelong connections to make new public policies intended to solve very dificult problems. Solutions too difficult for living politicians and bureaucrats to directly propose themselves, much less implement, and live.  These disembodied brains in vats are called "commissions." Today, the most notable commission is President Obama's Bipartisan Commission on Fiscal Responsibility and Reform, which has been tasked with the goal of producing a non-binding deficit reduction proposal by 1 December 2010, which is intended to provide sufficient political cover for today's living politicians to take a number of very unpopular steps to reduce the annual federal budget deficit. We're not joking when we suggest that the deficit commission might seriously propose raising taxes on everyone and/or everything. And as it happens, the commission is most certainly considering a tax raising option perhaps inspired by its containment unit: the Value Added Tax, or VAT.

Let's begin to think big about the tax code - For one thing, a 21st-century economy should be able to get rid of the worst mistakes it made in the 20th century. The deduction for employer-based health care is one of those mistakes. It was a carryover from World War II's wage-and-price controls, and it's given us a system that costs too much but in which most of us are so far from those costs that we're not willing to make the sacrifices reform requires. On top of that, it's awfully regressive: In effect, it means that people without health-care insurance, or with insurance that doesn't come from an employer, are subsidizing the people whose employers do give them insurance - and those folks are, on average, the richer group.  Similarly, the mortgage-interest deduction encouraged an overinvestment in housing, and did so at the expense of renters. Like the exclusion for employer-based health care, it's regressive, and it makes housing seem cheaper than it is. It's time to get rid of both, perhaps by converting them to refundable credits of some kind.  Speaking of consumption, it's time to start taxing it. Tax experts almost universally agree that taxing consumption is better than taxing savings and investments, but we tax savings and investments and let consumption off scot-free. Shifting some of our income tax burden to a value-added tax - a tax that would fall on what we spend, but spare what we save and invest - would balance the scales a bit.

Treasury answers your tax questions - Michael Mundaca, the assistant Treasury secretary for tax policy, has taken to the blogs to help up some of the perennial confusion surrounding taxes. And yes, he tackles the biggest question of all, about those 1099s:While businesses do not need to start filing information returns on the expanded set of payments until January of 2013, some groups have already raised concerns about the burden that this new provision may impose. As the President has said, it is important to look at whether this burden is too great for businesses to manage. Treasury and IRS are sensitive to these concerns and will look for opportunities to minimize burden and avoid duplicative reporting… Already, we have used our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. So, whenever a business uses a credit or debit card, no information report will need to be filed, and there will thus be no new burden under the new law.

Private equity doesn't do us much good; avoiding taxes does us considerable harm - David Weidner's "writing on the wall" column for Nov. 2, 2010 comments on "Paying for Wall Street's Prosperity: Loophole could cost taxpayers $70 million".  What loophole?  That "carried interest" provision that lets hedge fund and private equity managers get their compensation income with the tax benefits of capital gains rather than ordinary rates.  This isn't chicken feed.  There are lots of private equity deals, and private equity deals have a huge impact on ordinary Americans--for one thing, they frequently purchase by leveraging the company they buy, so that it has considerable debt the interest on which is deductible, lowering the company's tax bills, at the same time that they frequently "restructure" so that the successor company is likely to fire lots of employees, sell some assets, and then do an IPO a few years down the road to bring in cash to pay off the debt.  And many of them will fail--including bankruptcies and going out of business. The benefit (deferral and capital gains preference) goes to the private equity firms that make fortunes out of the deal.   The burden is--surprise, surprise--borne by the ordinary Joe who gets fired or sees his company driven to insolvency or at the least faces job insecurity during the time that the private equity firm is whipping his company into shape for selling at a profit. 

JPMorgan Internal Document Predicts 'Gridlocked' Congress 'Without Any Landmark Legislation' - The financial titan JPMorgan Chase is betting on the next congressional session to be historic in its lack of productivity, according to a leaked internal document.  On Tuesday, the money-in-politics research group Center for Responsive Politics published a document from JPMorgan's government affairs office that gives some interesting hints as to how Wall Street views the fallout of last week's elections.  The viewpoint is bleak. "[T]he 112th Congress could be remembered as a gridlocked one without any landmark legislation," the document's author writes.  In the House, Republicans will likely hail their wave of support as a mandate from voters to reject the comprehensive reform measures that passed over the past two years. House Republicans will look to pass a series of spending cuts, tax cuts and repeal measures -- to create a distinct alternative in the mind of the electorate from the administration and reinforce their image as the party of fiscal restraint.

The future of regulatory reform - In preparation for this week’s meeting of the G20, CEPR recently held a major conference on financial regulation – The Future of Regulatory Reform – bringing together senior policymakers, leading academics and industry practitioners. This column presents a report and video highlighting some of the speakers’ key recommendations.

The Volcker Rule, Merkley-Levin, and Loopholes (Gory Details Edition) - Continuing my Volcker rule theme, the current issue of Risk has an article titled, “Dealers Confident on Volcker Exemptions,” which quotes various banking lawyers talking about how easy it will be to get around the final Volcker rule language in Dodd-Frank. From the article: (emphasis mine) “Last month, we sat down with our counsel and after an hour of question-and-answer, the lead counsel turned to me and said ‘it is not going to be absolutely clear how the provision will work until the rules have been written, but given so much of proprietary trading has a client nexus to it, I’ll be embarrassed if I don’t manage to exempt all your activities from the rule’,” Early reports on the Volcker rule caused astonishment in the banking industry, with predictions of massive changes to the structure and business of certain dealers. Now lawyers have had some time to absorb the clause within Dodd-Frank, many feel the prop trading requirement will be relatively easy to negotiate. This is exactly what I said Wall Street’s real reaction to the Merkley-Levin version of the Volcker rule would be. As I wrote way back in May, when the Senate bill was still being debated: “I spent the majority of my career as a lawyer for one of the big investment banks, and my first thought after reading Merkley-Levin was: ‘Wow, this would be cake to get around.’ Wall Street is scared of the Volcker Rule, but believe me, they’re not scared of Merkley-Levin.”

Making The Volcker Rule Work - Simon Johnson.  This is the text of a letter (about 2,000 words) submitted on Friday to the Financial Stability Oversight Council, in response to their request for comments on the Volcker Rule.  The full letter is here and on regulations.gov.  If you would like more background on the Volcker Rule and its political importance, please see this post and the links it provides.

Opinion: Giving small banks a chance to thrive - Elizabeth Warren… On my first day of work helping set up the new consumer agency, I met with community bankers from Oklahoma. We talked about a lot of things — three of us had gone to the same high school, and many of their banks were located in towns where I still have family. But the most engaging part of our conversation was about how the new Consumer Financial Protection Bureau could become a strong partner with community banks.  Since that day, I have met regularly with community bankers — in Ohio, in California and here in Washington. I come away from each meeting more convinced that small banks and credit unions face unique challenges in today's environment. And I come away even more convinced that the new consumer agency’s push toward transparency in financial products can serve families and small financial services providers alike

Could Wall Street’s Favorite Dem Head Obama’s Consumer Bureau? - Will President Barack Obama appoint Wall Street-friendly Rep. Melissa Bean (D-Ill.) to head the new Consumer Financial Protection Bureau? If so, that would be bad news for reformers, who are appalled by the prospect—but good news for John Michael Gonzalez, a leading lobbyist for Big Finance. Before becoming one of Washington's top influence peddlers on behalf of financial firms and trade groups, he was Bean's chief of staff. According to Politico, Bean, a congresswoman representing northern Illinois who trails in the vote-counting in her close reelection race against Republican Joe Walsh, is under consideration by the White House for this new position, heading up the agency that consumer finance advocate Elizabeth Warren is now constructing.

Vikram Pandit Has No Clothes - Simon Johnson - Vikram Pandit heads Citigroup, one of the world’s largest and most powerful banks.  Writing in the Financial Times Thursday morning, with regard to the higher capital standards proposed by the Basel III process, he claims Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy.” Mr. Pandit is completely wrong.  To understand this, look at the letter published in the Financial Times earlier this week by finance experts from top universities – the kind of people who trained Mr. Pandit and his generation of bank executives. The professors write, “Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15%, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.”The point is that “bank capital” just reflects the choice between debt and equity – to “have more capital” simply means to rely more on equity relative to finance.

G20 Proposes Fig Leaf Regulatory Regime for Biggest Banks - Yves Smith - The latest idea out of the G20, that of creating an international regulatory structure for the biggest international banks, sounds like progress but I doubt it will prove to be. Some regulators took note of the dangers posed by globe-spanning financial behemoths prior to the crisis. The Bank of England, in its April 2007 Financial Stability Report, singled out 16 “large complex financial institutions” as having the potential to put the financial system at risk. It also noted smaller concerns could pose a threat by virtue of their position in key markets.  The list seems to have grown, as per the Financial Times: Banca Intesa is on this list and not AIG? Admittedly, this list is construed to be that of banks, but if the Financial Stability Board takes its name seriously, the omission of AIG reveals the same sort of blinkered thinking that enabled the crisis.

Top Finance Experts To G20: The Basel III Process Is A Disaster - Simon Johnson - The Group of 20 summit for heads of government this weekend will apparently “hail bank reform,” particularly as manifest in the Basel III process that has resulted in higher capital requirements for banks. According to leading authorities on the issue, however, the Basel process is closer to a disaster than a success. Bank capital can be best thought of as the amount of financing of a bank’s operations (lending and investment) covered by equity and not by debt obligations. In other words, it describes the share of a bank’s assets subject not to the “hard claim” of debt but rather to a residual or equity claim, which would not lead to distress or insolvency when the value of the asset declines. For global megabanks, equity capital is thus a key element in preventing the failure of an individual institution (or a couple of banks) from bringing down the financial system.  The framing of the Basel “success,” according to officials, is that the big banks wanted to keep capital standards down — and this is definitely true — but that governments pushed for requirements that are as high as makes sense. The officials implicitly conceded the banks’ main intellectual point, that higher capital requirements would be contractionary for the economy. But according to top academic experts on this issue — people who know more about banks and bank capital than anyone else on the planet — the banks have misrepresented and the officials have misunderstood reality.

Too big to fail bank plans may be softened (Reuters) - Plans to impose extra safeguards on the world's top banks may be softened, a senior regulator signaled on Wednesday as world leaders gathered in Seoul to keep their regulatory reforms on track. Shares of Mizuho Financial Group and other Japanese banks surged on Wednesday after a Financial Times report saying they -- and others -- may be exempt from new global rules under consideration that could require a further boost of capital. The Group of 20 leading economies (G20) summit in Seoul on Thursday and Friday will endorse a set of tough new bank capital rules known as Basel III in what will be a major regulatory milestone in the three-year old financial crisis. But the leaders had also hoped to approve a package of extra measures for the biggest banks so that taxpayers will not have to be called on again to bail them out in the next crisis. Disagreements over whether capital surcharges should be included had already pushed back its finalization well into next year but it emerged on Wednesday that key elements may also be watered down so that local supervisors have far more wriggle room in implementing it.

Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire - The subprime mortgage crisis isn’t the only calamity Wall Street created that’s upending the finances of U.S. states and cities.  For more than a decade, banks and insurance companies convinced governments and nonprofits that financial engineering would lower interest rates on bonds sold for public projects such as roads, bridges and schools. That failed promise has cost more than $4 billion, according to data compiled by Bloomberg, as hundreds of borrowers from the Bay Area Toll Authority in Oakland, California, to Cornell University in Ithaca, New York, quietly paid Wall Street to end agreements since 2008.  California’s water resources department this year spent $305 million unwinding interest-rate bets that backfired, handing over the money to banks led by New York-based Morgan Stanley. North Carolina paid $59.8 million in August, enough to cover the annual salaries of about 1,400 full-time state employees. Reading, Pennsylvania, which sought protection in the state’s fiscally distressed communities program, got caught on the wrong end of the deals, costing it $21 million, equal to more than a year’s worth of real-estate taxes.

Guest Post: Even Greenspan Admits that Moral Hazard and Fraud are the Main Problems - Even Alan Greenspan is confirming what William Black, James Galbraith, Joseph Stiglitz, George Akerlof and many other economists and financial experts have been saying for a long time: the economy cannot recover if fraud is not prosecuted and if the big banks know that government will bail them out every time they get in trouble. Specifically, Greenspan said today in a panel discussion at a Fed conference in Jekyll Island, Georgia (where the plans to form the Fed were originally hatched): Banks operated with less capital because of an assumption they would be rescued by the government, he said. Lehman Brothers Holdings Inc. wouldn’t have failed with adequate capital, he said. “Rampant fraud” was also an issue, he said. “Fraud creates very considerable instability in competitive markets,” Greenspan said. “If you cannot trust your counterparties, it would not work.”

Battered Obama took part in a ‘cover up’, says ex-regulator - "Obama has ignored the savings and loans crisis to this point. The position of the administration was that there were no lessons to be learned from the savings and loan crisis. I find that very bizarre." By instead green-lighting bank bailouts, ensuring that regulators do not consider toxic assets in stress tests, and reappointing Republican-era figures like Federal Reserve chairman Ben Bernanke, Black says Obama has taken some "disastrous" decisions. He argues that if the US government wanted to apply the regulators' understanding of the S&L crisis it should have opted to place insolvent "systemically dangerous institutions" into receivership. Further still, it should have blocked takeovers of endangered SDIs by other large institutions. "You don't want institutions so large that they are inefficient," he says. "Yet they have made the problem significantly worse because they have allowed, and in many cases encouraged, the SDIs to grow and pose an even greater risk."

Rare Agreement? - one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.  Hear, hear. That is James K. Galbraith, whose political views diverge considerably from mine. But the issue of what should have been done with the banks breaks more on outsider-insider lines than on ideological lines.  If Galbraith and I are correct, then President Obama's embrace of Geithner and the bailouts was a history-altering mistake.

Morgan Stanley financial adviser escapes felony charges for hit-and-run ‘because it could jeopardise his job’ - A financial manager for wealthy clients will not face charges for a hit-and-run because it could jeopardise his job, it has been revealed. Martin Joel Erzinger, 52, was set to face felony charges for running over a doctor who he hit from behind in his 2010 Mercedes Benz, and then speeding off. But now he will simply face two misdemeanour traffic charges from the July 3 incident in Eagle, Colorado. His victim, Dr Steven Milo, 34, is meanwhile facing 'a lifetime of pain' from his injuries. But prosecutors claim the decision is theirs to make. Erzinger, a private wealth manager who manages more than $1billion in assets at Morgan Stanley Smith Barney in Denver, is willing to take responsibility and pay restitution. 'Felony convictions have some pretty serious job implications for someone in Mr. Erzinger's profession, and that entered into it,' he said.  'When you're talking about restitution, you don't want to take away his ability to pay.

Demand for Loans Remains Weak, Mixed News about Underwriting Standards – The Fed's Senior Loan Officer Survey results of October indicate that demand for commercial and industrial loans from large and medium sized firms was weaker compared with the third quarter survey (see chart 1).  A larger percentage of bankers indicated weaker demand from small firms.  This information is discouraging because stronger economic growth in the months ahead is tied to a likely pickup in loan demand.  Reduced financing needs for inventories and accounts receivables, decline in investment of plant and equipment, and an increase in internal funds were the reasons cited for a lack of loan demand.

US Banks See Demand for Business Loans Drop - Bank loan officers say that demand for loans from small US companies fell in the past three months, casting doubt on how much the Federal Reserve can stimulate the economy. Twenty-nine per cent of banks said that demand for loans from companies with sales below $50m had fallen, compared with only 7.1 per cent of banks that reported a rise, according to a Federal Reserve survey of senior bank loan officers. The tepid demand for loans from small businesses reduces the chance of a strong rebound in growth in 2011 and suggests that even rock-bottom interest rates and easier borrowing conditions may not persuade them to invest. Every bank reporting a decline in small business loan demand said that its customers had cut back on their investment in plant or equipment. There was a decline in loan demand from larger companies as well, with 25 per cent of loan officers saying it had fallen, compared with 18 per cent who said that it rose. The survey came as four members of the rate-setting federal open market committee gave speeches warning that the Fed’s new programme of asset purchases made it even more urgent that Congress tackle the US fiscal deficit.

Fed: Banks expect tight lending standards for foreseeable future - From the Federal Reserve The October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses. ... However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future. Most respondents reported no change in their bank's standards for approving [commercial real estate] CRE loans. ... [A] special question asked banks whether their current level of lending standards remained tighter than the average level over the past decade and, if so, when they expected that standards would return to their long-run norms, assuming that economic activity progressed according to consensus forecasts. For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future. Here is the full report.

BofA, JPMorgan Reprise Perfect Trading Records in Third Quarter - Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, racked up perfect trading records for the second time this year, making money every day last quarter after accomplishing the same feat in the first three months of 2010.  Traders at Charlotte, North Carolina-based Bank of America made more than $25 million on more than 55 days during the third quarter, the bank said in a Nov. 5 regulatory filing. New York- based JPMorgan, which doesn’t break out its results by quarter, made more than $200 million on 12 days in the first nine months and lost money on only eight, the company said today in a filing.  Goldman Sachs Group Inc., which makes the most revenue on Wall Street trading stocks and bonds, had losses in that business on two days in the third quarter while Morgan Stanley reported 10 losing days. Goldman Sachs and Citigroup Inc. both had perfect trading results during the first quarter

Fed may let strong banks hike dividends (Reuters) - The Federal Reserve is expected to soon allow some healthy banks with strong capital levels to increase dividend payments, according to people familiar with the decision. The Fed's updated guidance is likely a few weeks away. It is expected to take a conservative approach in deciding which banks can increase dividends and assess each bank individually, according to a person familiar with the matter. Banks have been pushing to boost dividends. But regulators have balked at giving them the green light, citing uncertainty about the economic outlook and new capital rules. With global capital rules and the U.S. financial regulatory system retooling farther down the track, the environment is more conducive to letting strong banks increase dividend payments.

Fed’s Tarullo Warns Big Banks Against Rushing to Boost Dividends - Big U.S. banks will need to show they meet high capital hurdles to restore or increase dividends they slashed during the financial crisis, a top Federal Reserve official said Friday. Fed governor Daniel Tarullo said the U.S. central bank would soon issue guidelines he expects to be “conservative” on how banks will be able to change their dividend policy in the first quarter of next year. “We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized,” Tarullo said.

Negotiations With Banks Begin for Troubled Assets - Two years after Washington rescued Wall Street, hundreds of billions of dollars of bad investments — in many cases, the same ones that poisoned banks and then the economy — are going up for sale.  Entire financial businesses are being put on the block too, as the giants of finance try to slim down. The question is what this stuff is worth. Sensing opportunity, hedge funds and private equity firms are lowballing the banks. The haggling has only just begun. How these sales go, or do not go, could help determine the future of global finance. After all those taxpayer-financed bailouts, broken businesses and investments could pass from banks into private hands.  While banks need to purge themselves of troubled investments or drop profitable businesses they no longer want, the vast shadow financial system, which operates beyond the realm of traditional banks and banking regulators, could move deeper into the shadows if would-be buyers get their way.

Unofficial Problem Bank list increases to 898 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 12, 2010.  Despite failures, the Unofficial Problem Bank List continued its rise to the 900 level. This week the list count finished at 898 after six additions and two removals. Assets total $418.5 billion, up from $416.5 billion last week.  After three down trending weeks in October, some readers wondered if the list had peaked. After this pause, the Unofficial Problem Bank List has added a net 27 institutions and $16.4 billion of assets since October 22nd.

A High-Water Mark for Profits - The work force may still be struggling, but corporate profits appear to be heading toward a record (nominal) high, according to a new analysis from Deutsche Bank’s economics research team. Based on what can be inferred from corporate tax receipts to date, Deutsche Bank’s economists estimate that in the third quarter of 2010, corporate profits rose to $1.68 trillion at an annualized rate, higher than their previous peak in the third quarter of 2006 at $1.66 trillion.  This indicator, as released by the Bureau of Labor Statistics, is not adjusted for inflation. Still, corporate profits have been going gangbusters for a while. Since their cyclical low in the fourth quarter of 2008, profits have grown for six consecutive quarters at an annualized rate of 38 percent, which is the fastest six-quarter change in corporate profits in history, according to Deutsche Bank.

Insider Selling Hits All Time Record Of $4.5 Billion In Prior Week As Everyone Is Getting Out Of Market - Insiders have officially marked the top of the stock market: last week's insider selling of all stocks (not just S&P) hit an all time record of $4.5 billion. This is the biggest weekly number ever recorded by tracking company InsiderScore.com: as Sentiment Trader highlights no other week before had more than $2 billion in net selling. Furthermore, selling in just S&P companies hit a whopping $2.8 billion: over 4 times more than the week prior! As such the ratio of insider selling to buying is now meaningless. Even Bloomberg, which traditionally just posts the data without providing commentary to it, highlighted this ridiculous outlier: "Insider selling at Standard & Poor’s 500 Index companies reached a record in the past week as executives took advantage of a two-year high in the stock-market to sell their shares." We hope those retail investors who dared to reemerge in the stock market and play some hot potatoes with the big boys, enjoy their brief profit as they once again end up being the biggest fools.

Money Funds Resorting to `Micro Bailouts' as Disclosure Rules Take Effect - Money funds are covering small losses on their investments to avoid unsettling clients when tighter U.S. rules will require them to disclose even small shortfalls.  Charles Schwab Corp., based in San Francisco, spent $132 million last quarter and Baltimore’s T. Rowe Price Group Inc. said it will spend $17 million this quarter to eliminate losses from securities that went sour in 2008. The deficits weren’t big enough to push the funds’ share prices below $1.  “The reforms may usher in an era of micro-bailouts,”

Delinquencies in CMBS rose to 8.39% in October - Moody's Investors Service

said the number of delinquencies in commercial mortgage-backed securities rose to 8.39% in October, as the rate continues to slow but remains elevated. Analysts said the Moody's Delinquency Tracker, which was 8.24% in September, has been restrained of late because of an increasing number of loans leaving delinquent status. For July through October, $12.8 billion of loans were made current, worked out, or disposed of, which is about $200 million more than the entire first half of this year, according to Moody's. Still, there were 4,042 delinquent loans in CMBS valued at $52.7 billion at the end of October, which is an increase of 71 loans and $627 million. This is the first time there's been more than 4,000 delinquent mortgages, analysts said.

ForeclosureGate Could Force Bank Nationalization - For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw.  The megabanks are too big to fail, but they aren’t too big to reorganize as federal institutions serving the public interest. Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt.  The bank is put into receivership under the FDIC, which takes it over. What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called “welfare for the rich.”  The banks' losses and risks have been socialized but the profits have not.  The bankers have been feasting on our dime without sharing the spread.  And that was before ForeclosureGate – the uncovering of massive fraud in the foreclosure process.  Investors are now suing to put defective loans back on bank balance sheets.  If they win, the banks will be hopelessly under water.

Lenders Put the Lies in Liar's Loans - I have noted before a family maxim -- one cannot compete with unintended self-parody. Andrew Kahr has recently written a column in the American Banker entitled "Spread the Word: Lying to Banks is Illegal." Mr. Kahr is one of the architects of subprime lending. He warns: Federal law provides that anyone who knowingly makes a false statement to a[n] ... insured institution ... shall be fined not more than $1,000,000 or imprisoned for not more than thirty years, or both.  To say the least, this criminal law, intended to protect banks and hence the deposit insurance fund, is very, very rarely enforced against consumers. Why? How is a U.S. attorney to know that a customer has defrauded a bank by giving false information, unless the case is referred to him or her by the bank? And we're not doing that, Hence, the plethora of consumers giving willfully and materially false information to banks on applications and during loan servicing has mushroomed. With "liar's loans," this went from a cottage industry to an epidemic.

Lenders Put the Lies in Liar's Loans, Part 2 - To see part one, click here: But why would the fraudulent nonprime lenders and brokers rely on financially unsophisticated borrowers to not only lie – but lie astutely? Why would working class borrowers know the amount of income they would have to falsely claim so that the loan would appear to meet the magic debt-to-income ratios that would get the loan approved and allow it to be sold at a premium? Why would the borrowers know that they could rely on the brokers and lenders to not verify income and to wink at claims that hairdressers made $100,000 annually? It strains all credulity to think that millions of working class Americans managed to defraud financially sophisticated lenders.  It is even more absurd to believe that honest lenders, finding themselves the victims of an epidemic of mortgage fraud by these clever working class Americans, responded by (1) massively expanding the number of liar's loans they made, (2) spreading them to subprime borrowers with severe credit defects, (3) made defaults on the loans, and the loss upon default, far greater by layering risk and inflating appraisals, and (4) slashed their allowances for losses (ALLL) to trivial levels to ensure that the inevitable fraud losses would cause catastrophic losses.

When Privatization Increases Public Spending -- The Republicans were certainly elected to shrink the size of government. But while that goal naturally leads to less spending and lower taxes, it should not lead to privatizing the Federal National Mortgage Association, known as Fannie Mae, and Federal Home Loan Mortgage Corporation, Freddie Mac.  These companies, seized by the government in 2008 to ensure the availability of mortgage loans, provide money to lenders by buying new loans, then bundle those loans into securities for resale to investors.  We’ve seen too many decades of Fannie and Freddie to think that reprivatizing them will save taxpayers any money. Most of the time, privatization does indeed reduce government expenditures. Those who opposed the public health care option were appropriately worried it would end up draining the Treasury. Privatizing municipal services, such as trash collection, has often been seen a tool to reduce the costs of public services.  But Fannie and Freddie are the rare exceptions where the taxpayer is safer with them in government hands rather than private hands.

Bad (Public) Lenders, Good (Private) Lenders? - Maxine Udall - Could someone please explain to me why Glaeser's argument for not privatizing Fannie Mae and Freddie Mac could not also be used to justify government ownership (at least temporarily as in bankruptcy) or  strict(er) regulation of private sector mortgage lenders and investment banks? Here's Glaeser: If the federal government is going to bail out Fannie and Freddie anyway, the fiscally responsible thing to do is to keep them in government hands. Why wouldn't the same argument apply to private sector mortgage lenders and investment banks, which we also seem incapable of allowing to fail and that have and are likely to continue to behave just as Glaeser expects Fannie and Freddie to behave if privatized?

Regulators flawed in foreclosure oversight - As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations.  When two banks - J.P. Morgan Chase and Wells Fargo - declined to cooperate, the state officials asked the banks' federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states' request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked "confusing matters."  But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks' in-house assessments.

The least ‘advanced’ mortgage servicers - The mortgage servicing biz is not coming out of the foreclosure scandal unscathed. What was once a fairly steady industry — based on narrow margins but lots of volume — is suddenly having to rethink its business model. The foreclosure scandal has also firmly kicked some of the conflicts between servicers and Mortgage-Backed Securities (MBS) investors straight into the public eye — and the courts. We’ve already mentioned tranche warfare caused by foreclosure moratoriums — or the idea that junior tranches can benefit disproportionately as the timeline needed for loans to be liquidated extends. This happens because servicers still have to pay out principal and interest on delinquent loans during the longer period. The servicers recoup these payments only once a loan is foreclosed and liquidated, which means there’s less in the deal kitty for all the MBS tranches involved (More on this here).

Mortgage-servicing conflicts baked right into the cake - Marian Wang of ProPublica combs through recent mortgage debt servicer job postings and finds things like “$10.00-$12.00/Hour. High-school education required." And that's for a “Supervisor of Foreclosure Department" position. These positions are the people who are going to determine a large part of the future of the American macroeconomy. They have to figure out how to renegotiate bad mortgage debt in the middle of mass unemployment amid complicated, financially engineered legal and financial instruments. The destroyed economic capital, the spillover economic and social effects of foreclosures on neighborhoods, the destruction of a household's primary asset, the uncertainty of investment decisions and the debt overhang preventing economic expansion are all the obvious results if the servicing industry slips even an inch on the highwire balancing act they have to pull off. And they are hiring at $10 an hour. They are often outsourced to countries with the cheapest call centers. At J.P. Morgan Chase, they call those who fill these position the “Burger King kids." There's a narrative that mortgage servicers are an otherwise okay business that has been overwhelmed in the middle of this foreclosure crisis. What's important to remember is that this is a brand-new business, a brand-new way of organizing our financial system, and that the conflicts and breakdown are built right into the structure. This crisis has just shown how weak the plumbing is on one of our most crucial pieces of financial infrastructure.

Securitization Trustees in the Crosshairs in Mortgage Mess - Yves Smith - Tom Adams pointed to an article in American Banker by Kate Berry which discusses how mortgage securitization trustees are increasingly coming under scrutiny in the foreclosure crisis. By way of background, the trustee is the party responsible for securing the assets (the borrower promissory IOUs, liens, and various other documents related to the securitization). The trustee in theory is also responsible for overseeing the servicer. In practice, the trustee does very little, and the pooling and servicing agreement has all sorts of carveouts and indemnifications with the intent of severely limiting (cynics might say eliminating) any risk trustees might have by virtue of their supposed supervisory role.  The biggest mortgage securitization trustees are Bank of New York, Deutsche Bank, Wells Fargo, and US Bank. The interesting thing about the American Banker article is that the trustees appear to be in a great deal of denial as to how much hot water they are in. No where does the story mention their biggest exposure: that they gave multiple certifications to the investors in the mortgage securitizations that they did indeed have the trust assets. If, as it now appears to be the case, that many mortgage loans were not properly conveyed to the trust (as in endorsed by the originator and all the intermediary parties specified in the contract governing the deal, the pooling and servicing agreement, and finally over to the trust), then all those certifications were patently untrue. Since investors relied upon these certifications (no one in their right mind would have ponied up for these deals if they had had any doubt that the trust owned the mortgage loans) and the failure to convey the notes is a big cause of problems with foreclosures, it would seem that the trustees are very logical targets for investor litigation.

ABA clarifies role of trustee in securitization - Seeking increased clarity of the trustee's role in asset-backed securities transactions, the American Bankers Association said many market participants fail to recognize the legal limitations on the duties of trustees in ABS deals. The ABA said the role of the trustee wasn't a factor in the investment performance nor the market issues that may have caused or affected the current crisis within the space. "Importantly, the trustee typically has no duty under the transaction documents to make investigations on its own for the purpose of detecting defaults, fraud or other breaches," according to the ABA. The contracts governing ABS transactions explicitly outline, carefully detail, and specifically limit the responsibilities expected of the trustee. The ABA said these "duties are ministerial in nature and typically include administrative functions such as maintaining securitization accounts, receiving payments, performing calculations and making distributions of information and payments." The ABA said it is the servicer that collects income from the assets underlying the ABS and provides information to investors on how the assets are performing.

Ties to Insurers Could Land Mortgage Servicers in More Trouble - When banks buy insurance on the homes of borrowers whose policies have lapsed, they get a great deal. Just not for the homeowners and investors who have to pay for it. Nominally purchased to protect the owners of mortgage-backed securities, such "force-placed" insurance can be 10 times as costly as regular policies, raising struggling homeowners' debt loads, pushing them toward foreclosure — and worsening the loss to investors on each defaulted loan. Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes. Behind banks' servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors' and borrowers' behalf. "There's no arm's-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit," "Servicers and insurers have turned this into a gravy train."

Fed's Raskin : Mortgage Servicing Needs Serious Reform - Sarah Bloom Raskin on Friday used her first public speech as a governor of the Federal Reserve Board to call for major changes to mortgage servicing, saying it’s time for “serious and sustained reform.” Raskin said she’s deeply concerned that new questions about banks’ handling of foreclosure paperwork are part of a more widespread, long-standing problem with mortgage servicing. “Many may view these procedural flaws as trivial, technical, or inconsequential, but I consider them to be part of a deeper, systemic problem and am gravely concerned,” she said. Raskin said the mortgage-servicing industry has never been tested in a national housing crisis until now, and it’s far from getting a passing grade.“Mortgage servicers simply are not doing enough to provide sustainable alternatives to foreclosure,” she said, adding that the lack of action might be due to the fact that loan servicing is largely done by large servicers that are subsidiaries of depository institutions, affiliates of depository institutions, or independent companies focused primarily or exclusively on loan servicing.

Foreclosure mess prompts growing number of public officials to slow down process - One month ago, the city of Chicago and the surrounding suburbs of Cook County became a foreclosure-free zone. It wasn't the banks or judges that instituted the moratorium, because they were still moving cases forward at a rapid clip. The holdup was elsewhere: at the sheriff's office.  Sheriff Thomas J. Dart, whose office is responsible for physically evicting delinquent homeowners, announced Oct. 19 that his deputies would "no longer be doing the banks' work for them anymore."  "I can't possibly be expected to evict people from their homes when the banks themselves can't say for sure everything was done properly," he explained. There's now a backlog of over 1,000 evictions in his office, and the pile is growing each day.  Frustrated by the banks' response to the foreclosure mess, a growing number of public officials - including chief judges, attorneys general and sheriffs from jurisdictions big and small - are pushing the boundaries of their powers to slow down foreclosures in their areas.  The allegations of improper foreclosures "have incited something of a populist revolt, and it's become a political issue,"

Ezra Klein - Two ways to respond to the foreclosure crisis…Let's discuss two different policy designs for how to fight the worst parts of the ongoing foreclosure crisis, one successful and one not. We'll then discuss a great new report from the National Community Reinvestment Coalition that details many of the best local and state policy responses to the foreclosure crisis. The first comes from Los Angeles. Foreclosures are lose-lose-lose situations. They hurt lenders, borrowers and communities. The community losses are devastating; there are the well-documented spillover effects, where foreclosures drive down value of neighboring properties, forcing more properties deeper underwater, depressing economic activity. They also destroy municipality budgets. Given the high economic and social costs, the Los Angeles City Council, led by community activists including Alliance of Californians for Community Empowerment and others, as well as city workers who are members of SEIU Local 721 and L.A. Council member Richard Alarcon, did the sensible economic thing: They proposed a tax on abandoned and unkempt properties. Compare that to the Home Affordability Modification Program (HAMP). Here Obama's Treasury team took a system that had a terrible design and doubled-down on it. 

Latest Mortgage Scandal: Force-Placed Insurance -  American Banker’s Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world: Losses from Force-Placed Insurance Are Beginning to Rankle Investors.What is force-placed insurance? If any homeowner fails to keep up their insurance premiums, then their loan servicer can step in to buy a comparable insurance policy (theoretically on the loan holder’s behalf), to ensure the mortgaged property remains fully insured. It’s sensible in theory, but in practice, it’s ripe for abuse. And when the servicer owns the insurer, abusive practices, excessive commissions, and self-dealing transactions have become the norm. Consider one case found by Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy –  one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road. That $33,000 policy — including the $7,100 kickback –  is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year. Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

The rules of process serving under scrutiny - Filings in Foreclosure Cases as JPMorgan Chase Resumes Foreclosures. The expanding investigation into foreclosure fraud in Florida has turned up a new problem: individuals hired by law firms to notify homeowners when their foreclosures are to be heard in court may have filed false or faulty documents. Law firms that may have employed "robo-signers" to rapidly process claims are under scrutiny for violating , such as the personal delivery of legal papers, reported the Sun Sentinel. Note that in the old days the deed of trust required the use of certified mail return reciept requested to deliver notices now it is first class mail.

Ohio GMAC Foreclosure Case May Set Anti-Wall Street Precedent… When James Renfro had to stop making payments on his two-story fixer-upper in Parma, Ohio, he triggered events that were supposed to result in the forced sale of his home. That Nov. 15 auction has been canceled because of defects in documents submitted by his loan servicer, Ally Financial Inc.’s GMAC Mortgage unit. Two affidavits about Renfro’s home were signed by Jeffrey Stephan, a GMAC employee who said in sworn depositions in Florida and Maine that he hadn’t read thousands of affidavits he’d signed.  Renfro’s case has created a showdown between GMAC and Ohio’s Attorney General Richard Cordray. Cordray has asked Cuyahoga County Court of Common Pleas Judge Nancy Russo not to let GMAC simply submit new documents to cure defects without consequences. He’s taken the same stand against Wells Fargo & Co., which has said it found defects in 55,000 foreclosures.  “This is just the first,” said Cordray, who filed an amicus, or friend-of-the-court, brief in the Renfro case. He argued that Russo should punish GMAC, the fourth-largest U.S. mortgage lender, for its conduct.  The judge today in Cleveland set an accelerated schedule for evidence-gathering in the case, leading up to a Feb. 17 hearing on the integrity of the loan documents. Cordray’s office plans to file a motion tomorrow asking to take part in the case and participate in so-called discovery.

Some judges chastise banks over foreclosure paperwork - A year ago, Long Island Judge Jeffrey Spinner concluded that a mortgage company's paperwork in a foreclosure case was so flawed and its behavior in negotiations with the borrower so "repugnant" that he erased the family's $292,500 debt and gave the house back for free.  The judgment in favor of the homeowner has alarmed the nation's biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation's foreclosure system.  It is not the only case that has big banks worried. Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders. Their decisions illustrate the central role lower court judges will have in resolving the country's foreclosure debacle. The mess came to light after lawsuits and media reports showed lenders were routinely filing shoddy or fraudulent papers to seize the homes of borrowers who had missed payments.  In millions of cases across the United States, local judges have wide latitude to impose sanctions on banks, free homeowners from their mortgage debts or allow the companies to proceed with flawed foreclosures. Ultimately, the industry is likely to face a messy scenario - different resolutions by courts in all 50 states.

Bank of America Allegedly Foreclosing Fraudulently in Kentucky - - Yves Smith - If you were to believe the banks, the concern over foreclosure “improprieties” is way overdone. Yet Bank of America, having made the implausible claim that it had reviewed 102,000 cases in a few weeks and nothing was amiss, was forced to retreat and acknowledge that it’s review hadn’t been comprehensive, and it was finding errors at a rate that could exceed 5%..  The bank position so far has been that problems so far are mere mistakes and “sloppiness”. But as we’ve described repeatedly, the problems with securitzations run much deeper than that. It appears that the parties to the deal often failed to take the time consuming steps necessary to convey the note (the borrower IOU) to the trust as stipulated in the contract governing the deal, the pooling and servicing agreement. The PSA required that each note in the deal had to be signed by multiple intermediary parties before it got to its supposed final resting place, a trust. And that had to take place by closing or at most 90 days thereafter.  Many foreclosures show this process was not observed on a widespread basis: the notes were assigned (as in transferred) to the trust right before closing, a violation of the PSA, the New York trust statutes that govern virtually all mortgage securitization trusts, and IRS rules for these trusts (REMIC). When foreclosure defense attorneys started contesting these assignments, suddenly a new ruse started to show up: allonges, which are sheets of paper that contained the needed endorsements, would magically appear out of nowhere. The problem is that an allonge is supposed to be used only when there is no space left on the note for endorsements, including margins and the reverse side, and when it is used, it is supposed to be so firmly attached to the original as to be inseparable. But these “ta da” allonges were always somehow discovered at the custodian, quite separate from the note.

The Mortgage Loan Foreclosure Mess: Yves Smith on the Banks' Gluttony; Problems with MERS and Sloppy Securitizations - Yves Smith has an op-ed in the Oct. 31, 2010 New York Times on the mortgage mess. See Naked Capitalism, here, for full op-ed. As noted, the mortgage crisis goes much deeper than just bank use of robo-signers for documents. When the securitization process took off in the early 2000s, banks became sloppy. Loan product was needed, so niceties like documentation became an expendible. Subprime loans were more grist for the mill--the faster mortgage lenders could process them, banks could buy and securitize them, the more money they could all make. Since they were selling off the mortgage loans, they didn't care how good they were. And since they were often selling them via securitizations that they "sponsored", they didn't want to have to do all that legal busywork that location-specific transfers of mortgages and notes required, including payment of recording taxes in the county where the land was located every single time a loan was moved from one owner to another, though they still wanted to collect all kinds of fees from servicing the mortgage loans that they "sold" via securitization.

MERS: Symptom or Cause - MERS, which stands for Mortgage Electronic Registration System, is under fire. Courts in a few states have held that MERS does not have standing to pursue a foreclosure in its own name, and there is a pending multi-district litigation claim against MERS. The most recent MERS news is the press release by the Attorney General for the District of Columbia. The District of Columbia has a non-judicial foreclosure process that begins with a Notice of Foreclosure form. The AG has announced that people facing foreclosure can assume that the completion of such a Notice, with its identification of the "Holder of the Note" and the "Security Instrument recorded" in the DC land records means that every intermediate transfer of the security interest is documented in the public records. Under the AG's interpretation, MERS does not meet this requirement.

Full Video Deposition of Crystal Moore of Nationwide Title Clearing - 4closureFraud. Yves Smith: I’ve been reading about this for months, and I still can’t believe anyone considered this remotely acceptable from a corporate governance standpoint. How can someone sign AS AN OFFICER of a company they don’t work for? A corporate resolution allowing someone to sign for another firm ought to be under some sort of limited agent capacity, not as a pretend officer.

Is the foreclosure crisis is overblown? - Here are Andrew Ross Sorkin and Joe Nocera of the New York Times having a video debate about the foreclosure crisis.  Nocera thinks this is a key economic issue. Sorkin thinks the issue is overblown.My take: For political reasons, the Obama Administration would like to deep six this issue because it could harm the technical recovery from becoming a real recovery by 2012, when the President is up for re-election. The only way this issue gets traction is via Republicans, the states or the courts.But, as for the merits of the debate, clearly there was an epidemic of fraud perpetrated during the housing bubble. Many so-called homeowners – who are really renters with a mortgage because they have no equity  – were complicit in this fraud at loan origination. Do we use the government’s resources to uncover these fraudsters and prosecute them? Probably not, as there are thousands of these cases for governments with limited resources to track down. Instead, the government’s resources should be directed at uncovering fraud within banks. From a purely practical perspective, this makes sense because there are a much more limited number of targets. But from a societal perspective it does as well.

Matt Taibbi: Courts Helping Banks Screw Over Homeowners - The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages. The rocket docket wasn't created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.

At Legal Fringe, Empty Houses Go to the Needy - In a sign of the odd ingenuity that has grown from the real estate collapse, he is banking on an 1869 Florida statute that says the bundle of properties he has seized will be his if the owners do not claim them within seven years.  A version of the same law was used in the 1850s to claim possession of runaway slaves, though Mr. Guerette, 47, a clean-cut mortgage broker, sees his efforts as heroic. “There are all these properties out there that could be used for good,” he said.  The North Lauderdale authorities, though, see him as a crook. He is scheduled to go on trial in December on fraud charges in a case that, along with a handful of others in Florida and in other states, could determine whether maintaining a property and paying taxes on it is enough to lead to ownership.  Legal scholars say the concept is old — rooted in Renaissance England, when agricultural land would sometimes go fallow, left untended by long-lost heirs. But it is also common. All 50 states allow for so-called adverse possession, with the time to forge a kind of common-law marriage with property varying from a few years (in most states) to several decades (in New Jersey).

More Homeowners Underwater as Depression-Era Depreciation Nears - Nearly one-quarter, or 23.2 percent of U.S. homeowners with a mortgage, were underwater on the loan in the third quarter, meaning they owe more on the home than it is worth, according to figures released Wednesday by the real estate data provider Zillow. The third-quarter underwater number rose from 22.5 percent in the second quarter and is the highest it’s been since Zillow began tracking negative equity in 2009. The subtle hints of stabilization in home values that started emerging earlier in the year began to wane last quarter.  Zillow’s home value index recorded a 4.3 percent year-over-year decline in Q3 and was down 1.2 percent from the second quarter. The Seattle-based company says its index reading has fallen for 17 consecutive quarters now. The company’s market data shows the median home value nationwide has dropped to $179,900. With home values nationally 25 percent below their June 2006 peak, the current housing downturn is approaching Great Depression-era declines, when home values fell 25.9 percent in five years (between 1929 and 1933), Zillow pointed out in its report. Home values fell from the second to the third quarter in 77 percent of markets covered in Zillow’s study. In five of those markets – the California metropolitan areas of Los Angeles, San Diego, San Francisco, San Jose, and Ventura – home values began to drop again after five consecutive quarters of increases.

Amherst's Goodman: One in five distressed homeowners at risk of losing home « HousingWire - Laurie Goodman, senior managing director at Amherst Securities, believes one in five distressed homeowners in the U.S. are facing, or may face, foreclosure.The analyst adds that little may be done to stem the tide of foreclosures without greater government intervention or significant principal reduction. Currently, she said 11.5 million home loans are non-performing or highly distressed. Goodman spoke at Thursday's State of Housing webinar today, hosted by HousingWire. Several charts produced during the event paint a picture of a highly distressed housing market. Transition rates of negative equity homes are improving, however, from last year. "Many banks are opposed to principal writedowns," Goodman said. "Though it is interesting that they make good use of this for their own portfolios. We think before this crisis is over you will end up with a mandatory principal writedown program."

RealtyTrac: Foreclosure Activity Decreases slightly in October - From RealtyTrac: Foreclosure Activity Decreases 4 Percent in October RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for October 2010, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 332,172 properties in October, a 4 percent decrease from the previous month and almost exactly the same total reported in October 2009. ...“October marks the 20th consecutive month where over 300,000 U.S. homeowners received a foreclosure notice,” said James J. Saccacio, chief executive officer at RealtyTrac. “The numbers probably would have been higher except for the fallout from the recent 'robo-signing' controversy — which is the most likely reason for the 9 percent monthly drop in REOs we saw from September to October and which may result in further decreases in November."

Current Mortgages Turning Delinquent Rises for First Time in a Year - During the third quarter of this year, 2.7 percent of current mortgage balances transitioned into delinquency, according to new data from the Federal Reserve Bank of New York. That’s up from 2.6 percent that became newly delinquent in the second quarter. Fed officials called the quarterly increase “slight” but noted that the rise follows a full year of declines in new delinquencies. The New York Fed said it observed a similar pattern in the third quarter of 2009, which might suggest this is simply a seasonal effect, but the federal bank says it plans to “closely monitor” the development. According to the New York Fed’s report, about 457,000 individuals received home foreclosure notices on their credit reports between July 1 and September 30, 2010. Officials say this represents a 5.5 percent decrease from the second quarter and a 6.4 percent drop from a year earlier.

Housing prices decline as mortgage defaults rise for first time this year… Housing prices continue to show the steepest declines in the markets most affected by the bubble burst of three years ago, according to the real estate data provider Altos Research. And prices may have further to go still, as one mortgage analytics firm reports that mortgage delinquencies increase for first time this year. The firm's Altos 10-city composite price index fell 1.6% for October, and is off about 3.1% the past three months with Phoenix, Miami and California cities continuing to be hit the hardest. The average national house price is now $458,518, down about 1.6% from the prior month and once again at the lowest level ever recorded by Altos. The average home price in San Diego fell 3.28% last month, while Salt Lake City prices were off by 3.27% and Phoenix prices dropped 3.11%. The company said there has been some stability in its national composite index of late, although inventory is down nationwide and the impact of the shadow inventory looms large.

Clear Capital: Home prices drop 5% in three months -  National home prices fell 5% for the three months ending in October, while double-dip disparity still rages on a micro-market level, according to the Clear Capital Home Price Index. The data joins a chorus of bad news, both on Altos Research's falling home prices and an unexpected rise in mortgage defaults for first time this year according to an Amherst Securities report. Home prices dropped only 0.2% in the three months prior to September, but a major two-month decline through October had not been seen since early 2009. While prices in October remain 7.7% above 2009, they have dropped 6.8% from the year's peak in mid-August. Clear Capital said six of the largest local markets are officially in a double-dip. Even so, Alex Villacorta, Clear Capital's senior statistician said, prices are very dynamic at the local level. "For example, all six major metropolitan areas in California are out-performing both national and West region numbers in terms of yearly gains," Villacorta said. "Conversely, four of the top markets in Florida are either in or very near double-dip territory, even though national prices remain nearly eight percent above 2009 lows."

Falling Prices Sweep America - Declining home prices spread across the nation last month, reaching 25 of the 26 top markets tracked by Altos Research.  Only Washington, DC, with its large Federal workforce, experienced a gain.  Altos Research’s 10-City Composite price declined 1.6 percent to the first week of November and is off by 3.09 percent over the last three months. Worst hit were Phoenix, Miami and the California cities.  The average sales price in San Diego is down 3.28 percent since July. Salt Lake City is down 3.27 percent and Phoenix, down3.11 percent. While prices are falling, Altos found that inventory is dropping as well, suggesting that the shadow inventory is having a significant depressing impact as the overhang of properties in default and foreclosure is felt in leading markets.  Washington, DC had the biggest decrease at more than 16 percent, and inventory rose slightly in Las Vegas, Phoenix, and San Diego. Only three of the 26 markets covered in Altos’ report showed increases in inventory, and nationally inventory was down 4.64 percent in October.

Lawler: Early Read on October Existing Home Sales - Based on data available so far, it would appear as if national existing home sales in October ran at a seasonally adjusted annual rate that was little changed from September [4.53 million SAAR]. Of course, October’s YOY sales decline on an unadjusted basis is significantly larger than September’s. But October sales were significantly goosed (SAAR of 5.98 million) last October by the expiring (or so folks thought!) first time home buyer tax credit. In addition, there was one fewer business day this October than last October.The incoming listings data have on average been consistent with the realtor.com data showing a 3.2% decline in existing home sales inventory in October. CR Note: A 3.2% decline in inventory, and sales of 4.53 million SAAR would put the months-of-supply at about 10.4 months in October. That would be the fourth straight month of double digit supply. Based on this early forecast, YoY sales would be off 24%, and inventory would be up close to 10% YoY.

Las Vegas: 4,000 High Rise Condos still for sale From the Las Vegas Sun: Condo sales at CityCenter a mixed bag CityCenter projects it will have closed on 435 condominium units by the end of November out of 2,387 units it had on the market. ... even though it trimmed prices 30 percent a year ago...According to Las Vegas-based SalesTraq, more than 4,000 high-rise units remain unsold along the Strip. The CityCenter (18% sold) is even doing worse than Trump Tower (25% sold). It will take years to clear this inventory. Note: high rise condo units are not included in the new home inventory report from the Census Bureau, and they are also not included in the existing home inventory report from the NAR (unless they are list for sale). This is hidden inventory, and for certain cities like Las Vegas, this is significant.

Bankruptcy filings jump 14% in 2010 - In the federal government's fiscal year 2010, which ended September 30, more than 1.5 million non-business bankruptcy filings were processed, according to data released Monday by the Administrative Office of the U.S. Courts. That's up more than 14% from fiscal 2009, when about 1.3 million personal bankruptcies were filed. "As the economy looks to climb out of the recent recession, businesses and consumers continue to file for bankruptcy to regain their financial footing," Samuel Gerdano, director of the American Bankruptcy Institute, said in a statement. The ABI is a non-partisan private research group. Gerdano expects the number of bankruptcies to continue rising in the months ahead as unemployment holds near 10% and access to credit remains tight.

Savers shoulder the inevitable burden of bad loans - By now it should be clear that banks across the United States and much of Western Europe were not just illiquid but insolvent at the height of the crisis; their liabilities were worth far more than their assets could ever be sold for, even in the longer term, adjusting for interest costs and inflation. The implied losses on those loans were (and remain) so large they would wipe out shareholders’ equity, leaving the remaining losses to fall on bond holders and depositors alike. If market forces had been allowed to work freely, most of those businesses and households that had placed funds on deposit and in savings accounts with even the largest and most reputable commercial banks would have seen them frozen and perhaps never fully repaid. But while intervention may have averted the threat of widespread suspensions and failures, the losses from imprudent lending and borrowing to acquire unproductive and permanently impaired assets remain. Someone somewhere has to shoulder them. Like central banks around the world, the Federal Reserve has decided they should be borne by depositors, savers, pension funds and bond holders. Not in the form of suspensions, insolvencies and write-downs in the face value of accounts, but through the stealthy and gradual mechanism of negative real interest rates.

NY Fed: Continued Decline in Consumer Debt - This is a new quarterly report from the NY Fed: ... an interesting finding is that consumers are actively reducing their debt - the decline in debt isn't just because of defaults. From Q3 Report on Household Debt and Credit Shows Continued Decline in Consumer Debt: The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts.  Additionally, this quarter’s supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. Here is the Q3 report: Quarterly Report on Household Debt and Credit And a supplemental report: Have Consumers Become More Frugal? And some data and graphs.There are a number of credit graphs at the NY Fed site.

Deleveraging continues - THE New York Fed has released its latest report on household indebtedness. Here's the big picture: Total household debt has declined by just over $900 billion from the peak level, attained just prior to the financial panic in late 2008. As you can see, mortgage debt makes up the majority of household indebtedness; mortgages and home equity lines of credit account for 80% of what's now owed. From the peak, mortgage debt has declined about 7.4%. One big problem in the American economy today is that home prices have fallen much more than 7.4%, leaving many households underwater on their mortgages. There's over $750 billion in underwater mortgage debt in America—9% of all mortgage debt falls into this category. A significant portion of the household deleveraging left to go will involve a resolution of that underwater mortgage debt. Much of it will be dealt with through the slow and painful process of default and foreclosure. But there are other policy tools available. If a better approach to negative equity could be adopted, which included write-downs of principal, then the spillover costs of rampant foreclosures could be reduced.

The Many Faces Of Deleveraging Three and one half years ago in March of 2007, we penned a discussion entitled, "It's Delightful, It's Delovely, It's Deleverage".  Of course the upshot of that missive was that we suggested that the whole idea of balance sheet deleveraging was to be a huge investment theme to come.  Little did we know, huh?  Deleveraging subsequently became a popular and virtually consensus theme in late 2008 and early 2009.  Associated with this headline theme were tangential anecdotes such as "new normal", etc.  It's time to quickly revisit the subject of deleveraging now as per the recently released 2Q Fed Flow of Funds statement. Important now why?  Because believe it or not, a good two to three years past what was the initiation of one of the greatest credit debacles in US/global history that is still reconciling as we speak, very little real world deleveraging has actually occurred.  Has the need to deleverage private sector and public sector balance sheets suddenly disappeared amidst a miraculous macro economic recovery?  Not in the least.  Has it been negated by central bankers apparently under the impression that printing unprecedented amounts of what most folks call money will cure all ills?  Nope

The Uncertainty Myth - One of the more annoying clichés of the past year has been ““The markets hate uncertainty.” You can always tell when you are listening to an empty-headed pundit when they trot out that old saw.This morning, I have a Bloomberg column on that exact subject, titled “Kiss Your Assets Goodbye When Certainty Reigns.” (or, if you prefer, the older noir version of Bloomberg). Here is an excerpt:

Excess supply under monopolistic competition - Like Peter Dorman, I used to suffer terribly from cognitive dissonance. The theory of perfect competition says that, in equilibrium, firms will be selling exactly the amount of the good they want to sell. But my lying eyes kept telling me that most firms, most of the time, really wanted to sell more than they were able to sell. They always seemed really happy to see an unexpected new customer. It looked like excess supply, nearly everywhere, nearly all the time. Then I discovered monopolistic competition. And I've felt so much better ever since. This diagram is for Peter. He is exactly right to feel the way he does. There's something wrong with any economist who doesn't feel that way. This diagram will help me explain what I was trying to explain in comments on his blog.

NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers - Inquiring minds are digging into the November NFIB Small Business Trends Report for clues about the health of the economy and the plight of small businesses. Once again the number one problem facing small business owners is lack of sales. The second biggest concern is taxes. In spite of a huge surge in commodity prices, inflation barely registered as a concern.Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 52 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only three percent reported financing as their number one business problem. However, 30 percent of the owners reported weak sales as their top business problem, a major cause of the lack of credit demand observed in financial markets. A near record low 31 percent of all owners reported borrowing on a regular basis. Reported and planned capital spending are at 35 year record low levels, so fewer loans are needed.

NFIB: Small Business Optimism improves slightly - From National Federation of Independent Business (NFIB): Small Business Optimism improves slightly Optimism rose again in October, but the index remains stuck in the recession zone established over the past two years, not a good reading even with a 2.7 point improvement over September. This is still a recession level reading based on Index values since 1973. However, job creation plans did turn positive and job reductions ceased. Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. The first graph shows the small business optimism index since 1986. Although the index increased to 91.7 in October (highest since May), it is still at recessionary level according to NFIB Chief Economist Bill Dunkelberg.  The second graph shows the net hiring plans over the next three months. Hiring plans have turned slightly positive again. According to NFIB: "Average employment growth per firm was 0 in October, one of the best performances in years.

Atlanta Feds Lockhart: Companies Remain Cautious on Hiring - Few of the businesses surveyed by the Federal Reserve Bank of Atlanta expect their sales to improve significantly in the near future—and are putting off or minimizing hiring as a result—said Atlanta Fed President Dennis P. Lockhart. Speaking Thursday at a conference on trends in the job market and the problems of long-term unemployment, Mr. Lockhart said businesses in the Atlanta Fed’s six-state region in the Southeastern U.S. are continuing to keep a close watch on costs—especially labor costs—amid a slow economic recovery. “Even firms that have experienced stronger sales seem to be approaching hiring very cautiously,” he said. Mr. Lockhart, who emphasized that he was expressing his own views and not that of the Federal Reserve, said many firms in his region also cited uncertainties on issues such as tax policy and health care costs as other reasons not to add people. “We’ve frequently heard strong comments to the effect of ‘my company won’t hire a single additional worker until we know what health insurance costs are going to be,’” said Mr. Lockhart

Business Feedback on Today's Labor Market - The Atlanta Fed systematically collects anecdotal information and opinion on questions of relevance to monetary policy by leveraging its network of business contacts throughout the Southeast. Their business input is useful in fleshing out a real-time assessment of the economy and the labor market.

• Currently, when asked about their hiring intentions, businesses say they have capacity to cover near-term sales growth with existing workers and express caution about increasing their workforce in the near future. This caution apparently reflects the uncertainty about future revenue growth and the lack of clarity about the cost implications of various government policies.
• Many contacts confirm they used the recession to achieve leaner staffing and to reorganize for greater productivity. Although there are conflicting views on the permanency of downsizing, on balance, a return to a prerecession configuration of a firm's labor force appears unlikely. Also, adjustments made by businesses in the past few years have put a premium on certain job skills, such as versatility.
• It is very common to hear reports that businesses continue to pursue greater flexibility in their workforce arrangements in order to make labor a variable versus a fixed cost, which may be a lasting or transitory trend. 

AAR: October 2010 Rail Traffic Continues Mixed Progress - From the Association of American Railroads: October 2010 Rail Traffic Continues Mixed Progress. The AAR reports carload traffic in October 2010 was up 8.7% compared to October 2009, however carload traffic was still 7.9% lower than in October 2008. Intermodal traffic (using intermodal or shipping containers) is up 10.4% over October 2009 and up 1.2% over October 2008.  "Last week the government announced that GDP grew roughly two percent in the third quarter of 2010. Rail traffic in October suggests that similarly moderate growth is continuing into the fourth quarter," said AAR Senior Vice President John T. Gray. This graph shows U.S. average weekly rail carloads (NSA). Traffic increased in 15 of 19 major commodity categories year-over-year.

U.S. Postal Service Says Loss Widened to $8.5 Billion in 2010  - The U.S. Postal Service said its loss widened to a record $8.5 billion in the year ended Sept. 30, exceeding its forecast, as the volume of mail declined. Revenue fell 1.5 percent to $67.1 billion for the year and mail volume dropped 3.5 percent, according to a presentation to the service’s board today at a meeting in Washington. The loss in the previous fiscal year was $3.8 billion, the service said. The Postal Service, which forecast a $7 billion loss, said almost two thirds of the deficit, or $5.5 billion, covered health-benefit costs for future retirees. An additional $2.5 billion covered adjustments to workers’ compensation liabilities for interest rate changes. The loss for 2011 will be $6.4 billion, Chief Financial Officer Joseph Corbett said today. “We expect to go through the year with sufficient cash to continue operations,” Corbett said. “However at the end of the year, we don’t expect to have sufficient cash to pay all of our obligations, primarily the $5.5 billion retiree health payment due at the end of the year.”

More federal workers' pay tops $150,000 -The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office, a USA TODAY analysis finds. The fast-growing pay of federal employees has captured the attention of fiscally conservative Republicans who won control of the U.S. House of Representatives in last week's elections. Already, some lawmakers are planning to use the lame-duck session that starts Monday to challenge the president's plan to give a 1.4% across-the-board pay raise to 2.1 million federal workers.

Hires Rise, Still Five Unemployed Workers Per Job Opening - There were five unemployed workers per every available job in September, the Labor Department said Tuesday, a sign that even with October’s job growth the economy still has a lot of ground to make up. But the report on job openings and labor turnover (JOLTS) also had some bright spots, including an increase in hiring. The number of quits also rose to more than 2 million, a slight increase from the prior month, and more than the 1.8 million layoffs and discharges. Quits tend to increase when workers feel confident the job market is strong enough for them to land another job. The Labor Department tackled a host of other questions about the JOLTS report in a live web chat today. Real Time Economics has a few highlights here for those who missed it. (RTE edited down some questions and corrected some questionable spelling and punctuation.) The full transcript will be available here later this week.

For four out of five unemployed workers:  no jobs - This morning, the Bureau of Labor Statistics released a sobering September report from the Job Openings and Labor Turnover Survey (JOLTS), showing that job openings decreased by 163,000 in September, while downward revisions to earlier data reveal that there were 109,000 fewer job openings in August than previously reported.     The total number of job openings in September was 2.9 million, while the total number of unemployed workers was 14.8 million (the latter data are from the Current Population Survey).  This means that the ratio of unemployed workers to job openings was 5.0-to-1 in September, an increase from the revised August ratio of 4.8-to-1.  The job-seekers ratio is displaying a similar trend to other labor market data – substantial improvements from late 2009 to the spring of 2010, and then stalling out what are still crisis levels.  September’s value, at 5-to-1, is over three times as high as the first half of 2007, when the ratio averaged 1.5-to-1.

BLS: Job Openings decrease slightly in September, Low Labor Turnover - Note: The temporary decennial Census hiring and layoffs distorted this series over the summer months.  From the BLS: Job Openings and Labor Turnover Summary The number of job openings in September was 2.9 million, which was little changed from August. Although the month-to-month change is small, the number of job openings in September was 25 percent higher than the number at the most recent series trough in July 2009. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people.  The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Number of the Week: More Entrepreneurs, Fewer Jobs - 1 in 300:

The share of Americans starting a business each month More Americans are going into business for themselves, but that doesn’t necessarily mean they’ll be creating jobs for others. In 2009, an average of 340 out of every 100,000 adults started a new business each month, That’s up 11% from 2007, and well above the average of 290 in the ten years leading up to the recession. A lot of the entrepreneurial activity is born not of inspiration, but of desperation. Mr. Fairlie’s research shows that more people started businesses in places where unemployment was high. In places where the unemployment rate was relatively low — 4% to 5% — the monthly entrepreneurship rate was only 280 out of every 100,000 adults in 2009. To be sure, some of those businesses could become the Googles of tomorrow. Still, most of the new businesses are nonemployer firms, such as one-person consultancies or E-bay businesses, which people set up because they can’t find jobs. Many likely don’t have revenues, or are independent contractors providing labor to other firms, So far, there’s not much evidence that they’re turning into the kind of start-ups that create jobs. New, small employer firms created 11% fewer jobs in 2009 than in 2007, according to the Labor Department.

Here's What No One Told You About The Supposedly Great Jobs Report - With a really fantastic headline number coming from the Establishment Survey, we thought we’d take a closer look at the other side of the coin.  The Household Survey showed the following today: 
    •    a decline of 330,000 in the number of people employed;
    •    a decline of 254,000 in the labor force;
    •    a decline in the employment-population ratio to 58.3% from 58.5% in September;
    •    an increase of 462,000 in those not in the labor force; and
    •    an increase of 76,000 in the number of people unemployed.
The drop in the number of employed is concerning - and brings into question the disparity between the labor force and unemployment statistics in the Household Survey, and job creation indicated by the establishment surveys.  These were not small differences. The take-away is that final demand in the U.S. can only be generated through an increase in the number of people with jobs and/or the wages earned by those employed. A material decline in the number of people employed (especially with only meager changes in hour’s worked and hourly wages) is not consistent with an improvement in final demand.

Those Jobs Numbers Were Much Worse Than They Looked - The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years. While not actually knowing what happened to the net job change in the non-surveyed small business sector, the Labor Department assumed that 61k jobs were created in that sector. This assumption is not supported by such important private surveys as those from the National Federation of Independent Business or by ADP. Just a month ago the Labor Department had to revise downward the job totals due to a serious overcount of their statistical artifact known as the Birth/Death Model.

The Employment Numbers Are A Lot Weaker Than You Think - The headline numbers for changes in non-farm payroll employment are significantly overstated as a result of the distorting effects of two factors—- seasonal adjustments over a year’s time and the annual benchmark revisions that correct earlier incomplete data. Let’s deal with the seasonal adjustment distortion first. The recently released employment number for October indicates that seasonally adjusted jobs increased by 829,000 over October 2009. However, BLS data show that non-seasonally adjusted employment increased only 626,000 over the same period. Since normal seasonal fluctuations are not a factor when comparing any number to a year-earlier period, monthly seasonal adjustments in this case are overstating the change in employment by 203,000. The second distorting factor is the annual benchmark revision,This will be the second consecutive year in which the benchmark revision more than wiped out the additional jobs added by the birth/death adjustment. The final benchmark revision will be issued with the employment report to be released on February 4, 2011. We further note that for the 12 months ended October 31^st, 2010, the birth/death estimate added 496,000 jobs to the non-seasonally adjusted monthly numbers. Since it is highly unlikely that new business startups have actually added any jobs in that period, it is probable that these estimates will also be wiped out by subsequent benchmark revisions. To sum up: Start with the 829,000 jobs added on a seasonally adjusted basis. Subtract the 203,000 jobs added through the distortion of seasonal adjusting. That leaves 626,000 non-seasonally adjusted jobs added. Then subtract the 496,000 jobs added by the birth/death adjustment that will probably be wiped out by a subsequent benchmark revision. That leaves an estimated 130,000 jobs added for the entire 12 months.

Employment: Participation Rate - The following graph shows the employment population ratio, the participation rate, and the unemployment rate, Most of the increase in the participation rate in the '60 and '70s was from women joining the labor force. However one of the key features of the current employment recession is the decline in the participation rate.  The sharplest declines in the participation rate are for the "16 to 19" and the "20 to 24" age groups.  The partcipation rate for the "16 to 19" group has fallen from 41.4% in Dec 2007 to 35.2% in Oct 2010. The participation rate for the "20 to 24" group has fallen from 74.0% to 71.4% in the same period. The participation rate for the "55 and over" group has increased from 38.9% to 40.0% since December 2007. Of course the size of the "55 and over" group is increasing, and that might be pushing down the overall participation rate. I'll have more on this later this week.

Labor Force Participation Rate: What will happen? - The collapse in the labor force participation rate has been one of the key stories of the great recession. The participation rate is the percentage of the working age population in the labor force.  As the economy slowly recovers, an important question is what will happen to the participation rate over the next few years? If the participation rate increases to 66% - from the current 64.5% - then the U.S. economy will need an additional 3.3 million jobs just to hold the unemployment rate steady (not counting population growth). This graph shows the recent sharp decline in the participation rate (blue), and also the unemployment rate and the employment-population ratio. The participation rate had mostly been above 66% since the late '80s, and had been over 67% in the late '90s.  One of the key factors impacting the participation rate (other than a severe recession) is the age of the labor force. The following graph shows the participation rate by age group in 2007, but the general pattern holds for all years. The participation rate is low for those in the '16 to 19' age group. The rate increases sharply for those in the '20 to 24' age group, and the rate is at its peak from 25 to 49 - and drops off a little for the '50 to 54' age group. After 55 workers start leaving the labor force, and the participation rate falls off with age.

A Few Thoughts on the Employment Numbers - The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years.While not actually knowing what happened to the net job change in the non-surveyed small business sector, the Labor Department assumed that 61k jobs were created in that sector. This assumption is not supported by such important private surveys as those from the National Federation of Independent Business or by ADP. Just a month ago the Labor Department had to revise downward the job totals due to a serious overcount of their statistical artifact known as the Birth/Death Model.

Older Workers' Jobs Shellacked in October - Compared to September 2010, the employment situation in October 2010 worsened in the United States, as 330,000 fewer people were counted as being employed during the month.   Breaking the employment report down by age group, using the household Current Population Survey portion of the employment report, teens enjoyed a small gain, with some 51,000 more individuals in the U.S. workforce, bringing the total number of employed people between the ages of 16 and 19 up to 4,312,000. Since total employment in the U.S. peaked in November 2007, one month before the country entered into recession, some 1,594,000 fewer teens are now counted as being employed.  By contrast, young adults between the ages of 20 and 24 saw their numbers among the employed fall by 60,000 to 12,781,000. Since the total employment peaked in November 2007, some 1,216,000 fewer young adults are being counted as having jobs.  Meanwhile, the employment situation for adults Age 25 or older took a turn for the worse, as these more experienced workers saw their employed ranks drop by 321,000 between September and October 2010, with the total number of employed individuals Age 25+ being 121,968,000. The total decline in the number of employed Americans Age 25 or older since November 2007 is 4,612,000.

Year-To-Date Jobless Claims Revisions (bar graphs)

1.2 Million Unemployed Want A Job But Have Given Up Looking - A heartening jobs report last week masked an ominous statistic: Discouraged workers hit a record 1.2 million. Discouraged workers are those who want a job but aren't counted in the labor force because they've stopped looking for work. When the job market improves, many Americans on the sidelines will return to the labor force, holding up the unemployment rate even if job growth surges. "That is going to be a major factor in keeping the unemployment rate from dropping," says Sean Snaith, economics professor at the University of Central Florida. He predicts unemployment will still be at October's 9.6% by the end of 2011, despite 200,000 more jobs a month in the second half of next year.

Long-Term Unemployed Cut Job Hunt -Rather than intensifying their job searches or cutting the minimum pay they’ll take as unemployment drags on, most unemployed workers behave quite differently — sharply curtailing the amount of time they devote to the hunt as the weeks click past and holding out for paychecks close to what they view as the minimum to merit taking a new job, says Princeton University economist Alan B. Krueger. Mr. Krueger, a former assistant Treasury secretary for economic policy in the Obama administration, described a study which tracked more than 6,000 New Jersey workers as they looked for jobs in the depth of the recent recession, starting in late 2009.Workers were surveyed weekly for 12 weeks — with those who had been out of work 60 weeks or longer at the start of the survey tracked for an additional 12 weeks. Most economic models say the amount of time spent job hunting should be steady — or rise — the longer a worker is unemployed, in part because they know they’re nearing the exhaustion of jobless benefits. But the researchers found the opposite: Workers cut the time they spent job hunting by about a third over the initial 12 week period. The economists posit that workers may run out of suitable jobs to apply for — or could simply get more discouraged the longer they are on the hunt. The survey also found most workers tended to stick close to what they consider the minimum pay they were willing to accept, even in the face of prolonged joblessness

Sticky Wages Hold Back Job Growth - It’s something workers don’t want to hear, but one reason the economic recovery isn’t generating more jobs is that wages are too high, said Robert Shimer, an economist at the University of Chicago. Speaking on the sidelines of a conference at the Federal Reserve Bank of Atlanta focusing on problems with the U.S. job market, Shimer said a relatively small decline in wage levels of 3% to 5% would result in “significant growth in employment and consumption.” Shimer presented a paper on the topic at the two-day conference on Friday. One reason this is a particular problem today is the U.S.’s very low inflation rate, said Shirmer. When inflation is high, employers can cut their labor costs simply by stopping or constraining pay increases. When that happens in the face of higher inflation, the cost of employing a worker falls as inflation erodes the value of that worker’s paycheck. One alternative is to offer lower wages to new workers, but that also creates problems, said Shimer. “Companies are reluctant to do that because it creates equity issues.”

Inability to Cut Rates Fuels Joblessness - American consumers borrowed and spent their way into today’s slow recovery, and the jobless rate is being held near 10% because the Federal Reserve is unable to cut interest rates below zero, says Stanford University economist Robert E. Hall. In a paper presented Thursday at a Federal Reserve Bank of Atlanta conference, Mr. Hall calculates that loose credit earlier in this decade resulted in consumers buying 14% more long-lasting items — from cars and dishwashers to houses — than they would have if credit conditions had remained as they were in the previous decade.The recession was marked by those overextended households cutting spending and saving more in the face of hard times. The problem now is that the normal tool used to revive consumer spending and hiring — cutting interest rates well below the inflation rate — isn’t available because rates are nearly at zero. So unemployment has remained stuck at a high level, currently 9.6%. Mr. Hall concludes that the only way to get the job market growing is to institute monetary policies “that emulate the effect of low real rates — making current purchasing cheaper than future.” That should be music to the ears of many at the Fed

Ex-Weapons Plant Contractor Planning 1400 Layoffs - The company that manages a former nuclear weapons complex in South Carolina announced Wednesday that it plans next year to lay off 1,400 contractors, 800 of whom were funded with federal stimulus money. The total cuts represent more than 20 percent of the workers employed by Savannah River Nuclear Solutions at the Savannah River Site, the former weapons complex near Aiken. The 800 jobs also represent about a quarter of the site's 3,100 jobs that were either saved or created by federal stimulus cash. Savannah River Nuclear Solutions manages the 310-square-mile Savannah River Site, which once produced plutonium and tritium for atomic bombs. Work there is now focused mostly on research and cleaning up areas of the site contaminated during weapons production and sealing off former reactor sites with concrete.

Hours and Productivity in the Recession and Recovery - Our newly-specified model of hours and productivity can account for most of the extraordinary surge in productivity in 2009 and the first quarter of 2010, and the softening in productivity growth since then. It also accounts for almost all of the sharp decline in hours that occurred from 2007 to 2009. Productivity declined in 2008 then surged in 2009 and early 2010, before easing again.  Hours worked fell by more than 10% from peak to trough, before beginning to turn up recently.  Our model well accounts for most of the sharp decline in hours that occurred between 2007 and 2009, and, conversely, for most of the recent productivity surge, and for softer productivity in the last two quarters.  From the model’s perspective, most of the large swings in hours and productivity over the last few years are accounted for by cyclical factors.  We do not find that the level of productivity was inexplicably high in early 2010, requiring a period of extraordinarily slow productivity growth to offset the earlier surge. Looking ahead, we anticipate that productivity growth will recover to average 2.2% over 2011 and 2012, considerably slower than during its recent surge, but still solid growth in broader historical perspective.

What happened over the summer? - IT'S difficult to imagine a scenario in which America's labour market recovery proceeded as rapidly as the one following the 1982 downturn.  Still, things looked somewhat promising back in the spring of this year. Private employment, which had begun growing again in January of 2010, rose by 158,000 jobs in March and by 241,000 jobs in April. As of April, the quarterly rate of private employment growth had risen to 0.4%...But then things went sour. Private job growth fell to just 51,000 in May. From May to August, the economy added an average of just 93,000 jobs a month—too little to bring down the unemployment rate. What changed? Why did labour market improvement level off so suddenly? One might explain the hiccup as an effect of the government's homebuyer tax credit, which expired in April. The rush of buying before that deadline may have sucked workers into real estate and construction jobs during that time, after which they were spit out. Another explanation might focus on fiscal policy. Stimulus essentially stopped contributing to growth by the beginning of the third quarter, and the winding down of the fiscal boost could have sucked the wind out of the labour market recovery.

Is Structural Unemployment on the Rise? SF Fed Economic Letter: An increase in U.S. aggregate labor demand reflected in rising job vacancies has not been accompanied by a similar decline in the unemployment rate. Some analysts maintain that unemployed workers lack the skills to fill available jobs, a mismatch that contributes to an elevated level of structural unemployment. However, analysis of data on employment growth and jobless rates across industries, occupations, and states suggests only a limited increase in structural unemployment, indicating that cyclical factors account for most of the rise in the unemployment rate.Labor demand has been growing in the United States, reflected in a modest increase in private payroll employment this year and a more substantial increase in private-sector job vacancies over the past 12 months. Despite these signs of improvement, the unemployment rate has declined only slightly. Some analysts have raised the specter of a fundamental mismatch between the supply of labor in terms of workers’ skills and demand for labor in terms of employers’ skill requirements. Such a mismatch between available workers and available jobs could increase the level of structural unemployment. To the extent that structural unemployment is actually rising, the phenomenon poses a dilemma for policymakers. It cannot be ameliorated through conventional monetary and fiscal policy. And it implies an increase in the lowest unemployment rate associated with stable inflation, often identified by the acronym NAIRU, which stands for the non-accelerating inflation rate of unemployment.

Your Taxpayer Dollars At Work: San Fran Fed Asks If Structural Unemployment Is On The Rise, Discovers It Isn't - With unemployment stuck at 10% for about a year now, and with the real unemployment rate probably well over 20% if one removes all the BLS gimmicks, by now it is rather clear even to 2 year olds, that the New Abnormal is one where unemployment of 5% is merely a pipe dream, and that the Fed's attempt to revert to an abnormal mean, and blow the biggest bubble ever in the process, will do nothing to fix what is now a new structural baseline unemployment level. And yet, just to prove that the Fed will take taxpayer money and spend it on the most Captain Obvious topics ever, has just released a paper titled "Is Structural Unemployment on the Rise?" Adding insult to monetary injury, paper authors Rob Valetta and Katherine Kuang conclude that not only are worries about a "new normal" misplaced, but that jobs will promptly revert back to old levels. Sure, why not - as we showed previously, it will only take the creation of over 230,000 jobs a month for about 6 years straight to get back to the old unemployment level. It will also mean that luckily, at some point California will not have to borrow $40 million a day to fund its unemployment insurance payments. Lastly, with one brief paper the San Fran Fed has proven that all is good in the world, and those traitors responsible for 26 weeks of constant equity outflows, just like the 42 million Americans subsisting on food stamps, are complete morons for being "timid" in light of these stunning results.

High Unemployment Not Structural Problem - Fears high unemployment levels are structural in nature and beyond the aid of monetary policy are wrong, a new paper from the Federal Reserve Bank of San Francisco argues. If they are right, that means against concerns to the contrary, monetary policy remains an effective tool to help the economy generate better levels of job growth. On Wednesday, the Fed restarted a massive asset-buying campaign and will purchase $600 billion in Treasurys by the middle of next year, as it seeks to improve credit availability and drive up growth. Policymakers hope this will lower what is now a 9.6% unemployment rate, and push inflation toward to what central bankers consider a more sustainable rate. Even before the current escalation in Fed policy has started, there are signs of welcome improvement in hiring. The government reported Friday that even as the unemployment rate held steady in October, payrolls rose by a better-than-expected 151,000 jobs. If that pace can be sustained and built on, it would suggest employment was finally starting to catch up with the positive activity the economy has been generating.

Our unemployment crisis is not structural - It looks like, from here on out, there's going to be a lot of offhanded references to "structural unemployment," unemployment that demand-centered monetary and fiscal policy can't help. David Brooks is as good of a guide to what very serious people in D.C. are thinking as any, and he is now in the business of randomly referring to unemployment as being "structural." In "Midwest at Dusk," he claims that "[v]oters in [the industrial Midwest] region face structural problems, not cyclical ones."  Where is that coming from? And here is Allison Schrager, at Free Exchange, writing a survey of the debate:  Fiscal policy: Digging oneself into a hole?: And my new favorite: Kansas City Federal Reserve Bank President Thomas Hoenig makes a #slatepitch here, when he argues that he is worried about unemployment. Why? Because ... wait for it ... "If you try and bring it down too rapidly you are in danger of creating the next problem." Hoenig is worried that unemployment is going to come down too quickly! (Did he read his job requirements? Maximum employment is on there.)

America’s Employment and Growth Challenges - While the precise timing of any crisis is impossible to predict, ample signs of rising risk, distortions, structural problems, and imbalances could be seen by anyone who took the time to interpret a decade’s worth of mounting debt, low savings, surging asset prices, and excess consumption. The United States was on an unsustainable growth path for at least a decade – probably longer – before the crisis.  Restoring balance and eliminating the distortions will require time, investment, and structural change, and should be the central focus of America’s economic policy. The household sector is especially important. If the main problem had been confined to excess leverage and risk-taking within the financial sector, the economic shock would have been large, but the recovery quicker. It was the huge loss of households’ net worth that brought down the real economy.  Let’s be clear: elevated savings and reduced consumption relative to pre-crisis levels are likely to be permanent even after households reduce leverage and restore retirement savings – a process that in the US has removed roughly $1 trillion from the demand side of the economy. To make up the difference, Americans need to compete effectively for a portion of global demand.

Real Disposable Income Shrank Last Quarter -Sagging government support, falling interest rates and higher tax payments conspired to turn real disposable income growth upside down in the third quarter. After rising at a 4.6% annual rate in the second quarter, real disposable income in September fell 0.9% from June at an annualized rate. While stock market gains and refinancing are helping to buttress household spending, the consumer won’t be able to spend more for long unless disposable income picks back up. Personal income data from the Commerce Department out Monday reflect a near-stalemate between private-sector growth and public-sector drag. In September, wage and salary payments fell slightly as government pay cuts of $4.8 billion offset modest private-sector gains of $3.3 billion. On top of that, jobless benefits continued to decline as more people exhausted their 99 weeks of emergency benefits. In September, the government doled out $120.7 billion in jobless benefits, down from $136.1 billion in June. (August benefits of $147.5 billion were boosted by retroactive payments after extended benefits temporarily lapsed amid a fight in Congress over deficits.)

Wealth distribution in the U.S.: Something needs to be done - The gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s — just before the Depression. According to an analysis this year by Edward Wolff of New York University, the top 20% of wealthy individuals own about 85% of the wealth, while the bottom 40% own very near 0%. Many in that bottom 40% not only have no assets, they have negative net wealth. A gap this pronounced raises the politically divisive question of whether there is a need for wealth redistribution in the United States. This central question underlies such hot-button issues as whether the Bush tax cuts should be allowed to expire and whether the government should provide more assistance to the poor. But before those issues can be addressed, it's important to understand how Americans feel about the country's increasing economic polarity.We recently asked a representative sample of more than 5,000 Americans (young and old, men and women, rich and poor, liberal and conservative) to answer two questions. They first were asked to estimate the current level of wealth inequality in the United States, and then they were asked about what they saw as an ideal level of wealth inequality.

In a tough economy, old stigmas fall away - The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb through racks filled with second-hand clothes, shoes, blankets and dishes. A few years ago, opening a Goodwill store here wouldn't have made sense. Paramus is one of the biggest ZIP codes in the country for retail sales. Shoppers have their pick of hundreds of respected names like Macy's and Lord &Taylor along this busy highway strip. But in the wake of the Great Recession, the stigma attached to certain consumer behavior has fallen away. What some people once thought of as lowbrow, they now accept -- even consider a frugal badge of honor. At the supermarket, shoppers are buying more store-labeled products, like no-name detergents and cereal, and not returning to national brands. And in a telling trend, Americans are turning to layaway more often when they buy expensive items such as engagement rings and iPads. The wealthy are also using layaway more often, a drastic change from the past.

The Nouveau Poor: America's Middle Class - Spiegel - Pam Brown is one of millions of Americans who, during the recession, tumbled from their idyllic middle-class existence to near-poverty -- or beyond. For many, like Brown, the downfall is a Kafkaesque odyssey, a humiliation hard to comprehend. Help is not in sight: their government and their society have abandoned them. Wall Street is preoccupied with chasing new profits again. Yet for large sections of the nation, that old myth of working your way up, of bootstrap success and its ultimate prize, homeownership, has evaporated. The middle class, the America's backbone, is crumbling. The American Dream has turned into a nightmare. Last year the US poverty rate reached 14.3 percent, 1.1 percent higher than in 2008. Almost five million Americans skidded below the poverty line ($22,050 annual income for a family of four), many from hitherto sheltered circles, where poverty was a foreign word. The number of long-term unemployed keeps rising. Worst off are families with children. Every fifth child in the US lives in poverty today.

Financial Armageddon: 'The American Dream Has Turned into a Nightmare' - It's been said that those who are looking for a honest opinion of themselves need to go outside their immediate circle of family and friends to get the straight scoop. That doesn't mean, of course, that you can only trust outsiders to tell it like it is, because they might have other reasons for shading the truth, or worse, they might have a poor sense of judgment. Still, experience suggests outsiders' take on many things can add a layer of understanding that is hard to get from one's inner circle alone. With that in mind, the following report from Germany's Spiegel Online, "Recession Shadows America's Middle Class," paints a portrait of today's America that many Americans might find particularly disconcerting. American society is breaking apart. Millions of people have lost their jobs and fallen into poverty. Among them, for the first time, are many middle-class families. Meet Pam Brown from New York, whose life changed overnight.

Our Banana Republic - I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.  But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home — and in the aftermath of Tuesday’s election, it may get worse.  The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.  C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.

Nearly 1 in 5 Americans Struggle To Put Food On The Table, Survey Finds - A staggering 18 percent of Americans surveyed last month said there have been times over the past year when they could not afford to put food on the table, recent Gallup data shows. This number is slightly lower than it was in September 2009, despite persistently high unemployment levels and record participation in the food stamp program.  Jim Weill, president of the Food Research and Action Center, said in a press conference on Tuesday that the declining hunger numbers are a testament to the effectiveness of the Supplemental Nutrition Assistance Program (SNAP), which boosted monthly benefits for recipients about 13.6 percent in April 2009. "By early 2009, the rate of people answering yes [to the question of food hardship] had jumped up to 19 or 20 percent," he said. "Then, even as unemployment going up, there was a decline in yes answers to this question beginning in the spring of 2009, and it was pretty obvious that one key cause of this was the increase in SNAP or food stamp benefits that Congress passed as part of the Economic Recovery Act."

Will You Be Able To Heat Your Home This Winter? Millions Of American Families Will Not - Will you have a warm house to come home to this winter?  If so, you should consider yourself to be very fortunate. With the United States experiencing the highest levels of long-term unemployment that it has seen since the Great Depression, millions of Americans families are simply out of money.  All across America this winter, families are going to be forced to make some heart breaking decisions.  For many, the choice will come down to either heating their home or putting food on the table.  According to the National Energy Assistance Directors' Association, more than 10 million U.S. households will not be able to afford to heat their homes this winter without assistance, which would be a new all-time record.  As I have written about previously, millions of formerly middle class families have been absolutely ripped apart by this economy.  There simply is not nearly enough jobs for everyone, and those who have been left on the outside looking in are becoming increasingly desperate. Of course there is federal help available, but it doesn't go nearly far enough for those who are truly in need.  For example, the Low Income Home Energy Assistance Program (LIHEAP) assists low income households in paying their home heating bills.  However, the truth is that usually only a small fraction of heating costs are covered.  Nationally, the average benefit represents only about 8% of the average winter heating bill.

Florida Agency Issues Deadlines for Unemployment Benefits - The state agency in charge of doling out unemployment aid isn't waiting for Washington to act — or not — on the politically sensitive issue of still paying those out of work more than six months. The Florida Agency for Workforce Innovation on Tuesday told unemployment recipients the pending deadlines for ending extended benefits under the assumption Congress won't pass another extension during a lame-duck session next week. During the recession, the federal government had created several levels of additional benefits beyond the standard 26 weeks of state coverage. An emergency unemployment compensation, or EUC, program kicks in after the initial 26 weeks is exhausted; then several tiers of an extended benefit, or EB, program kick in. Barring congressional action, about 106,000 Floridians will run out of benefits as of Dec. 4 and another 41,000 will become ineligible every week.

Unemployment payouts push California deeper into debt - California's fund for paying unemployment insurance is broke. With one in every eight workers out of a job, the state is borrowing billions of dollars from the federal government to pay benefits at the rate of $40 million a day. The debt, now at $8.6 billion, is expected to reach $10.3 billion for the year, two-thirds greater than last year. Worse, the deficit is projected to hit $13.4 billion by the end of next year and $16 billion in 2012, according to the California Employment Development Department, which runs the program. Interest on that debt will soon start piling up, forcing the state to come up with a $362-million payment to Washington by the end of next September. That's money that otherwise would go into the state's general fund, where it could be spent to hire new teachers, provide healthcare to children and beef up law enforcement

Calif borrows $40M a day to pay unemployment - With one in every eight workers unemployed and empty state coffers, California is borrowing billions of dollars from the federal government to pay unemployment insurance. The Los Angeles Times reports that the state owes $8.6 billion already, and will have to come up with a $362-million payment to Washington by the end of next September. The continued borrowing means federal unemployment insurance taxes are going to increase, upping the annual payroll costs $21 a year per worker. California tops the list of 32 states that have borrowed a total of $41 billion to pay claims.

California plan to sell buildings not a financial panacea, report says - California's plan to sell government office buildings to generate short-term cash will cost hundreds of millions of dollars more than previously estimated and is the equivalent of long-term borrowing at 10% interest, according to an internal review prepared for the Legislature. Gov. Arnold Schwarzenegger and state lawmakers approved the building sales in 2009 and put the structures, including the Ronald Reagan State Building in downtown Los Angeles, on the market in February. The plan is to use the proceeds from the sale of 24 state buildings at 11 locations to shrink the deficit. The idea has no shortage of critics, who say the plan is a mere accounting gimmick, as the state will have to pay to lease back the offices in the coming years. "Nobody with any business acumen says that this is a smart deal," said Jerry Epstein, a former president of the Los Angeles State Building Authority, who says Schwarzenegger removed him from the panel after he raised questions about the transaction earlier this year. Administration officials insist that their calculations show that the state would save money — $2 million — over the first 20 years and that any estimates beyond that are "highly speculative."

California to see $25 billion budget gap: report (Reuters) - California faces a $25 billion deficit through the next fiscal year, its budget watchdog said on Wednesday, just weeks after leaders of the most populous U.S. state closed a $19 billion gap and days ahead of a planned sale of some $10 billion of state debt. The state's Legislative Analyst's Office said in a report that incoming Governor Jerry Brown and lawmakers must tackle a projected deficit of $6 billion in the current fiscal year and a shortfall of $19 billion in its next fiscal year. "Similar to our forecast of one year ago, we project annual budget problems of about $20 billion each year through 2015-16," the report added, noting that those estimates may be understated.

California budget shortfall twice as large as predicted - In what has become a somber November tradition, the nonpartisan Legislative Analyst's Office projected Wednesday that California must close a $25.4 billion shortfall next year, twice as large as legislative leaders predicted. California faces another major budget problem because tax rates are slated to drop, the federal government will provide less relief and state leaders enacted a flimsy fiscal plan last month, the analyst's office found. The economy is recovering, but not fast enough to overcome the state's budgetary obstacles. The latest projections suggest a difficult road ahead for Gov.-elect Jerry Brown, who will likely spend much of the next four years wrestling with budget problems. The LAO report forecasts annual budget deficits of about $20 billion through 2015-16 without permanent changes. The new deficit is larger than last year's $19 billion gap, which took legislators and Gov. Arnold Schwarzenegger until Oct. 8 to resolve, the latest budget enactment date in state history.

Schwarzenegger Declares Emergency, Calls Special Budget Session (Bloomberg) -- California Governor Arnold Schwarzenegger, citing a $25.4 billion budget gap over the next 19 months, declared a fiscal emergency and called lawmakers to a special session next month to begin dealing with the problem. Schwarzenegger, a Republican whose term ends in January, late yesterday ordered the session to start Dec. 6, the day newly elected legislators are sworn in. He wants to take steps to erase an officially estimated $6.1 billion gap that has already emerged in the budget enacted last month. In addition to the gap forecast for the fiscal year through June, the nonpartisan Legislative Analyst’s Office yesterday projected a $19 billion gap in the following 12 months. By Jan. 10, Governor-elect Jerry Brown, a Democrat who will be sworn in Jan. 3, must propose a plan to erase the next year’s deficit

Md.'s bleak budget outlook: Gap is larger than projected - After an uptick in revenue this fall offered a glimmer of hope that Maryland's recession-ravaged budget might be improving, new state data released Wednesday showed just the opposite: Rising Medicaid costs and a drop in federal stimulus funding have left the state with an even bigger gap to fill than lawmakers anticipated when the General Assembly adjourned in April. Maryland's general-fund budget shortfall for the fiscal year beginning next summer has swelled by about $400 million from an estimated $1.2 billion in September to $1.6 billion.

Gov. Paterson proposes eliminating New York participation in Federal Superfund Program - In a radio interview last week, outgoing New York Governor David Paterson announced his plans to eliminate the state’s participation in the federal Superfund cleanup program. The proposal is one of several cuts designed to reduce the state’s budget deficit and accommodate the proposed layoffs of an additional 898 state employees by the year’s end, including 150 in the Department of Environmental Conservation (”DEC”). The immediate impact of Paterson’s announcement on ongoing and future site cleanups is unclear, and DEC said that “no final decision has been made” on the issue. The state and federal governments currently operate their own Superfund programs, created through separate statutes, and it appears that cleanup will continue as planned for sites listed exclusively under the state program.

States' bailout: Largest 15 states spend over 220 percent of tax revenue -  The big news this week in terms of ginormous government transfer payments is, as usual, out of the Fed, as it embarks on an equally ambitious and ill-fated mission to buy $600 billion of US Treasury debt. Unsurprisingly, it’s not the only immense transfer of wealth taking place between governmental bodies. As spotlighted by Meredith Whitney, CEO of the Meredith Whitney Advisory Group, the feds are continuing to subtly bailout state governments at record levels and in an ongoing and unsustainable fashion which she describes in a recent WSJ opinion piece. From The Wall Street Journal: “What [...] investors fail to appreciate is that state bailouts have already begun. Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. California is not alone: Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

State Budget Shortfall Could Hit Cities Hard - Even though Texas hasn't been hit as hard by the recession as some other states, the budget is in bad shape. Some predict a 20 Billion dollar shortfall. State lawmakers begin filing bills for the 2011 Legislative session today, and KERA's BJ Austin says "cities" are bracing for a raid on revenue resources as lawmakers work to fill the budget gap. Bennett Sandlin, executive director of the Texas Municipal League says cities are preparing for a "grab" from Austin with lawmakers neck-deep in red ink and looking to stay afloat. Sandlin: Cities are going to try to play defense this session. The state budget deficit is expected to be so large now, 20 to 25 billion dollar range, it would be very likely that the state is going to look to cities and other local governments to help balance their budget by passing down mandates, raising fees and some other way expecting cities to essentially assist the state.

The Privatization-Industrial Complex - Privatization has long been advocated by many conservatives as a good government measure. Traditionally, privatization was used a tool that subjects government monopolies to competition from the marketplace, driving down costs and improving quality of service. Privatization pioneer Steve Goldsmith, former mayor of Indianapolis and now deputy mayor of New York City, used to apply what he called the “Yellow Pages test.” If he could open the Yellow Pages and find several companies providing a service, he wondered why government should be in that business. As Mayor, Goldsmith privatized dozens of city services in Indianapolis, saving the city an estimated $120 million the process. This ranged from contracting out services, to forming a public/private partnership to implement a $500 million infrastructure improvement plan to hiring private managers to run – but not own or lease – the airport and water utility. Today, sadly, privatization is less about Goldsmith style operational effectiveness and more about providing jackpots for financiers who stand at the core of a growing privatization-industrial complex.

Top-Rated 20-Year Municipal Bond Yields Rise to Four-Month High Amid Glut - Municipal debt yields rose in most maturities yesterday, with rates on top-rated tax-exempt debt due in 20 years climbing to the highest level since July. Twenty-year AAA general obligations jumped about 0.13 percentage point today to 3.69 percent, according to the Bloomberg Valuation index for that maturity. States and municipalities had planned to sell $11.2 billion in municipal debt this week, the most since Oct. 29, according to data compiled by Bloomberg. That means many issuers must offer greater yield to persuade investors to buy their debt

More than $150 billion issued in Build America Bonds – State and local governments have issued more than $150 billion in Build America bonds during the past 18 months, the Treasury Department announced Friday.  "In the beginning, Build America Bonds helped fill a critical hole in the municipal finance market left by the financial crisis," "They have now become an important source of financing to help state and local governments undertake much-needed infrastructure projects." The bonds, a part of the 2009 economic stimulus, have helped those state and local governments to save billions in financing costs compared with tax-exempt debt bond market that has faced "significant challenges over the past two years," Krueger said.  Build American Bonds provide a federal subsidy equal to 35 percent of the taxable borrowing cost.

“Passenger rail is not in Ohio’s future”: New GOP governors kill $1.2 Billion in high-speed rail jobs: Republicans who were elected on Tuesday are beginning to deliver on their campaign promises to kill America’s future. Within hours of declaring victory, the incoming tea-party governors of Wisconsin and Ohio stood fast on pledges to kill $1.2 billion in funding for high-speed rail in their states. The funding, part of the American Recovery and Reinvestment Act, will revert to the federal government for investment in other states — unless Republicans in Congress are able to kill that, too. Walker warned he would fight President Obama to keep the Milwaukee-Madison link killed “if he tries to force this down the throats of the taxpayers.” Kasich — who called the high-speed rail project linking Cleveland, Columbus, and Cincinnati “one of the dumbest ideas” he’s ever heard — used his victory speech to announce, “That train is dead“:

Illinois Wants Wisconsin's Rejected Stimulus Funds - Illinois transportation officials say they'll take the $810 million in federal high-speed rail funds that Wisconsin Gov.-elect Scott Walker has said he'll reject.   Walker made opposing a Milwaukee-Madison rail project a key part of his successful campaign against his Democratic opponent, Milwaukee Mayor Tom Barrett who supported it.  Illinois has received $1.2 billion in high-speed rail funding. Transportation Secretary Gary Hannig says the state could make improvements to the Chicago-St. Louis corridor with Wisconsin's money.  And it could be used to build stations in Joliet and Rockford.   But Illinois isn't the only state that wants Wisconsin's money.  New York Gov.-elect Andrew Cuomo has expressed interest too.

State Republicans, Facing Deficits, Promise Big Cuts - Republicans who have taken over state capitols across the country are promising to respond to crippling budget deficits with an array of cuts, among them proposals to reduce public workers’ benefits in Wisconsin, scale back social services in Maine and sell off state liquor stores in Pennsylvania, endangering the jobs of thousands of state workers.  States face huge deficits, even after several grueling years of them, and just as billions of dollars in stimulus money from Washington is drying up.  With some of these new Republican state leaders having taken the possibility of tax increases off the table in their campaigns, deep cuts in state spending will be needed. These leaders, committed to smaller government, say that is the idea.  “We’re going to do what families and businesses all over this country have already had to do, and that is live within their means,”

Kansas Schools Facing $50 Million Budget Shortfall - Education officials on Tuesday said more budget cuts are possible this school year because of the state’s continued fiscal problems, and even deeper cuts could follow that because of the loss of federal stimulus dollars. “School district leaders have been presented with impossible choices,” said John Heim, executive director of the Kansas Association of School Boards. “They have had to cut staff while saving for an uncertain future.” The immediate problem is a $50 million shortfall in the current school budget brought on by lower statewide property tax valuations, an increase in students receiving free lunch and a larger student population, the KASB reported.

Affordable Schooling - Much ink, real and virtual, has been spilled over the last few days on the macro and micro of the election, QE2, global central banking activities, competitive currency strategies and asset-price targeting. We’re going to give that a rest for today (although we reserve the right to spill some more of that ink ourselves in the coming weeks and months) to focus on another corner of the economy, the high and rising cost of secondary education. If it’s true, as economist Herbert Stein said, that if something cannot go on forever it will stop, how does one explain the graphs that follow? As reported by The College Board in its annual college pricing trends survey, the average cost of going to college keeps going up at a pace that typically exceeds not only inflation but also the rise in average household income.

California's $14 Billion in Sales Preceded by University Debt - University of California, whose medical centers represent the third-biggest U.S. public-hospital system, is selling $700 million in taxable Build America Bonds as the state prepares to borrow $14 billion this month.  The college’s revenue-bond sale comes as the extra yield investors demand to hold 10-year general-obligation debt from California issuers instead of top-rated tax-exempts was 127 basis points yesterday, the highest since July 7, according to Bloomberg Fair Market Value data. A basis point is 0.01 percentage point.  California, the largest U.S. issuer of municipal debt, will offer $2 billion of federally subsidized, Build Americas Nov. 18 and $1.75 billion of tax-exempt, general-obligation bonds Nov. 23, according to Treasurer Bill Lockyer’s website. The state is also planning to issue an estimated $10 billion in one-year, revenue-anticipation notes next week.

UC President Yudof Proposes 8 Percent Fee Increase - After weeks of rumors and speculation, UC President Mark Yudof announced a budget plan Monday that includes an 8 percent hike in student fees for the next academic year, though only 45 percent of students will have to pay these higher fees for the first year thanks to a one-time expansion of the university's financial aid program.  If approved by the UC Board of Regents, Yudof's proposal would raise the UC system's educational fee by $828 to $11,124 - more than twice what the fee was in 2003 - as well as the student services fee by $72 to a total of $972.

Executives Collect $2 Billion Running U.S. For-Profit Colleges - Top executives at the 15 U.S. publicly traded for-profit colleges, led by Apollo Group Inc. and Education Management Corp., received $2 billion during the last seven years from the proceeds of selling company stock, Securities and Exchange Commission filings show. At the same time, the industry registered the worst loan-default and four-year-college dropout rates in U.S. higher education. Since 2003, nine for-profit college insiders sold more than $45 million of stock apiece. Peter Sperling, vice chairman of Apollo’s University of Phoenix, the largest for-profit college, collected $574.3 million. Education corporations, which receive as much as 90 percent of their revenue from federal financial-aid programs, are “private enterprise that’s almost entirely publicly funded,” Henry Levin, director of Columbia University’s National Center for the Study of Privatization in Education, said in a telephone interview

For-Profit Colleges Are Crooked Business - For-profit colleges have lower graduation rates

and higher student loan default rates than their state or nonprofit counterparts. For-profits also receive the bulk of their revenue from federal financial aid programs. What do for-profit CEOs get for steering this crooked ship? Obscene annual incomes, of course. Bloomberg reports:  Strayer Education Inc., a chain of for-profit colleges that receives three-quarters of its revenue from U.S. taxpayers, paid Chairman and Chief Executive Officer Robert Silberman $41.9 million last year. That’s 26 times the compensation of the highest-paid president of a traditional university.Top executives at the 15 U.S. publicly traded for-profit colleges, led by Apollo Group Inc. and Education Management Corp., also received $2 billion during the last seven years from the proceeds of selling company stock.. At the same time, the industry registered the worst loan-default and four-year-college dropout rates in U.S. higher education. Since 2003, nine for-profit college insiders sold more than $45 million of stock apiece. Peter Sperling, vice chairman of Apollo’s University of Phoenix, the largest for-profit college, collected $574.3 million.

South Floridians Confront Social Security Shortfall - Baby boomers nearing retirement are growing nervous for good reason about the future of Social Security for themselves and younger generations. A focus group of Floridians age 40 to 75 will discuss the program’s potential insolvency and future benefits on Monday, Nov. 15, at a forum in Doral sponsored by AARP and the Rockefeller Foundation. Many Floridians were bitterly disappointed when low inflation brought word of no Social Security raise this year or next year, but potential insolvency and reduced cost-of-living adjustments down the road are far more serious concerns. New research on perceptions of Floridians regarding Social Security, as well the adequacy of benefits, will be released at the session and made available at www.aarp.org/SocialSecurityVoicesandValues. It’s designed for press coverage, but the general public should take interest. Social Security faces a significant shortfall, which Congress needs to address soon, says a research report from the Pew Economic Policy Group. Similar warnings are coming from the Left and the Right as Congress confronts growing federal deficits and proposals for trimming future Social Security benefits.

Super-sized pensions, and a doomsday scenario - While the federal debt of $13.7 trillion raises issues of devalued currency, higher borrowing costs for Washington, D.C., and loss of international bargaining power, state debt – much of it driven by exploding pension costs – poses a more immediate risk to the U.S. economy, according to many experts.Wall Street analyst Meredith Whitney correctly predicted the need for a government bailout of banks three years ago, so people listened in September when she forecast who will be next to beg for a federal bailout: States like California, New Jersey and Ohio. State and local governments have effectively run up huge credit card bills, and soon won’t even be able to make the minimum payments on that debt.  What happens then?  Middle America, Whitney predicted in a report called “Tragedy of the Commons,” might revolt at the idea at bailing out coastal states for years of mismanagement and overspending.

Dean Baker on the Urgency of 'Nothing' for Social Security - A year and a half ago I put up a post here called The Fierce Urgency of 'Nothing' whose conclusion was:  "Nothing". The numerically proven plan for Social Security since 1997. So you can imagine my gratification at running across the following by the co-author of the must read book from 1999 Social Security: the Phony Crisis, economist and co-director of CEPR (Center for Economic and Policy Research) Dean Baker.Action on Social Security: the Urgent Need for Delay The full paper in PDF can be found at this link The Urgent Need for Delay. And if I say so myself goes a long way towards explaining the justification of my previous post from Sept. Why 'Nothing" is STILL the 2nd Best Plan for Social Security. I am doing what I can here at AB to make sure that "the public will be better informed about the financial state of Social Security in the future", but you could do worse than taking the word from the Leader of the Pack. Because Dean has been on this beat even longer than I have, and is a real economist to boot. 

Action on Social Security: The Urgent Need for Delay - There is enormous public confusion (much of it deliberately cultivated) about the extent of Social Security’s projected shortfall. Many policymakers and analysts point out that projections from the Congressional Budget Office and the Social Security Trustees show the program to be out of balance in the long-term, therefore we would be best advised to make changes as soon as possible. This paper argues that supporters of the existing Social Security system should try to ensure that no major changes to the core program are implemented in the immediate future. It points out that:

1. There is good reason for believing that the public will be better informed about the financial state of Social Security in the future, in part because of the weakening of some of the main sources of misinformation;
2. Many more people will be directly dependent on Social Security in the near future. These people and their families will likely be strong defenders of the program;
3. The group of near-retirees, who may be the victims of early action, will desperately need their Social Security since they have seen much of their wealth eliminated with the collapse of the housing bubble; and
4. The concern over “maintaining the confidence of financial markets” is an empty claim that can be used to justify almost any policy.

Income And Life Expectancy - I’ve referenced this before, but here’s the Social Security Administration study. Look at Table 4: since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half.

SC Medicaid Could Run out of Money --The department that runs the state's Medicaid program is facing a $228 million shortfall and says it will run out of funds to pay claims byMarch 4 un­less it is allowed to oper­ate at a deficit. The $5.2 billion Medi­caid program now covers about 43 percent of all children in the state and about 53 percent of all births, according to the state Department of Health and Human Serv­ices. State funds make up $606 million of the budg­et. With the recession dragging on and leading to the loss of jobs and health insurance, more than 100,000 people have been added to the pro­gram in the past three years, according to DHHS. At the same time, the budget has been cut $228 million. "The biggest challenge is that we have more indi­viduals on the Medicaid rolls and fewer resources to pay for them,"

What if states ditch Medicaid? - The Affordable Care Act will expand the program rapidly by subsidizing insurance for all Americans up to 133 percent of the poverty line, which will add an estimated 16 million new Medicaid enrollees. During the health-care debate, Democrats heralded the move for helping to bring the country closer than ever to achieving universal coverage. But the Medicaid expansion has also become one of the biggest points of tension between the federal and state governments. Medicaid has traditionally been a federal-state cost-sharing program. Many GOP state governments, along with a handful of Democratic ones, have complained that the expansion will bankrupt already cash-strapped budgets. Texas, however, has taken such protestations a step further. Conservative state lawmakers are now demanding that the state drop out of the program altogether to alleviate the state's $25 billion shortfall. If Texas went ahead with such a plan, it's unlikely that the Medicaid program would entirely disappear, but its reimbursement rates would fall so low without state support that almost no one provider would accept the coverage, as Mike Tomasky explains. The New York Times cites one veteran GOP state representative who's pushing the idea: "We need to get out of it. And with the budget shortfall we're anticipating, we may have to act this year.

Medicaid: the assault begins - The most important article I read over the weekend was this one, in Saturday's New York Times, about some new goings-on in Texas: Some Republican lawmakers — still reveling in Tuesday's statewide election sweep — are proposing an unprecedented solution to the state's estimated $25 billion budget shortfall: dropping out of the federal Medicaid program.  So we are now talking about the dismantling of the welfare state in very specific and concrete ways. This is new, and it foretells a fundamental fight that's coming and perhaps soon. First, some background. Medicaid provides basic healthcare to poor people. It was passed in 1965 along with Medicare, which provides healthcare to seniors. Medicare is a federal-only program. Medicaid is a joint federal-state effort, meaning states contribute a percentage (usually maybe 20 to 40% or so, varying from state to state) of the costs. Medicaid was designed this way in part because Wilbur Mills, the moderate/conservative Democrat who chaired the House Ways and Means Committee at the time, thought that  if the feds picked up the full costs of care for both groups, it wouldn't be long until we had an NHS.

Departing Medicare Advantage plans leave 40000 seniors seeking coverage - The exodus of dozens of Medicare Advantage plans from various counties or from the state entirely is leaving 40,588 seniors across Washington to wade through charts in search of new plans. In some counties, most Medicare Advantage plans no longer will be offered, leaving patients with little choice. Some will opt to fall back on "original" Medicare, paying additional premiums for a prescription-drug plan and a supplemental "Medigap" plan, and likely forgoing some of the extras many Advantage plans provided. Offered by private companies, Advantage plans combine original Medicare services and often offer drug coverage and such extra benefits as eye or hearing exams, dental care, wellness classes or health-club membership. Some also require extra premiums and, until now, have had extra payments from the federal government. But those subsidies are being phased out.

Nearly 59 million lack health insurance: CDC  - Nearly 59 million Americans went without health insurance coverage for at least part of 2010, many of them with conditions or diseases that needed treatment, federal health officials said on Tuesday. They said 4 million more Americans went without insurance in the first part of 2010 than during the same time in 2008. "Both adults and kids lost private coverage over the past decade," Dr. Thomas Frieden, director of the U.S. Centers for Disease Control and Prevention, told a news briefing. The findings have implications for U.S. healthcare reform efforts. A bill passed in March promises to get health insurance coverage to 32 million Americans who currently lack coverage. But Republicans who just took control of the House of Representatives last week have vowed to derail the new law by cutting off the funds for it, and some want to repeal it. Experts from both sides predict gridlock in Congress for the next two years in implementing healthcare reform's provisions.

G.O.P. to Fight Health Law With Purse Strings - As they seek to make good on their campaign promise to roll back President Obama’s health care overhaul, the incoming Republican leaders in the House say they intend to use their new muscle to cut off money for the law, setting up a series of partisan clashes and testing Democratic commitment to the legislation.  Republicans, who will control the House starting in January but will remain in the minority in the Senate, acknowledge that they do not have the votes for their ultimate goal of repealing the health law, the most polarizing of Mr. Obama’s signature initiatives. But they said they hoped to use the power of the purse to challenge main elements of the law, forcing Democrats — especially those in the Senate who will be up for re-election in 2012 — into a series of votes to defend it.

Health care cost control is hard, and humbling - Let’s be honest. We really don’t know what’s going to control health care costs, long term. Today’s politically winning idea could be tomorrow’s platter of humble pie. There are lots of different thoughts about how best to do it. But which of them deserve political and legislative support? On the private side, one big idea centers on high-deductible plans, sometimes coupled with health savings accounts. The theory is that individuals, acting as prudent purchasers and spending their own money, will make more efficient health care decisions. This approach, the consumer-directed health plan concept, puts more of the cost risk on individuals. On the public side there are accountable care organizations. Under this model, an integrated delivery system would be responsible for providing all the health care required by a defined population. And what about Medicare prospective payment systems, Congress’s best attempt yet at controlling Medicare costs?

Without Health Care Reform, Catastrophe Awaits - Boehner will be the Speaker of the House, and McConnell will remain Minority Leader in the Senate. What does this have to do with health care and the current bill signed into law earlier this year by President Obama? For one thing, Boehner calls the legislation a "monstrosity"; McConnell wants it dismantled since it is an intrusion by government into the private lives of all citizens. If either gets his way (and this writer highly doubts it), the citizens of this country will face a catastrophe -- our nation will become a land mass comprised of those who cannot maintain their health because they cannot afford to pay for health care. And speaking of intrusions and costs, why don't these Republican leaders give up their government-sponsored health plans, or have them tell seniors to forgo Medicare, or even instruct our proud men and women in uniform to just forget about their VA healthcare? Get the point?

Antibiotics Research Subsidies Weighed by U.S. - Worried about an impending public health crisis, government officials are considering offering financial incentives to the pharmaceutical industry, like tax breaks and patent extensions, to spur the development of vitally needed antibiotics.  While the proposals are still nascent, they have taken on more urgency as bacteria steadily become resistant to virtually all existing drugs at the same time that a considerable number of pharmaceutical giants have abandoned this field in search of more lucrative medicines. The number of new antibiotics in development is “distressingly low,” The world’s weakening arsenal against “superbugs” has prompted scientists to warn that everyday infections could again become a major cause of death just as they were before the advent of penicillin around 1940.  For example, scientists have become alarmed by the spread from India of a newly discovered mutation called NDM-1, which renders certain germs like E. coli invulnerable to nearly all modern antibiotics. About 100,000 Americans a year are killed by infections acquired in hospitals, many resistant to multiple antibiotics. Methicillin-resistant staphylococcus aureus, or MRSA, the best known superbug, now kills more Americans each year than AIDS.

Processed Meats Declared Too Dangerous for Human Consumption - The World Cancer Research Fund (WCRF) has just completed a detailed review of more than 7,000 clinical studies covering links between diet and cancer. Its conclusion is rocking the health world with startling bluntness: Processed meats are too dangerous for human consumption. Consumers should stop buying and eating all processed meat products for the rest of their lives. Processed meats include bacon, sausage, hot dogs, sandwich meat, packaged ham, pepperoni, salami and virtually all red meat used in frozen prepared meals. They are usually manufactured with a carcinogenic ingredient known as sodium nitrite. This is used as a color fixer by meat companies to turn packaged meats a bright red color so they look fresh. Unfortunately, sodium nitrite also results in the formation of cancer-causing nitrosamines in the human body. And this leads to a sharp increase in cancer risk for those who eat them.

Spontaneous GMOs in Nature: Researchers Show How a Genetically Modified Plant Can Come About — Genetically modified plants can come about by natural means. A research group at Lund University in Sweden has described the details of such an event among higher plants. It is likely that the gene transfer was mediated by a parasite or a pathogen. The debate over genetically modified organisms (GMOs) is heated. One of the arguments against them is that it is unnatural to mix genes from different species. However, research in Lund, Sweden, shows that genetic modification can take place naturally among wild plants. The research group on evolutionary genetics has discovered that a gene for the enzyme PGIC has been transferred into sheep's fescue (Festuca ovina) from a meadow grass, probably Poa palustris, a reproductively distinct species. The DNA analyses also show that only a small part of a chromosome was transferred. This is the first proven case of the horizontal transfer of a gene with known function from the nucleus of one higher plant to another.

Republicans could scale back US science budgets - Budgets for scientific research in the United States could be scaled back with the return of a Republican-majority in Congress as conservatives aim to slash spending to reduce the ballooning deficit. The Republican electoral platform, the "Pledge to America," details the party's ideals of smaller government, lower taxes and robust national defense, and vows to "stop out-of-control spending." "There is a risk that we may have a significant reduction in the science budget," said Patrick Clemins, director of the research and development policy program at the American Association for the Advancement of Science.  The National Institutes of Health (NIH) could lose nine percent of its budget or 2.9 billion dollars, and the National Science Foundation (NSF) could see a 19 percent cut, or one billion dollars gone from its coffers.

In Race Between Humans and Bacteria, My Money’s on the Bacteria - From a WHO interview with a top immunologist on the subject of super-bugs, NDM1, & antimicrobial resistance: NDM1 is an enzyme that confers resistance to one of the most potent classes of antibiotics, known as carbapenems, but what has been observed is different in many ways to what we have seen to date. This new resistance pattern has been reported in many different types of bacteria compared to previously and at least one in 10 of these NDM1-containing strains appears to be pan-resistant, which means that there is no known antibiotic that can treat it. A second concern is that there is no significant new drug development for antimicrobials. Third, this particular resistance pattern is governed by a set of genes that can move easily from one bacterium to another. Fourth, NDM1 has been found in the most commonly encountered bacterium in the human population, E. coli, which is the most common cause of bladder and kidney infections. Q: Is this the doomsday scenario of a world without antibiotics? A: Unfortunately yes, with these new multiresistant NDM1-containing strains and their potential for worldwide spread. Doctors will face a terrible dilemma when a pregnant woman develops a kidney infection that spills over into the bloodstream with a pan-resistant strain containing NDM1 and there are no treatment options. We are essentially back to an era with no antibiotics

Commodities Rise to 25-Month High on Demand for Crops, Metals - Commodities extended a rally to a 25- month high as the global appetite for crops outpaced dwindling supplies, and precious metals surged on demand for a haven from slumping currencies. The Thomson Reuters/Jefferies CRB Index of 19 raw materials rose as much as 1.6 percent to 320.38, the highest level since Oct. 6, 2008. As of Nov. 5, the gauge climbed for 11 straight weeks, the longest rally since 1977. It has jumped 21 percent since Aug. 31, led by cotton, sugar and silver. Last week, the dollar slumped to the lowest level since December against a basket of major currencies on plans by the Federal Reserve to expand a U.S. stimulus program by buying more debt. The euro fell today amid debt woes in the region, sending gold to a record high. Corn, soybeans and cotton climbed as U.S. data showed adverse weather eroded supplies further. “The fundamentals for most commodities are very strong, and the global currency situation, not just the dollar but also the yen and sterling and euro, are like pouring gasoline on a fire,”

The Billion Prices Project @ MIT - The Billion Prices Project is an academic initiative that collects prices from hundreds of online retailers around the world on a daily basis to conduct economic research. We currently monitor daily price fluctuations of ~5 million items sold by ~300 online retailers in more than 70 countries. This webpage showcases examples of average inflation indexes that we created to illustrate the type of statistical work that can be done with this data. Our team is currently working on developing econometric models that leverage the data to forecast future trends and conduct economic research.

Grains trade at highest in more than two years - Grains futures surged Tuesday after the U.S. Department of Agriculture cut its estimate for the U.S. soybean harvest. Soybeans for January delivery, the most active contract, added 70 cents, or 5.5%, to $13.45 a bushel, its highest in more than two years. Wheat and corn followed suit, with December corn up 30 cents, or 5.1%, to $6.15 per bushel, corn's highest also since mid-2008. Wheat for December delivery added 60 cents, or 8.2%, to $7.96 a bushel, wheat's highest since mid-2008. The USDA estimated soybean production to hit 3.375 billion bushels, 1% lower from its estimate in October.

US accused of forcing up world food prices - The US central bank was accused today of adding to soaring food prices with its new programme of quantitative easing, after oil and commodities surged on world markets. Critics said the $600bn (£370bn) of QE announced by the Federal Reserve would hurt consumers by pushing up prices of soy, wheat and other staple foods, along with oil, copper and zinc. The jump in commodity prices raised the prospect of an inflationary bubble reminiscent of 2008, when oil and other industrial raw materials struck all-time highs just before the crash. While commodity traders said a decline in the dollar's value was expected following the QE decision, the Reuters/Jefferies CRB index, a global commodities benchmark, has since hit a two-year high. It has gained 18% since the start of September.

Sugar Prices Fall Record 12% in London, Most in 22 Years in N.Y. - Refined-sugar prices plunged by a record in London, and raw-sugar futures in New York tumbled the most in 22 years as speculation that China will boost borrowing costs roiled commodity markets. China may increase interest rates soon in a bid to cool inflation, according to Bloomberg News survey. Raw materials tumbled on concern that demand for crops will ease in the Asian nation, the biggest consumer of many commodities. Prices also fell after ICE Futures U.S. raised margins on contracts by 65 percent. Europe announced plans to increase sugar exports. Refined-sugar futures for March delivery fell $91.50, or 12 percent, to close at $677.10 a metric ton, marking the biggest drop ever. The price fell 2.8 percent yesterday after the EU said it also plans to lift import duties.

Soybeans, Corn Plunge as Commodities Drop on China Rate Concerns - Soybeans and corn fell the most allowed by the Chicago Board of Trade on speculation that China will raise interest rates soon, cubing demand for commodities.  China is the world’s biggest consumer of soybeans and second- largest user of corn. The Thomson Reuters/Jefferies CRB Index of 19 raw materials fell 3.6 percent, the most since April 2009. “The risk of rising Chinese rates increases the chances for demand to slow,” said Dale Durchholz, the senior market analyst at AgriVisor LLC in Bloomington, Illinois. “The message is, China is taking a more aggressive stance to cool inflation and push speculative money out of commodities.” Corn futures for March delivery dropped 30 cents, or 5.2 percent, to close at $5.48 a bushel, the biggest drop since Oct. 1. The price has gained 46 percent since the end of June, reaching a 26-month high of $6.175 on Nov. 9, after adverse weather reduced the size of the U.S. crop.

The Banksters Literally Steal Our Food - At least since Malthus the flunkeys of the rich have blamed hunger under capitalism on the profligacy of the producers themselves, rather than the systematic theft of the food itself by parasites who play no role in producing it or anything else. The claim always boils down to there being “not enough food”. But the fact is that there’s always been enough food, and scarcity and hunger have always been artificially produced. This is intentionally endemic to “markets”, and is also the knock-on effect of speculative finance.  Starting with the 19th century crop lien system the bankster “markets” have always manipulated first the money supply and then the cycles of market pricing. The intended result was always that the farmer would have to go deeply into debt at the highest interest rate to commence the season’s planting, but could only sell at the lowest price at harvest time. Consolidation at all processing and distribution points has only increased since then.

Food and Energy Clarion Call from India - The sound of trumpets–or was it sirens–was heard from Delhi this week as India’s Premier got loud about his country’s future energy needs. It’s not often we are treated to such transparency. In contrast, China tried to spin its own future call on global energy through the framework of limits this week when it declared it would hold coal consumption to 4.0-4.2 Mt (million tons) by 2015. Clearly, China’s coal consumption juggernaut wants to downplay the fact that these are coal use levels 25%-30% higher than today. In India, meanwhile, they are willing to put some big raw numbers on the situation: Premier Manmohan Singh told India’s energy firms on Monday to scour the globe for fuel supplies as he warned the country’s demand for fossil fuels was set to soar 40 percent over the next decade. The country of more than 1.1 billion people already imports nearly 80 percent of its crude oil to fuel an economy that is expected to grow 8.5 percent this year and at least nine percent next year. Demand for hydrocarbons — petroleum, coal, natural gas — “over the next 10 years will increase by over 40 percent,” Singh told an energy conference in New Delhi. Question: is it energy that India needs? Or is it food? This is of course roughly the same question.

Food Sovereignty vs. the Final Stage of Neoliberalism - What is globalization, really? Among other things, it’s the replacement of national sovereignty by corporate anti-sovereignty. Their own cadre, Dani Rodrik, wrote of how national sovereignty and democracy are incompatible with the corporate pseudo-sovereignty, and how if you want to maximize the latter you must destroy the former. This association of nation and democracy as the twin targets of the “free trade” onslaught demonstrates how national sovereignty itself can only arise out of the people. We can deduce from this that the only way to defend either and maximize both is to eradicate corporatism and elitism completely. It’s democracy which must be maximized: Direct democracy. Who are the globalizers? Don’t look first at the World Bank, IMF, WTO and so on. Those are just the power launderers, the stooge cadres. In America, the real globalizers are Wall Street, the Republican and Democratic Parties, the weapons rackets, and the Big Ag rackets – Monsanto, Cargill, ADM, Tyson, Smithfield, and others. These are the players who concoct the “agreements” among “countries” which are really turf deals among gangster elites. The politicians sign these agreements and set up special organizations like the WTO and IMF to serve as the point men. But the WTO, and for that matter most of the Dems and Reps, are the hired goons.

Why worry about water? A quick global overview - The future security of freshwater resources around the world is of increasing concern. Due to our interlinked global economy, water scarcity in many parts of the world could harm the global economy in ways we had not thought of. Shortfalls in crop yields and more variable food prices could be an early impact. Our demand for water is closely linked to economic growth. As we grow wealthier, the more freshwater we require to supply cities, power plants, factories and the production high protein food such as dairy, meat and fish.  It is not just a question of more people requiring more water. Rather, it is a case of more wealthy societies demanding much more water. During the 20th century, while population grew by a factor of four, freshwater withdrawals grew by a factor of nine. If we take these past patterns and look forward, the outlook for 2030 is stark. Currently about 70% of the world's freshwater withdrawals are for agriculture, 16% are for energy and industry and 14% are for domestic purposes. Recent work suggests that unless we change our historic approach to how we use water, we could face a 40% gap by 2030 between global demand and what can sustainably be supplied.

Ethanol subsidies pose early test for the GOP - Republicans talk about ending wasteful government intervention. Congressional Democrats say they want to protect the environment. And Barack Obama claims he's looking for bipartisan cooperation and reform. All of these goals would be served by rolling back ethanol subsidies. "A Republican takeover of the House of Representatives," Bloomberg News speculated this week, "may mean that U.S. subsidies aiding ethanol producers will be cut after the party pledged to reduce government spending." We'll find out within months if that's putting too much stake in GOP rhetoric. Ethanol fuel (especially ethanol distilled from corn) is subsidized in dozens of ways by governments at all levels. Two of the longest-running subsidies -- a 54-cent-per-gallon tariff on imported ethanol, and 45-cent tax credit for every gallon blended with gasoline -- expire on Dec. 31, making them a top priority for industry lobbyists during the lame-duck session.

Senators Propose Raising Gasoline Tax Nationally - A bipartisan pair of U.S. senators has written to the co-chairmen of the federal deficit commission asking them to consider raising the gas tax to finance highway construction nationwide. Senators George Voinovich, R-Ohio, and Tom Carper, D-Del., wrote to Erskine Bowles and former Sen. Alan Simpson, who co-chair the National Commission on Fiscal Responsibility and Reform. The Highway Trust Fund needs $34 billion over the next six years to maintain the nation’s roads, and Voinovich and Carper urged the commission co-chairmen to consider raising the gas tax to replenish the Highway Trust Fund and improve the nation’s infrastructure. The commission is expected to deliver a report outlining its recommendations on ways to curb the federal deficit and the national debt by December.  Voinovich and Carper urged the commission to strongly consider the importance of transportation investment to job creation and the fact that the federal fuel tax has not been increased since 1993, when it was raised by 4.3 cents to 18.4 cents per gallon. The purchasing power of the current fuel taxes has decreased during this time; thus, the federal government’s contribution to the transportation system has continued to fall behind.

First generation biofuels worse for climate than fossil fuel – study (Reuters) – European plans to promote biofuels will drive farmers to convert 69,000 square km of wild land into fields and plantations, depriving the poor of food and accelerating climate change, a report warned on Monday. The impact equates to an area the size of the Republic of Ireland. As a result, the extra biofuels that Europe will use over the next decade will generate between 81 and 167 percent more carbon dioxide than fossil fuels, says the report. Nine environmental groups reached the conclusion after analyzing official data on the European Union’s goal of getting 10 percent of transport fuel from renewable sources by 2020.

Climate change hurting China’s grain crop: report — Climate change could trigger a 10 percent drop in China’s grain harvest over the next 20 years, threatening the country’s food security, a leading agriculture expert warned in comments published Friday. Tang Huajun, deputy dean of the Chinese Academy of Agricultural Sciences, warned crop production could fall by five to 10 percent by 2030 if climate change continues unchecked, in an interview with the official China Daily. “The output of the country’s three main foods — rice, wheat and corn — may suffer a 37 percent decline in the latter part of this century if the government fails to take effective measures to address the impact of climate change,” Tang was quoted as saying.

80 nations want farming as part of climate talks - An 80-nation conference on food security is urging U.N. climate negotiators to consider agriculture when drawing up strategies to fight climate change. The five-day meeting has ended with a call to invest in new farming practices that will curb greenhouse gas emissions and better use currently available land to feed a global population of 9 billion by 2050. About 30 percent of carbon emissions come from farming, livestock and forest destruction. Dutch Agriculture Minister Henk Bleker says agriculture must be integrated into climate negotiations and should receive some of the funds earmarked for poor countries to help them reduce emissions and adapt to changing climate conditions

At least 10 more years of R&D needed, but algae biofuels could be major contributor (particularly for jet fuel): study - If you want a comprehensive snapshot of the state of algae biofuel development you may want to read a 178-report put out by the Energy Biosciences Institute in California. The general observation is that the market is in “early gestation” and there’s at least a decade to go before algae biofuels achieve the production economics that make them competitive with conventional fuels. “It is clear from this report that algae oil production will be neither quick nor plentiful — 10 years is a reasonable projection for the R&D to allow the conclusion about the ability to achieve relatively low-cost algae biomass and oil production, at least for specific locations,” according to the report, which also goes far in separating hype from reality.

Algae for Biofuels: Moving from Promise to Reality, but How Fast? - A new report from the Energy Biosciences Institute (EBI) in Berkeley projects that development of cost-competitive algae biofuel production will require much more long-term research, development and demonstration. In the meantime, several non-fuel applications of algae could serve to advance the nascent industry. 'Even with relatively favourable and forward-looking process assumptions (from cultivation to harvesting to processing), algae oil production with microalgae cultures will be expensive and, at least in the near-to-mid-term, will require additional income streams to be economically viable,' write authors Nigel Quinn and Tryg Lundquist of Lawrence Berkeley National Laboratory (Berkeley Lab), which is a partner in the BP-funded institute. Their conclusions stem from a detailed techno-economic analysis of algal biofuels production. The project is one of the over 70 studies on bioenergy now being pursued by the EBI and its scientists at the University of California at Berkeley, the University of Illinois in Urbana-Champaign, and Berkeley Lab

Any Port in a Storm - I wrote more than a year ago that a Government Accountability Office report was overblown, claiming a 20 percent chance of the GPS system going down in the next few years because the U. S. Air Force can’t launch new satellites fast enough to replace those that are dying. I just didn’t see this as a big deal and said so.This week, however, I heard from a retired communication engineer who lectured me at great length about my various failings as a human being, but in the process made a couple points that I have to concede are correct. The first of these is that the GPS system is vulnerable to a catastrophic solar storm and we have reason to believe such a storm might be coming between now and 2013.

Europe to Invest in Massive Solar Power Plants in India - The Asian Development Bank has roped in the European Investment Bank to invest in large-scale solar power plants in India. The ADB is committed to arrange finances for India’s ambitious National Solar Mission projects. The Asian Development Bank has been working closely with many Asian countries to provide them financial, technical and policy-related support for expanding solar energy infrastructure. The ADB is playing an active role in India to make solar energy more popular. In addition to the European Investment Bank, the ADB has also attracted funding from the US Import-Export Bank and Germany’s KWF. Under the National Solar Mission, India plans to install 20,000 MW solar-based power generation capacity by 2022. The current install capacity is a dismal 14 MW. The 20,000 MW capacity also includes the off-grid rural power plants. In order to rapidly increase the installed capacity the Indian government has announced two massive solar farm projects, one each in Rajasthan and Gujarat.

Shining Light on the Cost of Solar Energy - The truth: Capturing that power, and putting it to work in the form of electricity, is relatively expensive. It’s true that the cost of solar electricity has declined over the past ten years. Along the way, the popularity of solar electricity has risen. A decade ago, fewer than 25,000 solar cells and modules were shipped in the United States every year. In 2008, that number had skyrocketed to more than 500,000. But that is still a drop in the bucket. Only about one-tenth of 1 percent of the energy consumed in the United States came from solar sources in 2008. In Germany, a country with a much more robust government incentive program, solar’s share is much larger, but still only 1.1 percent of that nation’s electricity. And, while most scientists agree solar power will be an important part of the future energy mix, there’s no clear consensus on when it will be able to compete on a large scale. In fact, the experts don’t even agree on how much solar electricity costs today.

If Al Gore’s Chicago Climate Exchange Suffers Total Failure, Does the MSM Make a Sound? - Global warming-inspired cap and trade has been one of the most stridently debated public policy controversies of the past 15 years. But it is dying a quiet death. In a little reported move, the Chicago Climate Exchange (CCX) announced on Oct. 21 that it will be ending carbon trading — the only purpose for which it was founded — this year. Although the trading in carbon emissions credits was voluntary, the CCX was intended to be the hub of the mandatory carbon trading established by a cap-and-trade law, like the Waxman-Markey scheme passed by the House in June 2009.
At its founding in November 2000, it was estimated that the size of CCX’s carbon trading market could reach $500 billion. That estimate ballooned over the years to $10 trillion.

Water Flowing Through Ice Sheets Accelerates Warming, Could Speed Up Ice Flow - Melt water flowing through ice sheets via crevasses, fractures and large drains called moulins can carry warmth into ice sheet interiors, greatly accelerating the thermal response of an ice sheet to climate change, according to a new study involving the University of Colorado at Boulder. The new study showed ice sheets like the Greenland Ice Sheet can respond to such warming on the order of decades rather than the centuries projected by conventional thermal models. Ice flows more readily as it warms, so a warming climate can increase ice flows on ice sheets much faster than previously thought, said the study authors. "We are finding that once such water flow is initiated through a new section of ice sheet, it can warm rather significantly and quickly, sometimes in just 10 years, " said lead author Thomas Phillips, a research scientist with Cooperative Institute for Research in Environmental Sciences. CIRES is a joint institute between CU-Boulder and the National Oceanic and Atmospheric Administration.

Rolling Stone: Bill Gates is investing millions to halt global warming by creating an inexhaustible supply of carbon-free energy - Bill Gates is a relative newcomer to the fight against global warming, but he's already shifting the debate over climate change. In recent years, America's wealthiest man has begun to tackle energy issues in a major way, investing millions in everything from high-capacity batteries to machines that can scrub carbon dioxide out of the air. With a personal fortune of $50 billion, Gates has the resources to give his favorite solutions a major boost. But it's his status as America's most successful entrepreneur that gives his views the most clout: "His voice carries enormous credibility about how technology can be used to solve global warming," says Fred Krupp, head of the Environmental Defense Fund.When it comes to climate and energy, Gates is a radical consumerist. In his view, energy consumption is good — it just needs to be clean energy. As he sees it, the biggest challenge is not persuading Americans to buy more efficient refrigerators or trade in their SUVs for hybrids; it's figuring out how to raise the standard of living in the developing world without wrecking the climate. Achieving that, he argues, will require an "energy miracle" — a technological breakthrough that creates an inexhaustible supply of carbon-free energy. Although he doesn't know what form that miracle will take, he knows we need to think big. "We don't really grasp the scale of the problem we're facing," Gates tells me in his office overlooking Lake Washington in Seattle. "The right goal is not to cut our carbon emissions in half. The right goal is zero."

Arab World to Face Severe Water Scarcity by 2015 - The Arab world, one of the driest regions on the planet, will tip into severe water scarcity as early as 2015, a report issued on Thursday predicts. By then, Arabs will have to survive on less than 500 cubic metres of water a year each, or below a tenth of the world average of more than 6,000 cubic metres per capita, said the report by the Arab Forum for Environment and Development (AFED)."The Arab world is already living a water crisis that will only get worse with inaction," the report says, adding per capita supply has plunged to only a quarter of its 1960 level.Rapid population growth will further stress water resources. According to UN projections, the Arabs, who now number almost 360 million, will multiply to nearly 600 million by 2050. Climate change will aggravate matters. By the end of this century, Arab countries may experience a 25 per cent drop in precipitation and a 25 per cent increase in evaporation rates, according to climate change models cited in the report.

Population growth is a choice - It took all of human history to reach one billion people early in the nineteenth century and a mere hundred years to add the next billion. We are now adding a billion every thirteen years and stand just short of seven billion people.  With this extraordinary growth, thanks largely to the exploitation of finite resources, it’s understandable that some are wilfully ignorant of limits to growth.  They are happy to live the comfortable lie, paying scant attention to peak oil and the depletion of other finite resources, the sprawl-fed loss of arable land, food security, water supply, carbon emissions or climate change.  But living on an arid desert continent with an estimated six per cent arable land, Australians in particular have much at stake as we clamour together on our thin green coastal strip.

Stronger positive feedbacks in the Arctic Sea: Larger heat transport to the Arctic, in particular in the Barents Sea, reduces the sea ice cover in this area - A new study has looked at Arctic warming and sea ice. The study concentrated on the ocean heat transport. The results: “Those models which transport more energy to the Arctic show a stronger future warming, in the Arctic as well as globally. Larger heat transport to the Arctic, in particular in the Barents Sea, reduces the sea ice cover in this area. More radiation is then absorbed during summer months and is radiated back to the atmosphere in winter months. This process leads to an increase in the surface temperature and therefore to a stronger polar amplification. The models which show a larger global warming agree better with the observed sea ice extent in the Arctic. In general, these models also have a higher spatial resolution.” And conclusion: “These results suggest that higher resolution and greater complexity are beneficial in simulating the processes relevant in the Arctic, and that future warming in the high northern latitudes is likely to be near the upper range of model projections, consistant with recent evidence that many climate models underestimate Arctic sea ice decline.”

EPA Bid for Carbon-Rule Clarity Fails to Satisfy U.S. Business, Lawmakers - The Environmental Protection Agency’s effort to give states a leading role in curbing pollution tied to global warming failed to satisfy the agency’s critics in business and the U.S. Congress.  The agency said yesterday that states can determine what pollution-cutting technologies power plants and oil refineries should use when the first national carbon-dioxide emission rules take effect next year. Environmental activists praised EPA’s flexibility. Opponents said the rules were too vague and would damage the economy.  “The energy and manufacturing sectors will essentially be in a construction moratorium that could materially hamper economic recovery,” said Scott Segal, a Washington lawyer at Bracewell & Giuliani LLP who lobbies for utilities that burn coal to make power.

Coal May Rise 12% Next Year on Asian Demand, Deutsche Bank Says - Coal burned to generate power may jump 12 percent next year on Asian demand for the fuel and supply constraints in producer nations, Deutsche Bank AG said. Contract prices for the fuel in the Japanese financial year starting April 1 will rise to $110 a metric ton from $98 in the current year, Deutsche Bank analyst Daniel Brebner in London forecast in a report dated today. Supplies of seaborne thermal coal will lag behind demand by 13 million tons next year, up from a shortage of 2 million tons this year, he wrote. “Thermal coal has the potential to be the best performer of the bulk commodities in 2011,” Brebner said. Coal imports by China, the biggest user and producer, jumped 16 percent in September from the previous month, customs data show, the fourth consecutive such increase.

Making the Case for More Nuclear Power - From yesterday's Detroit News: To be sure, we also need to consider all forms of renewable energy as they become cost-effective, but the unavoidable truth is that nuclear plants occupy a small fraction of the land required for solar and wind power. And while nuclear plants produce electricity about 90 percent of the time, wind turbines generate power, on average, only 30 percent of the time and require back-up electricity from fossil fuel turbines on days when the weather isn't cooperating. Solar energy is less efficient, providing electricity only 20 percent of the time.  Nuclear power, therefore, must play a larger role in maintaining our nation's energy security and reducing atmospheric pollution and acid rain. Nuclear power also has economic benefits, as it provides a stimulus for new jobs and revenue. The Saudis can build nuclear plants. The Turks can build nuclear plants. We can, too. The enormous power at the heart of the atom promises to benefit economies worldwide.

Study: Leaks from CO2 stored deep underground could contaminate drinking water - "Potentially dangerous uranium and barium increased throughout the entire experiment in some samples." - Carbon capture and storage (CCS) from fossil fuel plants has many problems that constrain its ability to be even 10% of the solution to the climate problem (as discussed here).  One of the biggest near-term problems is cost (see Harvard: “Realistic” first-generation CCS costs a whopping $150 per ton of CO2 — 20 cents per kWh!). But public acceptance (aka NIMBY) is also a huge problem — one that is likely to grow after the publication of this new study, “Potential Impacts of Leakage from Deep CO₂ Geosequestration on Overlying Freshwater Aquifer” (PDF here).What kind of contaminants could bubble up into drinking water aquifers:  “Potentially dangerous uranium and barium increased throughout the entire experiment in some samples.”Here’s more of the Duke release on the study that “appears in the online edition of the journal Environmental Science & Technology, at http://pubs.acs.org/doi/abs/10.1021/es102235w.”

Chromium plume spreads in Calif. town’s water -  A tiny desert town whose plight was made famous by the movie "Erin Brockovich" has seen a dramatic increase in the size of a toxic plume of chromium as it has spread to multiple groundwater wells. Water regulators earlier this year discovered a well with increasing concentrations of the cancer-causing pollutant and now even more wells have been uncovered with elevated levels, said Lauri Kemper, assistant executive officer of the Lahontan Regional Water Quality Control board. The water board on Monday ordered Pacific Gas & Electric to do additional groundwater monitoring at the site near Hinkley, about 120 miles northeast of Los Angeles."The more dispersed chromium continues to move," Kemper told The Associated Press on Tuesday. "Because of the widespread nature of the lower concentration chromium, it's difficult to capture the contamination."The contamination was first publicized during a 1996 court case in which PG&E settled with more than 600 Hinkley residents for $333 million. Many sick residents blamed the contaminated water for their crippling health problems that included Hodgkin's disease and breast cancer.

Post Europe: Environmental Damage - Who Pays? - Now that the Hungarian toxic spill is no longer making headline news, what are the longer-term implications of this environmental catastrophe? Tony Lennon looks at the potential ramifications that this recent environmental disaster will have on the European Union’s Environmental Liability Directive.  In the aftermath of the MAL Alumina toxic spill in Hungary, it has become evident that the company was ill-prepared both financially and practically for an environmental incident. MAL had very low limits of third party liability insurance (under £120k), and it would appear that it had no environmental liability cover to help pay the costs associated with restoring the damaged environment to its previous state. MAL has had to be nationalised and the Hungarian taxpayer - and probably taxpayers across the European Union - will end up having to pay for the environmental remediation and recovery costs for years to come.

Cheniere Working On Deal To Send Liquefied Natural Gas to China…A subsidiary of Cheniere Energy Inc. said Thursday that it is working toward a deal to supply liquefied natural gas from its Sabine Pass terminal in Louisiana to one of China's largest independently owned natural gas companies.  Cheniere originally built its Sabine Pass terminal, the largest regasification facility in the world, with the aim of importing LNG to the U.S. But the glut of natural gas that has come from domestic shale formations in recent years has turned the U.S. natural gas market upside down--and seems to make massive importation of LNG unnecessary.  The U.S. Department of Energy granted Cheniere permission in September to begin annually exporting up to 16 million metric tons of liquefied gas, culled from shale formations in Texas, Oklahoma, Arkansas and Oklahoma, through the Sabine Pass terminal. However, the company needs to build the exporting infrastructure first.

Scientists Fear Oil Is Settling on Bottom of Gulf - The federal government is concerned that oil from the Gulf of Mexico spill may be settling on the ocean floor, causing environmental damage where it's hardest to see. Scientists who finished a government-sponsored research expedition Thursday reported finding a small area of dead and dying corals covered with an unknown brown material on the bottom of the Gulf, about seven miles from where a BP PLC well gushed millions of barrels of oil into the water this year. The environmental damage likely resulted from the BP spill, said Charles Fisher, a biologist at Penn State University and the chief scientist on the trip, in a statement Friday. "The circumstantial evidence is extremely strong and compelling, because we have never seen anything like this," said Mr. Fisher, who, with other scientists, worked on a National Oceanic and Atmospheric Administration ship.

Where's the Gulf Oil? In the Food Web, Study Says -- Scientists say they have for the first time tracked how certain nontoxic elements of oil from the BP spill quickly became dinner for plankton, entering the food web in the Gulf of Mexico. The new study sheds light on two key questions about the aftermath of the 172 million-gallon spill in April: What happened to the oil that once covered the water's surface and will it work its way into the diets of Gulf marine life? "Everybody is making a huge deal of where did the oil go," said chief study author William "Monty" Graham, a plankton expert at the Dauphin Island Sea Lab in Alabama. "It just became food." The study didn't specifically track the toxic components of the oil that has people worried. It focused on the way the basic element carbon moved through the beginnings of the all-important food web. Graham said the "eye-opening" speed of how the oil components moved through the ecosystem may affect the overall health of the Gulf.

Exclusive: Multiple independent lab tests confirm oil in Gulf shrimp - Experts operating states apart confirm toxic content in not just shrimp, but crab and fish too. The federal government is going out of its way to assure the public that seafood pulled from recently reopened Gulf of Mexico waters is safe to consume, in spite of the largest accidental release of crude oil in America's history. However, testing methodologies used by the government to deem areas of water safe for commercial fishing are woefully inadequate and permit high levels of toxic compounds to slip into the human food chain, according to a series of scientific and medical professionals interviewed by Raw Story. In two separate cases, a toxicologist and a chemist independently confirmed their seafood samples contained unusually high volumes of crude oil and harmful hydrocarbons -- and some of this food was allegedly being sent to market. One test, conducted by a chemist from Mobile, Alabama, employed a rudimentary chemical analysis of shrimp pulled from waters near Louisiana and found "oil and grease" in their digestive tracts. "I wouldn't eat shrimp, fish or crab caught in the Gulf," . "The problems people will face, health-wise, are something that people don't understand."

Journalist Sprayed With Poisonous Corexit 9500 - video

Alaska and the Gulf of Mexico and Oil - Several articles caught my attention: first, the impact on the Gulf from the largest oil spill in US history, in particular on coral [0], and second, the attempts to get approval to drill off Alaska's coast [1]. From the second, Shell Presses for Drilling in Arctic : Shell is pressing the Interior Department to grant final approval for its Arctic projects by the end of this year so that the company has enough time to move the necessary equipment to drill next summer, when the waters offshore are free of ice.  Well, we've just experienced a massive oil spill in the Gulf of Mexico; while the visible impact on the surface has dissipated, we know that much is unknown about the effects, subsurface. One impact -- loss of already dying coral. From Dead Coral Found Near Site of Oil Spill :

Special Report: Oil and ice: worse than the Gulf spill?… "There is no climate on Sakhalin, just nasty weather," Chekhov wrote. "And this Island is the foulest place in all of Russia." More than a century on, Sakhalin's prisoners have been replaced by oil and gas workers, most of whom seem to agree that Chekhov's description still fits. The sparsely populated island -- which is the length of Britain -- has some of the most extreme weather on earth. Marine cyclones and violent snowstorms rip through its forested hills, and the ocean waters off its northern coast freeze solid for a good part of the year. In winter, temperatures drop to minus 40 Celsius and snow can pile three meters high. Workers at Exxon's Odoptu oil field, eight km (five miles) off the northeast coast of Sakhalin, had to shovel their way out of their dormitory last winter to clear pipe valves and free oil pipelines of snow. "The blizzards were so bad that at one point we had to evacuate half of the staff," Now Moscow hopes to attract global oil players to another extreme location: its icy Arctic waters. Shared by Canada, Denmark, Iceland, Norway, Russia and the United States, the Arctic may hold around one-fifth of the world's untapped oil and gas reserves according to a U.S. Geological survey.

An Arctic Oil Spill Could Linger for Years - Pulling together a lot of the existing research on cleanup technologies and how well they might work under the kind of nightmare scenarios that are all too easy to imagine -- a spill underneath a solid sheet of pack ice, for example, or oil that attaches itself to drifting ice floes and travels hundreds of miles out to sea. Cleanup could be hampered by wintertime temperatures that drop on average to minus 49 degrees, fierce Arctic storms, endless darkness and fog that shrouds the region for more than half the days of the year, said the report, prepared by Nuka Research and Planning Group LLC, and Pearson Consulting LLC. BP's upcoming Liberty production unit, slated to pump oil from beneath the Beaufort Sea by means of long-range drilling tunnels reaching from near shore, has the potential for a blowout of 20,000 barrels a day -- the highest rate in the U.S. Arctic, the report said.

Energy Investments to Hit $26trn - Saudi Arabia has completed a gigantic hydrocarbon capacity expansion programme involving investment of more than $100 billion and this will support global energy security, according to its oil minister. Ali Al-Naimi said the programme was part of overall plans by the 12-nation Organization of Petroleum Exporting Countries (OPEC) and other producers to expand their sustainable output capacity to face world demand. Addressing an energy conference in Singapore last week, he estimated producers need to pump nearly $26 trillion into the hydrocarbon sector over the next two decades to develop production capacity.

World's oil thirst leads to risks - The world's thirst for crude is leading oil exploration companies into ever deeper waters and ventures fraught with environmental and political peril. The days when the industry could merely drill on land and wait for the oil _ and the profits _ to flow are coming to an end. Because of that, companies feel compelled to sink wells at the bottom of deep oceans, inject chemicals into the ground to force oil to the surface, deal with unsavory regimes, or operate in some of the world's most environmentally sensitive and inaccessible spots, far from ports and decent roads. All those factors could make it difficult to move in equipment and clean up a spill. From the Arctic to Cuba to the coast of Nigeria, avoiding catastrophes like BP's Gulf of Mexico spill is likely to become increasingly difficult and require cooperation among countries that aren't used to working together

Global Oil Production Increased in October - Yesterday, OPEC reported a decent sized increase in oil production, and today the International Energy Agency concurs.  The chart above shows all three major agencies that report public data for global liquid fuel production, with the data since the beginning of 2008.  Interestingly, we are now within a few hundred thousand barrels/day of the all-time peak in July 2008.  I pointed out back in the spring that it was logically possible we could exceed that peak if the demand was there.  At this point, one good monthly increase could put us over that level. Of course, it's not altogether clear whether the demand will be there.  The incoming economic news flow is not too encouraging, with Ireland on the brink of default, and the G-20 leaders in disarray.  And oil prices are on the upswing again, though a lot of that is really due to currency movements. Anyway, here is the longer context since 2002, showing the whole "bumpy plateau" period since 2005.

Getting Oil Is Getting Expensive - Have a look at the chart: Over the past five years, the cost of drilling for oil and gas has crept right up to the revenue. What's going on? Well, we're getting these old fossil fuels in ever more expensive ways: deepwater drilling, tricky so-called "horizontal drilling," and hydraulic fracking. These methods are also more dangerous, as the recent mishap in the Gulf and that movie Gasland made clear. The Oil Drum speculates that some companies may be embarking on drilling projects that won't pay off at all. As the cost of drilling keeps rising, and the return on investment keeps falling, that's going to make oil more expensive and slow down the economy. I hear there's free energy from the sun though.

Oil demand set to pick up - Oil demand is expected to strengthen in the next few years as the global economic continues to recover and Asian markets consume more crude, according to an expert at the prestigious Oxford Institute for Energy Studies. Bassam Fattouh, Academic Director of the Oil and Middle East Programme at the British Institute, ruled out an immediate oil supply crunch on the grounds spare crude capacity is still high. “We are currently living in a world of spare capacity. So, we can’t really talk of an imminent supply crunch. But what we are seeing is a strong growth in global oil demand,” he told an oil conference held over the past two days at the Abu Dhabi-based Emirates Centre for Energy Studies and Research. “This robust growth in oil demand is originating from many parts of the world. It is coming from China, India, and Asia in general. Even in the US and other OECD countries, we are seeing some recovery as well though from low base.”Fattouh said the Middle East has also become an important oil consumer because of the rapid population growth and economic expansion.

Fed's dollar flood may force oil prices up - The US Federal Reserve may be paving the way for more expensive crude by releasing floods of dollars as it seeks to boost sluggish domestic economic recovery. "Cash and carry" hedging is now the principal driver of crude prices, not the fundamentals of supply and demand, said Dr Leo Drollas, the deputy executive director and chief economist of the London-based Centre for Global Energy Studies. In his speech at the energy conference of the Emirates Centre for Strategic Studies and Research, Dr Drollas was referring to the investment practice of simultaneously buying a commodity and selling a contract for later delivery. The hedger's guaranteed profit is the difference between the price of the futures contract and the lower spot price, minus storage costs. "The oil inventory disequilibrium is the key determinant of oil prices," Dr Drollas suggested. "Oil prices are driven by discrepancies between demand for oil inventories and the inventories actually held."

Oil Rises to Two-Year High as Equities, Dollar Offset Supplies (Bloomberg) -- Oil surged to a two-year high as advancing equities and a weakening dollar tempered concern of rising excess crude supplies in the U.S., the world’s largest oil consumer. Futures advanced for a seventh day as the dollar retreated from a one-week high against the euro. An Energy Department report tomorrow may show that crude stockpiles in the U.S. increased 1.75 million barrels last week from 368.2 million, according to a Bloomberg News survey of analysts. That would take it to the largest amount since May 2009. “Financial factors like the euro-dollar and equities are driving the recovery, but sustained gains on the back of fundamentals are unlikely,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “Inventories are plentiful, there are no serious supply disruptions and the dollar rebound is capping gains.”

Oil Will Be `Substantially Higher' by 2012 as Supplies Drop, Goldman Says - Oil prices will be “substantially higher” by 2012 as the global stockpile surplus shrinks and excess production capacity drops, according to Goldman Sachs Group Inc., the most profitable bank in Wall Street history.  Global economic growth will drive oil demand and reduce inventories, which are still “exceptionally high” in developed countries including the U.S., the world’s biggest user of crude, Goldman said in a report dated yesterday. Spare capacity held by the Organization of Petroleum Exporting Countries will decline as the 12-member group, which pumps 40 percent of the world’s oil, boosts supply to meet demand, the bank said.  “Despite the recent rally, we believe that forward price levels offer good hedging opportunities,” Goldman analysts, led by Allison Nathan in New York, said in the report. “We continue to expect improving fundamentals will provide additional support to prices.”  Oil climbed to the highest in two years yesterday, and is up 7 percent this month, on speculation the Federal Reserve’s stimulus program will weaken the dollar, bolstering the investment appeal of commodities. U.S. crude inventories plunged 7.4 million barrels last week, the biggest drop since September 2008, according to an American Petroleum Institute report yesterday.

Crude Oil Production Forecast to 2015 - With fresh data out from EIA Washington just this afternoon, and, on the heels yesterday of IEA Paris’ long-overdue admission of Peak Oil, I thought I would release a crude oil forecast. This is a production chart that I’ve been working on over the past few weeks. I use rough estimates of future world GDP, the recent mix of primary energy use with special attention paid to coal vs oil use, and then finally decline rates in global oil production. Despite these efforts, any forecast of this nature is at best general in nature. That said, the trajectory here is worth paying attention to.  The chart shows the most recent data through October of 2010, as current year average production now stands at 73.434 mbpd (million barrels per day). The problems in future production come through a combination of the factors I listed above, plus, the inability of the OECD to pay the significantly higher prices now required to increase global supply. These problems exist right now. Oil’s current advance once again into the 80 dollar range in part reflects the fact that the supply increase enjoyed in the latter part of 2009, is now over. That supply increase was largely funded through the supply crash of late 2008 into early 2009.Global oil availability has peaked -EU energy chief (Reuters) - The availability of oil worldwide has already peaked, the European Union's energy chief Guenther Oettinger said on Wednesday. "My fear is that the global consumption of oil is going to increase, but European oil consumption has already reached its peak. The amount of oil available globally, I think, has already peaked," Oettinger told a news briefing in Brussels. He was presenting a new EU energy strategy for investing 1 trillion euros over the next decade in a common EU energy network, to curb the bloc's dependence on fossil fuel imports.

UC Davis News :: New forecast warns oil will run dry before substitutes roll out - At the current pace of research and development, global oil will run out 90 years before replacement technologies are ready, says a new University of California, Davis, study based on stock market expectations. The forecast was published online Monday (Nov. 8) in the journal Environmental Science & Technology. It is based on the theory that long-term investors are good predictors of whether and when new energy technologies will become commonplace. “Our results suggest it will take a long time before renewable replacement fuels can be self-sustaining, at least from a market perspective," said study author Debbie Niemeier, a UC Davis professor of civil and environmental engineering. Niemeier and co-author Nataliya Malyshkina, a UC Davis postdoctoral researcher, set out to create a new tool that would help policymakers set realistic targets for environmental sustainability and evaluate the progress made toward those goals.

IEA World Energy Outlook 2010 Now Out; a Preliminary Look - The International Energy Agency issued its annual energy forecast today for 2010. It consists of a three volume report, plus an executive summary and a press release. The website can be found here. In the next few weeks, we will be analyzing the report. At this point, we can only point to a few of the summary findings. One clear concern is that demand will be rising--especially from China and India. Another is that prices (in inflation-adjusted terms) will be rising. A third concern is that conventional oil production will no longer be able to rise.  The above scenario shows conventional crude oil on a plateau to 2035 at a level below recent production. This graph is from the "New Policies" scenario, so reflects some cutback in demand as a result of governmental policies from what the reference scenario would assume.

IEA Acknowledges Peak Oil - If you go to the executive summary of the 2009 International Energy Agency World Energy Outlook, and search for "peak oil", your browser will come up empty.  The whole subject was so beneath the dignity of a serious energy agency that they didn't even bother mentioning it. However, yesterday, the 2010 IEA World Energy Outlook became available.  And if you repeat the exercise in that executive summary, you will come upon a section titled: Will peak oil be a guest or the spectre at the feast? Followed by an explicit discussion of the whole question.  The IEA's position is summarized in the graph above - conventional crude oil production has already peaked in 2006!  Suddenly, the subject of impending peak has gone from not worthy of discussion to in the past already!

New Statesman - The age of cheap oil is over - We are now inhabiting a 'post-peak' world. That is the implication of the International Energy Agency's (IEA) new report, World Energy Outlook 2010, which in its 25-year 'New Policies Scenario' projects that it is most probable that conventional crude oil production "never regains its all-time peak of 70 million barrels per day reached in 2006." In this scenario, crude oil production is most likely to stay on a plateau of around 68-69 million barrels per day. The IEA blames a number of factors for this - a combination of supply constraints due to below-ground geological resource limits, and above-ground factors such as political obstacles to fully exploiting existing reserves (such as in Iraq), as well as international commitments to reducing fossil fuel emissions to meet climate targets. So is this the end of industrial civilization as we know it? Not quite. Or perhaps, not yet. Despite the peak of conventional oil production, the IEA concludes that total growth in liquid fuels from other unconventional sources - such as tar sands, oil shale and natural gas liquids - will continue to make-up for the short-fall in crude until around 2035. But while this means there will be no imminent fuel shortages as such, it also means, in the words of IEA chief economist Fatih Birol, "The age of cheap oil is over."

Energy Price Spike Looms, Agency Says - The International Energy Agency warned Tuesday that governments aren't doing enough to prepare for the next spike in energy prices. The Paris-based IEA said more must be done to increase energy efficiency and boost green technologies in order to meet what it predicts will be a 36 per cent jump in energy demand — increasingly driven by China — between 2008 and 2035. The IEA — a policy adviser to 28 member countries, mostly industrialized oil consumers — predicted in its annual World Energy Outlook that global oil demand will rise to 99 million barrels a day by 2035. That would be some 15 million barrels a day higher than last year, but a slower increase than the 105 million barrels a day by 2030 it forecast last year.

Reverse Bubbleomics: What If OPEC Figures Out Crude Oil’s Fair Price is $150? The International Energy Agency (IEA) recently announced their 2009 projection of when oil production would peak was changed from 2030 to 2020, although in a bemusing twist they said it would never ever exceed the peak that was reached in 2006 of 70 million barrels per day. Err…just a small point there; perhaps someone can help me out here? Like I’m not very smart, but the way I read that it looked to me like they were saying that “Peak Oil” was in 2006? http://af.reuters.com/article/energyOilNews/idAFLDE6A70SK20101109 They also predicted $100 oil by 2015 and $200 by 2035 although they don’t say how they calculated that. But if you assume (a) that the share of GDP that will be spent on oil is constant (b) that right now the price of oil is just right (according to the theory of Parasite Economics it is http://www.marketoracle.co.uk/Article10998.html) (c) broadly static production capacity over the next ten to twenty years, and (d) 5.5% global GDP growth (nominal), then you get to those numbers. Except that oil demand is not elastic.  $147 oil in 2008 proved that, the price went up, demand was hardly affected, and then the players blinked. In that year USA spent $450 billion importing oil; if oil had cost $147 for a whole year they would have spent $750 billion. That makes QE2 look like chump-change.

The unsung development miracles of our time - Which are the countries that have improved their human development indicators the most since 1970 relative to their peers? You’d be surprised, as I was, to find that the top 10 is dominated not by East Asian superstars, but by Moslem countries: Oman, Indonesia, Saudi Arabia, Tunisia, Morocco, and Algeria. This year’s Human Development Report is full of neat analysis and results, including this one.  Leaving aside the oil exporting countries, the North African cases are particularly interesting. As Francisco Rodriguez and Emma Samman, two of the report’s authors, note, Tunisia, Morocco, and Algeria have experienced remarkable gains in life expectancy and educational attainment, leaving many Asian superstars in the dust. Only Tunisia among the three is a high growth country, underlining one of the report’s main findings that economic growth and human development often diverge significantly, even over as long a time frame as 40 years.

In Forecast for Global Energy Use, China Looms Large - China’s push for rapid economic development will dominate global energy markets and be the single biggest force in spurring higher oil prices and carbon emissions linked to climate change over the next quarter-century, the International Energy Agency reported on Tuesday.  At the same time, however, China is poised to be the driving influence behind the development of renewable energy like wind and solar power, according to the agency’s annual energy outlook.  The agency, which is based in Paris and advises the industrialized nations, predicted that Chinese energy demand would soar 75 percent by 2035, accounting for more than a third of the growth in global consumption. While China today accounts for 17 percent of world demand for energy, it should account for 22 percent in 25 years, at the same time that India and other developing countries also expand their energy use.  The growth in Chinese energy consumption has already been breathtaking, according to the report. Over the last decade, China’s energy demand has doubled. While China used only half as much energy as the United States in 2000, it actually surpassed the United States in 2009 as the world’s largest energy user.

Copper Surges to a Record on Rising Inflation, Supply Shortfall -- Copper jumped to a record after China's inflation reached a two-year high, prompting investors to buy commodities as a hedge against rising consumer prices amid a credit rating update by Moody's Investors Service. Three-month futures on the London Metal Exchange advanced as much as 2.4 percent to $8,966 a metric ton, surpassing the previous peak of $8,940 set in July 2008. The contract, which more than doubled last year, has advanced 21 percent in 2010 on speculation that global supply will lag behind demand, and on prospects for a weaker dollar. "The inflation number should be bearish as it signals the government will keep on trying to cool the economy," said Zhang Xi, an analyst at Luzheng Futures Co. "However, the market is taking it as a bullish factor for higher commodity prices going forward as investors seek to hedge against rising costs,"

Rare earth prices to rise again? (Reuters video)

Don't let China hold rare-earths to ransom again - We're all screwed over this China rare earths thing, aren't we? After five weeks of withholding shipments, the Chinese seem to have let some of them go again, but if they can keep their precious cargo to ransom once, they can do it again, can't they? The problem is, as those who stayed awake in chemistry class will know, that much of these whizzy modern electronic thingies that we all make our living with depend upon the lanthanides (those 15 elements in the funny little box at the bottom of the periodic table). Hard drives and windmills need neodymium for the magnets, CFL bulbs need terbium, MRIs need lutetium, CRTs need europium and so on – all the way down to metal halide bulbs needing the scandium that I deal with. The further problem is that China currently produces 95 to 97 per cent of the world's supply of these metals – and if they're playing silly buggers with supply then WTF are we going to do?

Surging Rare-Earth Prices Spur Mining in Kazakhstan, Kyrgyzstan, Greenland - Surging rare-earth prices are spurring developments of deposits in Kazakhstan, Kyrgyzstan and Greenland as China cuts exports of the metals used in BlackBerrys, televisions and Toyota Motor Corp.’s hybrid cars.  Sumitomo Corp., Japan’s third-largest trading house, and its local partner in Kazakhstan plan to start a pilot plant about the end of next year to produce rare earths from uranium tailings, said Yerzhan Ishanov, deputy director of general affairs at Summit Atom Rare Earth Co., Sumitomo’s venture with Kazatomprom, Kazakhstan’s state-owned nuclear company.  China, the source of more than 90 percent of the world’s rare earths, in July reduced its second-half export quota by 72 percent to ensure domestic supply. Prices have jumped as much as sevenfold in the past six months, prompting companies including Glencore International AG, Stans Energy Corp. and Greenland Minerals & Energy Ltd. to seek to restart and open mines.  “For main applications like rare-earth magnets and glass catalysts, the (demand) increase is from 10 to 15 percent a year,” Summit Atom’s Ishanov said. Japan’s consumption of the metal products is about 40,000 metric tons a year at present, he said.

Trade Deficit decreases in September - The Census Bureau reports: [T]otal September exports of $154.1 billion and imports of $198.1 billion resulted in a goods and services deficit of $44.0 billion, down from $46.5 billion in August, revised. The first graph shows the monthly U.S. exports and imports in dollars through September 2010. After trade bottomed in the first half of 2009, imports increased much faster than exports. Over the last five months, both exports and imports have been relatively flat. The second graph shows the U.S. trade deficit, with and without petroleum, through September. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.The petroleum deficit decreased slightly in September, and the trade deficit with China decreased slightly (NSA).

Econbrowser: East Asian Exchange Rates and China's Trade Surplus - China's exchange rate regime has generated consternation in recent years. However, since much of the value-added of China's exports comes from other East Asian countries, economists should focus on exchange rates throughout the region and not on the renminbi alone.  China1s trade surplus, as Figure 1 shows, is entirely in a customs regime called processing trade. Imports for processing are intermediate inputs such as hard disk drives that are brought into China for assembly and re-export. Processed exports are final goods such as computers that are produced using the imported inputs. Processed goods are produced within East Asian production networks. These networks involve complicated combinations of intra-firm trade, arm's length transactions, and outsourcing (see Kimura and Ando, 2005) [1]. Parts and components and semi-finished goods often flow back and forth several times between East Asian countries before going to China for final assembly and re-export. The finished products then flow disproportionately to Western countries and especially to the U.S

China Could Surpass US In 2012– By One Economic Measure - China’s continued rapid growth should make it the main driver of the global economy next year as the U.S. slows down, the Conference Board said in a report published Wednesday. In just two years, the Asian country could even overtake the U.S. as the world’s largest economy — at least by one economic measure, the research group said in its annual global outlook. China’s economy should grow by 9.6% in 2011 after expanding by 10% this year. By contrast, the U.S. economy is seen slowing to just 1.2% growth next year from 2.6% in 2010.According to the most commonly used way to compare economic size, the gap between second-place China’s $5.0 trillion economy and the U.S.’s nearly $15 trillion output remains large. By that measure, it could take China more than a decade to match the U.S. even at the current very high growth rates, which will be hard to sustain for the Asian country. But things look different when considering purchasing-power parity (PPP), which takes into account the goods and services a country’s currency actually buys at home and is a measure that’s closely watched by some professional economists, including at the Conference Board. Taking into account the difference in prices of the same goods between countries — in other words, measuring the real purchasing power people have in each country — the think tank predicts China could have a larger economy than the U.S. by 2012.

Chinese acquisitions: China buys up the world - IN THEORY, the ownership of a business in a capitalist economy is irrelevant. In practice, it is often controversial. From Japanese firms’ wave of purchases in America in the 1980s and Vodafone’s takeover of Germany’s Mannesmann in 2000 to the more recent antics of private-equity firms, acquisitions have often prompted bouts of national angst.  Such concerns are likely to intensify over the next few years, for China’s state-owned firms are on a shopping spree. Chinese buyers—mostly opaque, often run by the Communist Party and sometimes driven by politics as well as profit—have accounted for a tenth of cross-border deals by value this year, bidding for everything from American gas and Brazilian electricity grids to a Swedish car company, Volvo.  There is, understandably, rising opposition to this trend. The notion that capitalists should allow communists to buy their companies is, some argue, taking economic liberalism to an absurd extreme. But that is just what they should do, for the spread of Chinese capital should bring benefits to its recipients, and the world as a whole.

China and antidumping - Over the last decade, China has been the target for the largest number of antidumping measures of any country in the world. With the onset of the global crisis, antidumping has becomes even more in vogue (Bown 2010). How China reacts to these measures and the knock-on effects for other countries is becoming increasingly important. This column examines the impacts and argues that China should be paying more attention to measures that come from its main trading partners.

Costello: On Trade - When speaking of economics, one very old and fundamental element is trade. From prehistoric times, societies/cultures traded. Egyptians, Babylonians, Chinese, Greeks, Phoenicians, Romans, Aztecs, and Incas, all had great trading networks. Trade is in no way a development of industrial capitalism or more recently of corporate globalization, it is far older. However, many of the myths, theories, and practices valuing modern trade developed over the past two-hundred years. Particularly a wrong-headed doctrine that all trade is good, which can traced back to the particular place and time when private international merchants were attempting to break-up the monopolies of state mercantilism. Over the past fifty years, the world, and particularly the United States went completely to the other extreme, abdicating all state power on trade to Wall Street and global mega-corporations to the detriment of both the United States and the rest of the world. Greider has a good piece in The Nation laying out some of the fundamental issues involved, particularly: Washington must also change the rules for how American business and finance operate. Only in America do multinationals get to behave like free riders, with no strings attached. They harvest public money as subsidies and investment capital, they are protected by US armed forces and diplomacy, and they are rescued when they get into trouble. It is a one-way relationship, and the American public knows it.

History lessons for a world out of balance - The prevailing rhetoric about currency wars smacks of the 1930s, when a sauve qui peut mentality marred international monetary relations. What are the lessons of that beggar-thy-neighbour period for Group of 20 policymakers meeting at a time of renewed uncertainty in sovereign debt markets? While the world has so far avoided the extreme loss of output experienced in the Great Depression, history suggests, among other things, that competitive devaluations and capital controls are the inevitable consequence of surplus countries failing to take any responsibility for global payments imbalances. The 1930s gold standard was a fixed exchange rate system in which deficit countries were required to adjust by way of deflation rather than devaluation. Surplus countries, in contrast, incurred no penalty for accumulating gold. Barry Eichengreen, a leading expert on the gold standard, argues that far from being the stabilising influence it was perceived to be, the gold standard was itself the main threat to financial stability and prosperity between the wars. While World Bank president Robert Zoellick, in his call on this page for gold to be given a new role in the monetary system, was not advocating a return to the gold standard as such, Mr Eichengreen’s verdict suggests even a move to use gold as a reference point could be risky.

Protectionism on the eve of the Seoul G20 summit - The Korean hosts of this week's G20 summit are apparently keen to raise the profile of protectionism and to develop a development-friendly trade initiative. With these possible goals in mind the Eighth Report of the Global Trade Alert, published today, assesses the global state of protectionism, the quality of G20 leadership on trade, and the harm done to the most vulnerable developing countries by other country's beggar-thy-neighbour policies.

Geithner's Four-Point Plan for the G-20 is Nothing but a Wish-List - Please consider A Four-Point Plan for the G-20 The deep economic challenges left by the crisis in the established economies and the prospect of rapid expansion in emerging economies necessitate a new agenda for international economic cooperation. Four objectives define this new agenda for global cooperation. First, we must work together to strengthen global economic growth. The main risk for the world is not inflation in the advanced economies, where inflation expectations are stable at relatively low levels, but that the advanced economies underachieve on growth. Second, because of this risk, we need to strike a balance on the pattern of growth across countries. Balance matters not for its own sake, but because it is critical to strong and sustained growth globally and to future financial stability. Third, to help smooth these transitions, we need a new framework for cooperation to allow exchange rates to reflect economic fundamentals and support needed structural reforms. And finally, we need to continue to keep our markets open and work to expand trade and maintain a level playing field across countries

G-20 Spat Risk Eases as U.S. Downplays Surplus Goal - U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit. The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”  Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.

Germany Stands Up To U.S. In Fight Over Surplus (CBS)  In a heated war of words over Germany's incredible $23 billion trade surplus with the United States, German Finance Minister Wolfgang Schauble says the U.S. has only itself to blame.  Germany and the United States are set to meet at the Group of 20 meeting of industrial and developing nations beginning Wednesday night in Seoul, where Treasury Secretary Timothy Geithner was hoping to put some kind of cap on the unfavorable-to-the-U.S. trade ratios with Germany and China.  Schauble, however, says his country will do no such thing, and blames the US for long-term economic policies that are "in deep crisis."  Schauble said in an interview with the German news magazine, Der Spiegel, "The U.S. has been living on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses."

Straight out of Mad Men: US markets import protection as export promotion - Last month the US Department of Commerce announced a series of proposals to strengthen the enforcement of US trade laws. This column argues that these proposals will directly undercut President Obama’s trade commitments announced in his 2010 State of the Union Address – reducing access to critical inputs for US firms and increasing the chances that they face the same treatment abroad. It begs US policymakers to reconsider.

The NYT Times Has Problems With Arithmetic, Economics and Editorializing - In introductory economics students learn that in a system of floating exchange rates (like the one we have), trade deficits and surpluses are eliminated through changes in the exchange rate. That is the point of the float. This means that if a country has a trade deficit, like the United States, then we should expect its currency to fall. This means that when countries that complain about the U.S. trade deficit complain about the decline in the value of the dollar, as the NYT claims is the case with Germany, China, and Brazil, these countries are saying that they don't understand economics. In this case, the news is that major economic powers are being governed by people who don't know economics. This would be like countries promoting their exports and then complaining that foreigners were buying up their output. If these countries want the United States to reduce its trade deficit then they want the dollar to fall. There is no other plausible mechanism to reduce a trade deficit. In the article the drop in the dollar is described as the "easy way out." It should also have been described as the "only way out."

The return of capital controls - The unholy trinity in open economy macroeconomics is pretty simple. It's impossible for a country to do the following three things at the same time:  1) Maintain a fixed exchange rate. 2) Maintain an open capital market  3) Run an independent monetary policy. One of the issues with macroeconomic policy coordination right now is that different countries have chosen different options to sacrifice. China, for example, has never opened its capital account. The United States, in pursuing quantitative easing, has basically chucked fixed exchange rates under the bus, no matter how many times Tim Geithner utters the "strong dollar" mantra in his sleep to reporters.   These  policies are generating a fair amount of blowback from the rest of the world, forcing President Barack Obama to defend the Fed's actions. And it appears that the developing countries are mostly following China's path towards regulating their capital account to prevent exchange rate appreciation and the inward rush of hot money.   How does this end? I think it's gonna end with a lot more capital controls for a few reasons.

Why the Tea Party is bad news for globalization - The Pew Research Center's newest poll on Americans' attitudes to trade contains some striking findings.  The most significant, to me, is that support among Republicans for trade agreements has collapsed in less than a year by 15 percentage points.  Remarkably, most Republicans now think trade agreements are bad for the U.S.  As the table below shows, Republicans who support the Tea Party are even more hostile to trade agreements than the rest.   Democrats are free traders by comparison!

The End of Free-Trade Globalization - The world economy is on the brink again, facing a crisis of epic dimensions for reasons largely obscured by the inflamed politics of 2010. Against their wishes, the United States and China have been drawn into an increasingly nasty and dangerous fight over currencies and trade. American politicians, especially desperate Democrats, have framed the conflict in familiar moral terms—a melodrama of America wronged—and demand retaliation. Other nations, sensing the risk of a larger breakdown, have begun to take protective measures. Every man for himself. The center is not holding. Some free advice for President Obama: take a deep breath, admit the Democratic Party has failed to grasp the enormity of economic upheaval in this country—and start using government's powers to create jobs, jobs, jobs.

Buy American tea - PEW has conducted a detailed survey of American views on the subject of trade, and the results are both interesting and disheartening. As you might expect, continued economic weakness has eroded positive views of the benefits of trade. In 2006, 44% of Americans thought free trade agreements were good for the economy and only 35% felt they were bad. In October of this year, those percentages were reversed. Scepticism of increased trade with China is particularly rampant. Americans feel positively, on net, about increased trade with Mexico and India, but a plurality of American respondents think more trade with China would be a bad thing for the American economy. Where things get really interesting is when Pew breaks out results by political party. Democrats view free trade agreements more favourably than independents who few them more favourably than Republicans. And Tea Party Republicans are the most sceptical of all. Just 24% of Tea Partiers think free trade agreements are good for America; 63% say they're bad.

Is America Catching the “British Disease?” - In the United States, the scent of decline is in the air. Imperial overreach, political polarization, and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to the “British disease.” Doomed to slow growth, the US of today, like the exhausted Britain that emerged from World War II, will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty. In thinking about these prospects, it is important to understand the nature of the British disease. It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain’s failure in the late nineteenth century to take its economy to the next level.

Inflation under-statement sparks row in China -  (Reuters) - With price pressures on the rise in China, a rare public spat has broken out in government circles about whether the statistics agency is suppressing the full truth of how high inflation really is. Many Chinese have long harboured suspicions about the quality of official inflation data, saying that it does not adequately capture soaring property prices or food costs. But criticism took a curious turn this week when the Chinese Academy of Social Sciences, a top government think-tank in Beijing, published a research article arguing that the consumer price index had been under-stated by more than 7 percent over the past five years. The National Bureau of Statistics, which regularly defends the quality of its output, swung into action. "Obviously, the article's conclusion does not hold any water," Sheng Laiyun, NBS spokesman, told reporters. The think-tank report found a gap between historical inflation figures and those that can be calculated based on the supposed weights assigned to the various components of the consumer price basket. The inference was that the NBS might have been massaging reported data by changing weightings without informing the public.

China inflation unlikely to ease soon: economist (Reuters) - China's consumer price inflation will hover above 3 percent in the final quarter of this year, driven by global excess liquidity and a spike in agricultural prices, a senior government economist said in remarks published on Monday. Fan Jianping, chief economist with State Information Center, a think tank under the powerful National Development and Reform Commission, also said that interest rate increases would not help to curb inflation, although they could possibly help contain asset price bubbles. "Global agricultural prices will continue to climb up for a while under the U.S. quantitative easing policy," Fan said. "Agricultural prices will have monetary foundation to stabilize only when the global money supply returns to neutral." A surge in hot money inflows, combined with domestic speculative money, will drive up Chinese agricultural prices, he told the official China Securities Journal. "Interest rate hikes are not able to curb vegetable and pork price rises," he said. "But rate rises are negative for the stock and property markets, so they may be able to contain asset bubbles."

Global economy: Meet China's "dolphin tribe" - They're called the "dolphin tribe," a pun on the Mandarin word for "hoarding."They're an example of how a weaker U.S. dollar is starting to affect everyday lives in China and across east Asia — and why, even as Asia-Pacific leaders meet in Yokohama to hash out a free trade agreement, the "currency wars" have only just begun. "Dolphin tribe" (haitunzu) is one of the latest buzzwords on the Chinese-language internet, and it refers to Chinese who have begun hoarding everyday goods on expectations of more price hikes. Ms. Zhang, from the southern metropolis Guangzhou, told China's Southern Daily that hoarding had become an obsession, and she's even snatching up makeup and towels. "I'm hoarding everything I use — I've become a 'dolphin'," she told the paper. It's not just hysteria. China just shocked analysts by posting 4.4 percent rate of inflation in October, far higher than expected — and some economists are now saying the rate could soon hit 6 percent. According to the Southern Daily, prices at Guangzhou supermarkets are soaring: cooking oil shot up 15 percent in late October; sugar, 13 percent, ditto garlic, ginger, apples and rice wine.

Economist Report: China’s Future is Inland - China’s economic future lies in its center–the 20 biggest cities in inland China, to be exact. The Economist, in a new report, has dubbed this trend CHAMPS (named after some of the leading cities in its inland Top 20 list: Chongqing, Hefei, Anshan, Maanshan, Pingdingshan and Shenyang). These cities, located in rural areas, will lead Chinese urbanization and economic growth in coming years.  Indeed, since 2007, they have already been outpacing their coastal rivals in terms of growth. For example, “Zhengzhou, the capital of Henan province, will in 2020 have a bigger economy than Sweden, Hong Kong or Israel,” writes the Economist. “China’s megacities will attract a relatively high proportion of upper-income earners and their sizes will offer economies of scale and scope that will drive productivity growth in the service sectors.” Here’s more from The Economist Intelligence Unit’s CHAMPS report, which we received a preview of:

Chinese workers build 15-story hotel in just six days - As the United States and China battle over the finer points of currency manipulation at the G-20 summit, American negotiators may want to take note of this startling testimonial to the productivity of Chinese workers: A construction crew in the south-central Chinese city of Changsha has completed a 15-story hotel in just six days. If nothing else, this remarkable achievement will stoke further complaints from American economic pundits that China's economy is far more accomplished than ours in tending to such basics as construction. http://www.youtube.com/watch?v=Ps0DSihggio&feature=player_embedded

Get Ready for China’s Big Development Switch -  China's recently released a draft plan for the next five years is nothing short of full-blown strategy for transforming the nation's development model. In a first for the government's planning process, the 12th Five-Year Plan for the 2011-2015 period outlines specific steps designed to raise consumption levels and make China a leading consumer market. One message is clear: The Chinese government wants to foster a national transformation from "world's factory" to "world's market." Can China effectively change its development model? The answer will determine whether the nation can indeed rise to the top among global consumer markets and, indeed, whether the next five-year plan works. China cannot afford to delay the scheduled change from an "extensive" resource- and export-driven growth model to an "intensive" model that's driven by technological advancement and efficiency. The ills of extensive economic growth in China – results of the nation's planned economy – are well-known. Plans to switch models have been on the agenda for years. The 9th Five-Year Plan passed by the National People's Congress in 1996 said a basic task would be to switch from extensive to an intensive growth model. The 17th National Congress of the Communist Party in 2007 stressed the need to accelerate transformation, thus expanding the effort to transition from economic growth to comprehensive development.

General Electric Plans to Invest $2 Billion in China - General Electric Co. plans to invest more than $2 billion in China in technology and financial service ventures and research, adding 1,000 jobs in a country Chief Executive Officer Jeffrey Immelt is targeting for growth. GE intends to invest more than $1.5 billion in joint ventures with Chinese state-owned companies in “key high- technology sectors,” it said in a statement today. The Fairfield, Connecticut-based company will spend $500 million on product development and customer innovation centers through 2012, where the jobs will be added. Immelt yesterday appointed Vice Chairman John Rice to accelerate a push to bolster exports and expand partnerships in countries building infrastructure to support economic growth, such as China and India. GE expects to have $20 billion in discretionary cash by year-end partly for investment to boost sales, which missed analyst estimates in the third quarter. “China and India will lead future growth in energy demand,”  “They will need more roads, more power plants and more railways to meet the needs of their soaring economies, generating opportunities for equipment manufacturers and technology providers like GE.”

China Pension Chief Dai Proposes Setting Dollar Trading Range - China’s pension-fund chief proposed setting a trading range for the dollar as officials in the fastest-growing major economy fault the U.S. for adopting policies without regard for the American currency’s global role.  The world needs a stable dollar, Dai Xianglong, chairman of China’s National Council for Social Security Fund and a former head of the nation’s central bank, said today at a forum in Beijing. He spoke two days before a Group of 20 summit aimed at addressing global imbalances in trade and investment flows.  Dai’s proposal follows charges by Chinese officials that the Federal Reserve’s plan to buy $600 billion of Treasuries risks inflating asset bubbles in emerging markets. While Treasury Secretary Timothy F. Geithner said Nov. 6 the U.S. takes its global responsibilities “very seriously,” Fed Chairman Ben S. Bernanke has said his focus must be on the American economy.

Cost To Insure China Sovereign Debt Falls, Rises For US - The cost of insuring bonds issued by China using credit derivatives fell 1.1% Thursday morning after Moody's Investors Service raised its ratings on the government's bonds one notch to Aa3 from A1. Credit default swaps, which are over-the-counter derivatives that investors use to bet on whether a company or government will default on its debt, were quoted as tight as 55 basis points--equivalent to $55,000 annually to cover $10 million of bonds for five years--compared with $58,000 when markets in Beijing closed, according to data provider Markit. The cost later rose a bit, to 57.5 basis points, but is still 26.5% cheaper than it was this time last year, when it cost $78,630. By comparison, CDS on U.S. sovereign debt has become costlier. The price to insure Treasurys over five years rose to 44 basis points Thursday, or $44,000 annually for five-year protection, up from Wednesday's close of $41,000. That's 60% more expensive than it was a year ago, when it cost $26,700.

Chinese trade surplus brings currency war into focus - Pressure grew on China and its currency policy ahead of the G20 summit as the country reported a jump in its trade surplus.  China's exports leapt 22.9% in October from a year earlier, to a total of $135.98bn, while imports climbed 25.3% to $108.83bn. The surplus hit $27.15bn (£19.66bn) last month after falling to its lowest level in five months in September, of $16.9bn, customs authorities said. The figures came before a gathering of the Group of 20 nations in Seoul that is set to focus on rebalancing the global economy. China's exports leapt 22.9% in October from a year earlier, to a total of $135.98bn, while imports climbed 25.3% to $108.83bn. Analysts said the figures are likely to fuel debate over trade imbalances, especially as the US is expected to report a trade deficit of $45bn later today. On Tuesday, UK government hopes that economic recovery will be spearheaded by manufacturing and exports took a dent as official figures showed the UK running a record trade deficit in the three months to September.

China Says Fed Easing May Flood World Economy With 'Hot Money' - Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might “shock” emerging markets by flooding them with capital. The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters in Beijing today. With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said.“Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,” Zhu said. The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”

World Bank Says Asia May Need Capital Controls to Curb Bubbles - Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said.  Any curbs should be “targeted,” temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said in an interview. This could include countries tying up funds for as long as a year to help limit hot-money, she said.  “Certain assets will become, potentially, bubbles,” Sri Mulyani said in Kuala Lumpur late yesterday. “The quantitative easing will create a lot of liquidity flooding to the East Asia Pacific region, because it is the most dynamic and attractive with a higher return on investment.”

Capital controls won’t stop inflows - We think there is a low probability of new concrete measures being announced at the G20 meetings this week either to correct global imbalances or to relieve upward pressure on emerging-market (EM) currencies. The US has already committed to another phase of quantitative easing, and is very unlikely to accept constraints on its monetary autonomy for the convenience of emerging-market policy authorities. The liquidity injection this entails together with low yields in the developed economies are likely to further push the asset diversification flows that we have seen this year, with emerging markets among the prime beneficiaries. Emerging markets have taken up US$65bn of equity portfolio and $38bn of bond portfolio inflows in the year to date, with more inflows probably on their way. Emerging market exchange rates and local asset valuations are likely to be pushed further upwards. Moreover, the ‘push factor’ created by low yields in developed economies is only half the story. Emerging markets (EM) are an attractive long-term destination to investors for their strong growth prospects, low public and private sector debt levels, and generally strong external payments positions. EM GDP this year is on track for 7.7 per cent growth against 2.4 per cent in the developed economies.

New Rules for Hot Money - Nouriel Roubini - Capital flows to emerging-market economies have been on a boom-bust merry-go-round for decades. In the past year, the world has seen another boom, with a tsunami of capital, portfolio equity, and fixed-income investments surging into emerging-market countries perceived as having strong macroeconomic, policy, and financial fundamentals. Such inflows are driven in part by short-term cyclical factors (interest-rate differentials and a wall of liquidity chasing higher-yielding assets as zero policy rates and more quantitative easing reduce opportunities in the sluggish advanced economies). But longer-term secular factors also play a role. These include emerging markets’ long-term growth differentials relative to advanced economies; investors’ greater willingness to diversify beyond their home markets; and the expectation of long-term nominal and real appreciation of emerging-market currencies. Given all this, the most critical policy question in emerging markets today is how to respond to inflows that will inevitably drive up their exchange rates and threaten export-led growth.

IMF Board Votes to Expand Power of Emerging-Market Economies‎ - The International Monetary Fund's executive board voted Friday to boost the role of emerging economies within the organization as part of a move to increase its role as the world's arbiter on economic matters. The vote to overhaul its governance structure is a critical part of an agreement reached in October by finance ministers from the Group of 20 industrialized and developing nations. The IMF pledged to hold the vote before the G-20 leader's summit, set for Nov. 11-12. The change will result in increased powers for China, Brazil, Russia and India by allowing them to become larger shareholders in the IMF. The changes include a rebalancing of quota shares, which determine voting powers of IMF member countries as well as the financial contribution each country contributes to the fund. The changes will also affect which countries hold seats on the IMF's executive board. The changes would also double the total contributions countries make to the IMF, a figure the IMF put at $755.7 billion at current exchange rates.

QE2 worsens China’s currency dilemma - Whatever the effects of QE2 on the US, its impact on China will be major. Because China has attached its renminbi to the dollar, the ‘dollar economy’ consists of the US and China - the so-called “Chimerica”, though as an optimal currency area it might better be called Chimera. In this dollar economy, China is heavily undervalued (though nobody can assess by how much) and the US is overvalued. The Fed’s newly created liquidity could in effect “flow downhill” to the undervalued portion of the dollar economy. Already overheated, inflationary China will get a much larger dose of cost-push inflation in food and energy than the US. Food is one third of China’s CPI, versus 14 per cent in America. This makes the recent 20 per cent rise in food commodity prices more important. Meanwhile, China’s competitive leg-up vis-à-vis Japan, Korea, Germany and others will be exacerbated by a further 5 per cent trade-weighted devaluation (in line with the dollar) - a currency impact that is likely to take effect much more quickly than any benefit from devaluation to the US. So higher Chinese inflation arising from QE2 is a double-whammy: demand-pull as well as cost-push.

China Newspaper Warns of Disaster Over Fed Move - Washington's latest move to print more money is a form of indirect currency manipulation that could lead to a new round of currency wars and even global economic collapse, a leading Chinese newspaper warned on Monday. The United States last week announced it would inject an extra $600 billion into its banking system in its latest effort to boost a fragile economic recovery, prompting criticism from a number of countries, notably China and Germany. The overseas edition of Communist Party mouthpiece the People's Daily said in a front page commentary that this quantitative easing was bad for China and bad for the world. "In essence this is an uncontrolled increase in money supply, equal to indirect exchange rate manipulation,"

QE2 and the Titanic - China reported an October trade surplus of $27 billion Wednesday. This is a very big number and not one likely to soothe anger directed at China. It will be very hard for China credibly to argue that it is trying to contribute to global growth while pulling in more and more foreign demand. Here is the article in the People’s Daily: China’s exports rose 22.9 percent in October from a year earlier, while imports increased 25.3 percent,  China’s trade surplus expanded to 27.1 billion U.S. dollars last month, compared with 16.88 billion U.S. dollars in September, making the October figures the second highest this year after July’s 28.73 billion U.S. dollars. Last week I argued that Tim Geithner’s proposal on restricting current account imbalances directly, rather than targeting currencies, was a good idea. October’s trade surplus shows both why it is a good idea and why it will be hard to accept.The proposal was a good idea because trade responds to a lot more than the level of the currency, and just pushing for currency adjustment might have no impact on the balance. My biggest concern was that if countries like China were forced to raise the value of their currencies faster than they liked, or if tariffs were imposed on their products, there would be a huge temptation to intervene in other areas, especially by lowering real interest rates.

Geithner Seeks Yuan Gains, Says It's `Overwhelmingly' in China's Interest - U.S. Treasury Secretary Timothy F. Geithner said China needs to continue to allow its currency to gain, adding that the world’s second-largest economy is “very supportive” of the Group of 20 nations’ framework on reducing global imbalances. Speaking at an event in New Delhi today, Geithner said it’s “overwhelmingly” in China’s interest to allow its currency to appreciate. At the same time, he acknowledged that China’s leaders are split on how to proceed.  “They’re in the midst of a constant debate,” Geithner said. “The balance between the forces in favor of moving more quickly and moving more slowly are constantly shifting.”

China Resisting Being Economic Lifeline for US: IMF - China is resisting pressure to become a locomotive to pull the floundering US economy out of its hole, notably by stubbornly pegging its yuan to the dollar, a senior IMF official said Tuesday. Right now, the booming economies of emerging markets Brazil, India and China are like "rockets" being fuelled by US and European investor inflows, Nicolas Eyzaguirre, the head of the IMF's Western Hemisphere Department, told a business conference in Sao Paulo. In return, slumping developed countries are trying "to attach ropes to those rockets to drag themselves out" of their low-growth situations, he told the event, hosted by Britain's magazine The Economist. But "China is avoiding being caught by the rope," Eyzaguirre said, pointing specifically to Beijing's policy of keeping its currency in line with the sliding US dollar.

Moody’s didn’t get the memo re: China - At exactly the moment when the absurd but hilarious battle of cross-border ratings agencies could have really escalated, Moody’s decides to spoil the fun: Moody’s Investors Service has today upgraded the Chinese government’s bond rating to Aa3 from A1 and is maintaining its positive outlook. The action raises the government’s foreign and local currency bond ratings to Aa3 from A1, China’s country ceilings for foreign and local currency bank deposits to Aa3 from A1, and the ceilings for foreign and local currency bonds to Aa3 from A1. The short-term foreign currency rating remains at P-1 and is therefore unaffected. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.

FT.com – China tees up G20 showdown with US  - China has curtly dismissed a US proposal to address global economic imbalances, setting the stage for a potential showdown at next week’s G20 meeting in Seoul. Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”. “We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.” China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets. Officials from China, Germany and South Africa on Friday added their voices to a chorus of complaint that the Fed’s return to so-called quantitative easing would create instability and worsen imbalances by triggering surges of capital into other currencies.

The expectations game - G20 leaders always try to beat expectations when they produce their final communiqué - and the expectations for today's final agreement, recently released, had been set very low indeed. In the early hours of last night, negotiatiors made just enough progress on the vexed subject of exchange rates and global imbalances for all sides to declare victory. The US can say they got some numbers attached to the language about limiting imbalances - but those numbers are dates. And even those are not very specific The question of whether countries will ever be - even nominally - committed to particular current account targets has been kicked down the road, for the finance ministers to sort out (or fudge) in the first half of next year. The US President has had a tougher ride here than at any previous G20 Summit - and it's hard to miss the frustration on the American side at how their policies, and their position at this Summit has been portrayed. On the US version of events, the idea of hard targets was abandoned weeks ago, after the finance ministers' meeting. There is also consternation at the response to last week's decision by the Fed.

What can we realistically expect from the G20? - The forthcoming Seoul summit marks the end of the second year of the G20's crisis-related activities. This column takes stock of the G20's accomplishments and methods of operation, identifying what can reasonably be expected of the G20 over the medium term. It argues that a series of evolving accommodations – articulated imprecisely to outsiders – is the most that governments and analysts should expect.

Obama given chilly reception at G20 summit –Barack Obama, heralded as a hero abroad when he was elected U.S. President, is getting none of that treatment at the G20 Summit in South Korea.  Mr. Obama headed to the summit with a plea for nations to work together to put the global economy on sounder footing and with hopes of signing a huge export-boosting trade agreement with South Korea. Instead, he has gotten an earful from world leaders who have blasted the United States for monetary policies that are depressing the value of the U.S. dollar and threatening to create new bubbles. And, in another major blow, he failed to seal a free trade deal with South Korea, a pact that would have marked the United States’ biggest trade pact since NAFTA was signed in 1994. Meanwhile, Hu Jintao, the President of China, is reported to have rebuffed Mr. Obama’s pressure to be more aggressive about letting the value of the yuan appreciate, a move that critics of the artificially weak currency say would help level the playing field on international trade.

Obama’s Trade Strategy Runs Into Stiff Resistance - NYT— President Obama’s hopes of emerging from his Asia trip with the twin victories of a free trade agreement with South Korea and a unified approach to spurring economic growth around the world ran into resistance on all fronts on Thursday, putting Mr. Obama at odds with his key allies and largest trading partners.  The most concrete trophy expected to emerge from the trip eluded his grasp: a long-delayed free trade agreement with South Korea, first negotiated by the Bush administration and then reopened by Mr. Obama, to have greater protections for American workers.  And as officials frenetically tried to paper over differences among the Group of 20 members with a vaguely worded communiqué to be issued Friday, there was no way to avoid discussion of the fundamental differences of economic strategy. After five largely harmonious meetings in the past two years to deal with the most severe downturn since the Depression, major disputes broke out between Washington and China, Britain, Germany and Brazil.

G-20 refuses to back US push on China's currency - Leaders of 20 major economies on Friday refused to back a U.S. push to make China boost its currency's value, keeping alive a dispute that raises fears of a global trade war amid criticism that cheap Chinese exports are costing American jobs. A joint statement issued by the leaders including President Barack Obama and China's Hu Jintao tried to recreate the unity that was evident when the Group of 20 rich and developing nations held its first summit two years ago during the global financial meltdown. But deep divisions, especially over the U.S.-China currency dispute, left G-20 officials negotiating all night to draft a watered-down statement for the leaders to endorse. "Instead of hitting home runs sometimes we're gonna hit singles. But they're really important singles," Obama told a news conference after the summit.

G-20 Meeting Puts Off Hard Calls on Trade Imbalances -—Leaders of the world’s biggest economies agreed on Friday to curb “persistently large imbalances” in saving and spending but deferred until next year tough decisions on how to identify and fix them.  The agreement, the culmination of a two-day summit meeting of leaders of the Group of 20 industrialized and emerging powers, fell short of initial American demands for numerical targets on trade surpluses and deficits. But it reflected a consensus that longstanding economic patterns — in particular, the United States consuming too much, and China too little — were no longer sustainable.  President Obama called the agreement significant, even if not as dramatic or far-reaching as the one that emerged from the first G-20 leaders’ meeting in 2008, when nations came together quickly amid fears of a global meltdown.

G-20 Sparring Over Devalue vs. Undervalue - One of the big questions about the agreement world leaders hashed out at the G-20 summit in Seoul was what precise wording would be used to describe the controversial currency policies that have roiled financial markets. (Hang in there, it gets interesting.) Because the communiqué released at the end of these meetings has to be agreed on by everyone, it tends to reflect the most inoffensive (some would say “watered-down”) language possible. But there were fights behind the scenes over just a few letters. A draft of the communiqué obtained Wednesday by Dow Jones Newswires said nations would “refrain from competitive devaluation” of their currencies. But in brackets was the alternative wording saying countries would refrain from “competitive undervaluation” of their currencies. An agreement not to devalue your currency is essentially an agreement not to proactively push it down. That’s something that’s difficult to do and nearly impossible to get away with. Therefore, it’s easier for countries to agree not to devalue their currency, because that implies it starts higher and is pushed lower.

Cameron Hails G-20 ‘Progress’ on Imbalances - U.K. Prime Minister David Cameron on Friday hailed the results of this week’s summit of Group of 20 industrial and developing nations as moving forward in addressing the issue of global economic imbalances.  Speaking at the end of the G-20 Seoul leaders summit, Mr. Cameron said “I think real progress has been made.” He said it was clear that the G-20 was “determined” to avoid a return to 1930s protectionism and currency wars, noting the communiqué’s pledge to push ahead on an ambitious Doha trade deal and an agreement to move forward with the G-20 Mutual Assessment Process, a road map for the global economy.  Mr.Cameron said that crucially, U.S. President Barack Obama had told other G-20 leaders that he would seek to “take a deal forward” if a “balanced” Doha deal can be achieved. The long-stalled Doha round of talks were started in 2001 in the Qatari capital with the aim of increasing global prosperity through trade.  Mr. Cameron acknowledged that the global imbalances problem won’t be resolved overnight and that he would like to see China moving faster on rebalancing itseconomy toward domestic demand. But he said “actually there is progress…Slowly, slowly, China is moving into a position of actually… rebalancing its economy.”

From 'competitive depreciation' to 'competitive miscommunication' - They say it's difficult to prevent the next crisis while the last one is still going on. Eurozone leaders have been learning that one the hard way. In recent days they have almost single-handedly brought on a mini-panic over European sovereign debt which has sent bond yields on the periphery to new highs, and leaves the euro about two cents lower against the dollar than when the leaders got on a plane to Seoul. The German chancellor talks about the evils of "competitive depreciation". Maybe President Obama should start laying into the Europeans for their "competitive miscommunication" to financial markets. How did they get here? Cast your mind back to the summer, when the eurozone leaders bailed out Greece, and set up an emergency safety net for other eurozone countries. That is supposed to last for three years. But ministers know that investors will take even more risks next time, if they think governments are always going to bail them out.

G20 summit overshadowed by US monetary easing (Xinhua) -- Group of 20 (G20) policymakers are meeting in Seoul Thursday amid signs of renewed regional political tensions over a further round of U.S. monetary easing. The decision by the U.S. Federal Reserve to print extra money to buy 600 billion U.S. dollars in Treasury bonds has triggered strong concerns and resentment worldwide and could trigger a currency war and intensify trade conflicts amid a staggering global economic recovery. China's Vice Minister of Finance Zhu Guangyao said Monday China was concerned with and had questions about the U.S. new monetary policy, and would discuss it candidly with the U.S., the issuer of the main international currency, at the upcoming G20 summit in the capital of South Korea. The new aggressive round of money easing, described by some economists as a "helicopter drop of dollars," is expected to help the United States stay competitive in global trade. However, it also drew scathing remarks globally with many accusing the U.S. of instigating of a currency war by deliberately encouraging a sell-off of dollars on international currency markets.

G20: Profound And Complete Disappointment For The US Treasury by Simon Johnson - Early Friday I went through the G20 communique for the Wall Street Journal; a marked up copy is available on-line. It is hard to imagine how the summit could have gone any worse for the US Treasury and the president.  The spin machine is now working overtime – and you’ll see big efforts to get more positive stories over the coming week – but on all fronts the outcome is very bad.

1. There was no substantive progress on anything to do with exchange rates.  The “indicative guidelines” to be agreed next year are just a way to kick the can down the road.  The Chinese are digging in hard on their exchange rate; this is headed towards a mutually destructive trade war.
2. There was less disagreement at the summit regarding the ”regulation” of global megabanks – but only because this had been gutted so effectively by the bankers’ lobby and officials who bought their specious arguments.  There is nothing here that will prevent or limit the impact of another major worldwide financial crisis.
3. On IMF governance, over which there was substantial fanfare in advance, it turns out there has been a major step backwards.  The Europeans have apparently signaled they are no longer willing to give up the job of Managing Director – they have always controlled this job and this is a major reason why IMF legitimacy remains weak. 

'Currency War' Continues, Mantega Says as Summit Ends - Group of 20 leaders pressed governments to avoid foreign-exchange manipulation, Brazilian Finance Minister Guido Mantega said, adding that the "currency war" hasn't yet ended. The G-20 gives "moral sanctions" against manipulation and governments that influence their currencies will face "general condemnation," Mantega told a news conference in Seoul today after the group's two-day summit ended. Leaders urged nations to be "more cautious" about devaluing their currencies, he said. "The currency war became more explicit and started to be discussed" among governments, Mantega said. While G-20 nations pledged to refrain from "competitive devaluation," officials from South Korea and South Africa said last month they may consider currency controls. The reliance on intervention underscores the challenges finance officials face to keep their economies on track after injecting more than $2 trillion to spark growth following the worst financial crisis since World War II.

BOJ Yamaguchi Warns of Economic Risks, Hints at Easing - Bank of Japan Deputy Governor Hirohide Yamaguchi warned of looming risks to Japan's economy, stressing that the central bank was ready to boost its asset buying scheme if it sees clear signs of a downturn. Yamaguchi told parliament on Monday that despite strong growth in some emerging and resource-producing countries, there were considerable risks to global growth and very high uncertainty persisted about the U.S. economic outlook. "We need to be quite mindful of downside risks to Japan's economy," Yamaguchi, one of the BOJ's two deputy governors, said. "In case there are clear signs of downturn in the economy and prices, we are ready to act flexibly and decisively, including boosting the asset buying fund," he said.

Mantega Says Brazil May Take Additional Currency Measures, Estado Reports - Brazilian Finance Minister Guido Mantega said today that the government may take additional measures to protect the economy from U.S. efforts to weaken the dollar, O Estado de Sao Paulo reported, citing comments by the minister in Frankfurt. Mantega said the U.S. decision to inject $600 billion in the economy puts a spotlight on the currency war, the Sao Paulo- based newspaper reported. He said U.S. policies may generate speculative bubbles that can lead to the bankruptcy of economies, O Estado reported. According to O Estado, Mantega said the government will take the necessary steps to prevent U.S. policies from contaminating Brazil’s economy.

South Korea proposed 14% withholding tax puts spotlight on ‘currency war’ - South Korea may revive a 14 percent tax on domestic Treasury and central bank bonds held by foreigners as early as January to curb foreign-exchange volatility, a ruling party lawmaker said.  “If we don’t do it right now and the situation worsens, we may have to set up higher barricades,” Kim Song Sik, a member of the Grand National Party and the legislature’s financial committee, said in an interview yesterday in Seoul. He also called on the central bank to raise interest rates to head off asset-price bubbles.  The bonds initiative is part of a series of measures across Asia aimed at defusing the danger of hot money, or inflows of capital that push up currency and asset values in the search for short-term gains. Taiwan yesterday said it will restore curbs on foreign investment in its debt, only allowing offshore funds to have as much as 30 percent of their portfolios invested in all types of government bonds and money-market products.

Dreaming of a New Edo Era - Historically squeezed between its two giant neighbors, China and Japan, South Korea had long been perceived as an underdog with a fuzzy cultural identity. In Asia, however, Japan’s leaders are not waiting for the Seoul summit to take a closer look at South Korea. South Korea was formerly a Japanese colony (1910-1945), and the natives were treated like an inferior race. Today, South Korean’s economy has been growing annually by 5% on average for ten years, whereas Japan grew by 0.42% per year during the same period. One could argue that South Korea is not yet a mature economy and is only catching up with a more advanced Japan. This was the case in the 1970’s, but no more. Whereas China’s growth is fueled by low-cost labor as millions of peasants enter the industrial economy, this is not the South Korean recipe for success, which has been driven by private entrepreneurship, innovation, and quality products: Samsung and Hyundai, not cheap wages, are South Korea’s growth engines.

U.S., South Korea Fail To Finalize Stalled Trade Deal — South Korea and the United States failed to score a breakthrough on a long-stalled free trade agreement and will keep negotiating, their presidents said Thursday, in a sharp setback to hopes of speedily ratifying the ambitious accord. The two sides have been holding negotiations this week to jump-start the deal to slash tariffs and other barriers to trade that was signed in 2007 when previous administrations were in power. It remains unratified by lawmakers in both countries. Progress has been slowed by U.S. demands that South Korea reduce its surplus in auto trade and further open its market for American beef. The global financial crisis in 2008 and recession that followed also sapped momentum. "We share the view that we need more time," South Korean President Lee Myung-bak said at a joint press conference with President Barack Obama.

Korea mulling various steps on capital flows - Korea is considering raising taxes or introducing bank levies as possible options to control inflows of capital that are driving up the nation’s currency, Shin Hyun-song, presidential adviser for international economy, said Friday. The government is considering various capital controls and these are aimed at ensuring financial stability, Shin said at a press conference Friday. Korea, Taiwan and Brazil are among emerging economies that are struggling to contain inflows of hot money that risk stoking asset bubbles. On Thursday, Financial Services Commission Chairman Chin Dong-soo told reporters Korea was considering reimposing a tax on foreign holdings of government bonds as part of efforts to ease a massive inflow of overseas capital, the top financial regulator said Thursday.

Taiwan’s two lines of currency defence - In Taiwan, the exchange rate of T$30.219 per US dollar is commonly known as the Ma Defence Line, a reference to the Taiwan dollar’s highest level since president Ma Ying-jeou (left) took office in 2008. The defence was broken this week, as America’s quantitative easing weakened the US dollar and spurred hot money inflows into Asian economies. However, Taiwanese exporters seem to be doing rather well - and that points to the central bank’s own line of currency defence. Taiwan’s central bank says it allows the Taiwan dollar exchange rate to float freely and would only take action in the event of “excessive volatility due to seasonal or irregular factors”. However, traders chatter that the central bank is an active participant in the forex market: indeed, little else could explain the Taiwan dollar’s frequent falls at the close of trading days.

Taiwan and Japan: Breaking formation | The Economist - This year Taiwan’s standard of living surpassed Japan’s - IN THE 1930s the Japanese economist Kaname Akamatsu proposed a theory of how the economies of Asia could take wing. Japan, the first Asian country to industrialise, would lead the way. Its neighbours would follow, breaking into industries as the goose in front graduated out of them. But this year Japan was overtaken by one of the geese in its slipstream.  In 2010, according to the IMF, Japan’s income per head will amount to $33,800; Taiwan’s will be over $34,700 (see chart). These incomes are converted not at market exchange rates, but at purchasing-power parities (PPPs), which take account of the higher cost of living in Japan. Taiwan is not the first of the trailing geese to overtake the leader, based on this measure. Singapore and Hong Kong both caught Japan in the early 1990s. South Korea is also closing the gap, although the other Asian tigers, such as Malaysia, lag further behind. Akamatsu’s inverse V is beginning to turn into an X.

Japan Hopes for U.S. Help in Row With China - The key topic of the Asia-Pacific Economic Cooperation (APEC) summit may be trade, but on the sidelines, host nation Japan is stressing the need for U.S. support in its strained relations with China. And analysts say while the U.S. attempts to play peacemaker, it may see its future with China in Japan's current relationship with the rising superpower. Japan's prime minister, briefing reporters about his meeting with the U.S. president on Saturday, thanked Barack Obama for his support in territorial disputes with Russia and China. The disputes with both countries surround islands that Japan claims as sovereign territory, and began with a September skirmish at sea with China.A Chinese fishing crew collided with two Japan coast guard vessels near islands in the East China Sea. Japan and China both claim the island as their territory.  Weeks later, Russia's president visited another set of disputed islands between Japan and Russia, seen largely as Russia taking an opportunity to take a stand against a weakened Japanese prime minister.

Currency War Spreading to Mexico as Carstens Signals Lower Rates Next Year - The peso’s biggest rally on record may prompt Mexico’s central bank to cut interest rates next year to boost exports after other Latin American policy makers raised borrowing costs to cool their economies. Governor Agustin Carstens signaled during a Nov. 2 meeting with economists in New York that he would consider cutting rates should the peso keep gaining, according to analysts from Barclays Capital, Deutsche Bank AG and UBS AG who attended the meeting. The bank may lower borrowing costs a quarter percentage point to 4.25 percent by March, Mexican futures trading show. Foreign investment in short-term Mexican notes known as Cetes has risen more than six-fold since the end of 2009 as investors looked for alternatives to near-zero interest rates in the U.S. and Europe. Inflows almost doubled last month to 70.4 billion pesos ($5.78 billion) as international investors anticipated the Federal Reserve would pump additional liquidity into the U.S. economy. China said this week the Fed’s decision to purchase $600 billion in U.S. Treasuries threatens to “shock” emerging markets with “hot money.”

China raises bank reserves as cash inflows surge (Reuters) - China on Wednesday ordered its banks to put more money aside as required reserves, a tightening step that mops up some of the cash that has been streaming into the country and posing a growing inflationary threat. Although Chinese officials have directed their ire at U.S. monetary easing as a cause of unwanted speculative inflows, data earlier in the day provided a reminder that a whopping trade surplus is the main source of Beijing's liquidity headache. The central bank lifted the required reserve ratio for all deposit-taking institutions, confirming a report by Reuters that it had increased the ratio for at least some of the country's top banks. The move means the biggest banks are setting aside a record 18 percent in reserves, BNP Paribas said in a note to clients

G20: Obama on the back foot - Even a few weeks ago, there was talk of China being forced into a corner at this meeting - signing up to a significant appreciation of its currency against the dollar. There was even the possibility that Treasury secretary Geithner would get his way in having concrete current account targets for countries in the G20. But talking to officials here, it's striking how much the results of the US congressional elections, and surprisingly widespread criticism of the Fed's new round of quantitative easing, has changed the mood. To many leaders gathered here, Mr Obama no longer looks like the coming man. Bizarrely, now it's the US that is on the defensive for manipulating its currency. The only concrete "deliverable" the US delegation had been hoping for from this Summit was the Korea-US free trade agreement. On the basis of the two presidents joint press conference earlier today, it seems they are not going to get even that.

Obama in India: shooting from the hip - Jeff Immelt’s message was clear. If India wants to escape protectionist pressure on its IT outsourcing sector, it needs to up the pace on infrastructure delivery and give more opportunities to US companies. Speaking at the US-India Business and Entrepreneurship Summit in Mumbai, Immelt, the boss of GE, said the US had been let down by a sector of the Indian economy that held promise but where spending was slight. “You guys are not living up to your side of the bargain,” Immelt told a room full of India’s top executives. “There is a trillion dollars of infrastructure investment in India and it’s not happening.”  His advice is: engage US companies in modernising the Indian economy, and the rumpus over ‘offshoring’ and jobs moving from Buffalo to Bangalore will die down. Infrastructure development – energy, transport and airports – is often touted by India’s government and leading businesspeople as where investment will flood in. But with the exception of high profile projects like Delhi international airport and Mumbai’s congestion-relieving sea-link, progress is painfully slow. As a result, the country’s growth is shackled by poor roads, clogged ports and power shortages.

Obama in India - Some commentary from the people most affected: We, the farmers of India, mainly from Bhartiya Kissan Unions, are also quite agitated and upset with the furthering of Indo-US cooperation in agriculture. Since 2006, when Mr. Bush signed the Indo-US Knowledge Initiative on Agriculture, we have witnessed a greater penetration of US agribusiness companies in our policy making on agriculture as well as in our agricultural research institutions, such IARI, ICAR and agricultural universities. This also resulted in different policy initiatives in agriculture, like the new Seeds Bill, the National Biotechnology Regulatory Authority bill 2009, Protection and Utilisation of Public Funded Intellectual Property Bill, 2008 to benefit US agribusiness mainly Monsanto, DuPont, Cargill and others. Moreover, the US retail giant, Wal-Mart, has been publicly lobbying for opening up India’s retail sector to FDI and in this visit the thrust of Obama’s engagement would be on opening up of the food retail, which would result in complete takeover of Indian small retail. We, therefore, fear that any kind of the Indo-US agricultural treaty, focusing on agricultural research, biotechnology, retail, would bring Indian agriculture under the direct control of US Corporate houses

Obama, India and Making Outsourcing Acceptable - To many Americans, the Great White Collar Fear is outsourcing. And, nobody represents this phenomenon to many eyes than India. With its formidable array of business process outsourcing firms like Satyam, Tata, Wipro, and Infosys, the very mention of the country strikes fear into middle class hearts. Contrary to the suggestions of less perceptive individuals, the real determinant of whether American jobs are "shipped overseas" isn't skill level but the geographical transferability of the tasks performed. That is, America will still need hairdressers since you need a pair of hands and scissors at the end of the day, but it certainly might do away with computer programmers who can do these tasks more inexpensively in, say, India. Routed at home, Barack Obama thus journeyed to India to paint an image of the commander-in-chief drumming up business elsewhere. What's more, he wanted to get the point across that India's rise bodes well for the United States instead of the more conventional job-stealer stereotypes:“I am here because I believe that in our interconnected world increased commerce between the U.S. and India can be and will be a win-win proposition for both nations,” Obama said in a speech to the U.S.-India Business Council in Mumbai yesterday.

Don’t Count on Global Governance - The absence of global institutions – acting as lender of last resort or serving up coordinated fiscal stimulus – aggravated the crisis and delayed the recovery. And now, go-it alone fiscal, monetary, and exchange-rate policies are spilling across national borders, threatening currency wars and protectionism. How we deal with these challenges is the greatest economic question of our time. One approach, favored by technocrats and most policymakers – at least until domestic politics intrudes – is to seek solace in ever-greater global governance. Global problems, after all, require global solutions, which means strengthening international organizations like the International Monetary Fund, the G-20, and negotiating stricter international codes and standards (as has occurred with capital-adequacy requirements, for example). Another approach is to recognize that global governance is bound to remain incomplete, and to moderate the side-effects through a more cautious form of economic globalization. This strategy entails throwing some sand in the wheels of the global economy in order to expand room for domestic policy and limit the impact of adverse spillovers from other countries’ actions. This option may seem protectionist, but it could ultimately ensure a more durable globalization.

G20 relieved no longer has to pretend to care about poor - G20 representatives expressed universal relief today in Seoul, Korea that they no longer have to pretend to feel deep concern about global poverty. “Thank goodness for all the grave problems the rich countries face,” said one anonymous and technically fictitious official. “Now we can stick to things we actually care about.” Another gave a representative view: “it’s been exhausting every year since Gleneagles in 2005, going through hours of discussion to come up with enough meaningless actions to show our deep empathy for the global poor.” “Our statements always stressed the sufferings of those people,” he continued, “but we were suffering too, working far into the night and often missing gala dinners to negotiate the details of the promises that we never intended to keep.” The New York Times also reports on this story using non-fictional sources.

Mortgage debt tops $1 trillion - The level of mortgage debt in Canada has topped $1 trillion, though most homeowners are comfortable with their borrowings and rising interest rates aren't likely to cause problems, according to a new report. As of August, there was $1.01 trillion in outstanding mortgage debt in Canada, up 7.6% from last year, according to the sixth annual report from the Canadian Association of Accredited Mortgage Professionals. However, overall equity in Canadian homes runs at about 72% of the total value of housing, with equity levels per homeowner averaging about 50% of the value of the property, it said.  The Bank of Canada has repeatedly warned that high household debt, now at record highs, may pose a serious threat to the economy. Much of that debt is in the form of mortgages, with record low interest rates spurring consumers to borrow.

Fiscal fragility: What the past may say about the future - The global crisis has brought to the fore the fiscal vulnerabilities of OECD countries, and in particular, some countries of the Eurozone such as Greece, Ireland, Italy, Portugal, and Spain (Baldwin et al. 2010 and Corsetti 2010). The US faces similar fiscal challenges, although its ability to obtain relatively cheap funding of its debt allows it to delay dealing with them.  Amid government concern over public debt, one measure – the debt-to-GDP ratio – has gained prominence above all others. This column presents forecasts of the fiscal burden of debt for each OECD country. Looking at past as well as current data, it argues that prudent fiscal policy should involve both short-term stabilisation and forward-looking fiscal reforms. Finding a balance between the two is crucial.

Axis Of Deflation - Krugman - I’ve lately taken to reading another econoblog, TripleCrisis; it’s been especially good on the (especially bad) G20 summit. In particular, Gerald Epstein is right: A strange thing happened on the way to the G-20 meetings: world elite opinion has turned against the Federal Reserve’s “quantitative easing” (QE) program, the only significant “Keynesian” macroeconomic policy being implemented anywhere in the face of massive unemployment in much of the developed world; and this criticism is garnering some support from strange places, including among some progressive economists. With all the hub-bub, the mercantilist policies of Germany and China and the pre-Keynesian Gold Standard-like stance of the European Central Bank (ECB), are getting a virtual free ride. The basic situation in today’s world isn’t mysterious: we’re in the midst of a deleveraging crisis, in which those who ran up large debts during the Great Moderation are being forced to pay them down, rapidly. The trouble with this situation is that someone has to make up for the decline in debtors’ spending, or the world will be pushed into a deflationary slump.

BBC News – Growth slows in Europe’s leading economies - The pace of economic recovery has slowed in Europe's major economies, according to official estimates.  Germany, Europe's largest economy, has seen a sharp slowdown in the third quarter, with growth of 0.7% compared with the record expansion of 2.3% it reported in the previous three months.  In France, GDP grew by 0.4% between July and September, compared with growth of 0.7% in the previous quarter.  The 16 eurozone members grew 0.4% on average, down from 1% growth before.  Italy also saw its rate of recovery decline, to 0.2% from 0.5% in the second quarter. But in crisis-hit Greece, the economy contracted at a slower rate of -1.1%, compared with -1.7%.

ECB stepped up bond purchasing programme last week - Traders report that the ECB last week intervened in bond markets more than ever since the launch of the bond purchasing programme in May; bond spreads stabilise as a result; Robert Zoellick calls for the establishment of a gold-backed Bretton Woods II system; German politicians are in uproar over the Fed’s decision to start another programme of quantitative easing; Merkel says she wants to raise the issue at this week’s G20 summit; there won’t be another general election in Greece, after Papandreou’s Socialists did relatively well at the regional elections; Juncker said he will make a proposal for a common European bond; Mario Draghi says the heart of Italy’s economic malaise is low-skilled employment; Dominique Baert argues that France has a debt sustainability problem; Portugal’s opposition leader calls for budget slippage to become a criminal offense; Ireland seeks EU support amid bond buyers strike; Belgium TV, meanwhile, is to air a programme discussing how a break-up of the country could be managed. [more]

Spanish ministers in talks with business after zero growth - The Spanish government plans high-level meetings next week with private sector executives and labour representatives after the country reported zero growth in the third quarter.  GDP has flatlined after seven quarters of continuous, if timid, growth, it emerged on Friday. This has been attributed to a 2 per cent increase in VAT and the end of the government's Plan 2000E, which funnelled money into public works schemes and the car industry. The zero growth also explains the government's muted welcome to last week's 70,800 drop in jobless figures, the first since the recession began in 2007. Close analysis showed most of the new jobs, an estimated 90,300, were created in the public sector – the biggest single jump in government employees since records began in 2005. And unemployment in Spain, still stands at 19.79 per cent – nearly twice the EU average, and by far the worst in western Europe.

Spain Leads Surge in Sovereign Credit Risk to Record in Europe, Swaps Show - Spain led a surge in the cost of insuring European government debt to a record on concern the region’s peripheral nations will struggle to cut budget deficits and repay debt.  Credit-default swaps on Spanish government bonds jumped 10.5 basis points to 275.5, an all-time high based on closing prices, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 2.5 basis points to 179.5.  Investors are shunning Europe’s most indebted nations, driving borrowing costs and swaps higher for an 11th consecutive day. Confidence in Spain is ebbing after its central bank estimated the economy stagnated from July to September after emerging from recession in the first quarter.  “Spain is getting carried along with the general weakness in peripherals,”

Ireland Facing House Price Collapse? - Ireland is not nearly done with its mortgage crisis.  Another tsunami is headed for the Emerald Isle: If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency. There is no shame in admitting that you too were mauled by the Celtic Tiger after being conned into taking out an unaffordable mortgage, when everyone around you is admitting the same. The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits - there is no longer any such thing - but from the pockets of other taxpayers.

The Luck of the Irish - It's getting worse.  Here is one bit: The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue. However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly. While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.

The Irish mess (V) - Back in July, Rebel Economist noted how the Greek bailout actions had compromised the ECB:  …The retreat by the ECB is particularly disappointing because it represents a missed opportunity for Europe to interrupt the sequence of bailouts that have characterised the financial crisis since the demise of Lehman Brothers in September 2008 and to differentiate the euro as a reliably hard currency even in adverse circumstances. It looks as if that train has well and truly left the station now. In the Irish Times, Morgan Kelly, Professor of Economics at University College Dublin, shows us how far the ECB has advanced down Rebel Economist’s slippery slope. September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank. In other words, the exposures I suggested in my last, based on the 6-month-old numbers published by the BIS in September, are very out of date. Just based on the September action, the French, German and British banks are less firmly on the hook than I thought. If there has been significant ECB intervention in Irish sovereign debt since May, as well, as rumored, then that will again have tended to bail out those banks, and leave the ECB holding the bag

We'll Need The Courage Of Our Forefathers

- First of all, please allow me to share the following very intriguing graph, from a 61-page PDF by Gordon T. Long. For the whole thing, click the title (which I made up myself, it's not Mr. Long's). In the article he explains that the timeframes he depicts may well turn out to be too long. The New Economic Cycle. I saw a long line of articles the past few days that all basically have the same theme: US banks that are doing so bad, nationalization must once again be seriously considered. But then I read Professor Morgan Kelly's great, and greatly alarming, article in the Irish Times today: If you thought the Irish bank bailout was bad, wait until the mortgage defaults hit home ...Yeah, the European problems will yet come back to bite us all. Ireland is gone as an independent nation in all but ceremonial terms. Greece is not far behind, with Portugal snapping at its heels. Think the US dollar is going to plunge? Think again.

Ireland's 'Dr. Doom' Says Nation Will Need EU Bailout - Ireland’s economy will need to be bailed out as a wave of mortgage losses increase the cost of rescuing the nation’s lenders, according to Morgan Kelly, an economics professor dubbed the country’s “Doctor Doom.”  “From here on, for better or worse, we can only rely on the kindness of strangers,” Kelly wrote in the Irish Times today. Kelly was given the “Doom” nickname by newspapers including the New York Times after he forecast in 2006 that Irish property prices may decline as much as 80 percent.  Ireland’s government said in September that it may need to spend as much as 50 billion euros ($69 billion) to bail out lenders such as Anglo Irish Bank Corp. The government, which is targeting 15 billion euros of savings over the next four years to reduce the euro area’s widest deficit, also canceled debt auctions for the rest of the year.  The bill “for the banks dwarfs the 15 billion euros in spending cuts now agonised over and reduces the necessary cuts in government spending to an exercise in futility,” said Kelly, who sees the bank-bailout figure rising to 70 billion euros. “What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?”

More Ireland - The WSJ has some interesting facts on the Ireland residential housing market: Ireland's Next Blow: Mortgages More than 36,000 borrowers, representing 4.6% of Irish mortgage loans, were at least 90 days behind on their loans as of June 30, according to Ireland's financial regulator. ... nearly 200,000 Irish mortgages—about one of every four outstanding home loans—is expected to be "underwater" by the end of the year. As a comparison, the Q2 CoreLogic report showed 11 million American mortgages, or 23 percent of households with mortgages, were underwater - about the same percentage as in Ireland. In the U.S. about 4.3% of mortgages are more than 90 days delinquent, and another 3.8% are in the foreclosure process. The Ireland 10-year bond yield hit a record 7.86% today. Ireland will not have to borrow until next year, but if the 10-year yield moves above 8% or so, then it is likely that Ireland would use the European Financial Stability Fund

Irish Default Swaps Surge to Record on Bank Bailout Cost Woes-- Credit-default swaps on Ireland and its banks surged to record high levels on concern the cost of bailing out the nation's financial system is unsustainable.Contracts on Ireland soared 28 basis points from a record closing level to 606, according to data provider CMA. Swaps on the senior debt of Allied Irish Banks Plc climbed 43.5 basis points to 899.5 and Bank of Ireland Plc increased 37.5 to 724.5. Ireland is struggling to convince investors it can plug its budget deficit and repay debt as the cost of backstopping its banks mounts. The euro weakened as the nation's troubles undermined confidence in the region and the yield on the Irish 10-year bond gained eight basis points to 7.91 percent. "The uncertainty regarding sovereign debt and deficits in the European periphery will remain a strain for risky assets,"

Ireland: A Side Show - I've been posting on Ireland recently because the 10-year bond yield is approaching 8% (some analysts think Ireland will use the European Financial Stability Facility (EFSF) above 8%). The Ireland 10-year yield hit a record 7.94% today.  To be clear: Ireland is not Greece. There is no short term liquidity issue; Ireland does not need to borrow until mid-2011 and rates could fall before then. The increase in yields is being driven by investor fears of a permanent crisis-resolution mechanism that will include possible haircuts for private investors.  Here are some excerpts from a proposal from the think-tank Bruegel about a permanent crisis-resolution mechanism (Via the WSJ Making Default A Real Possibility):  We propose in this paper the creation of a European Crisis Resolution Mechanism (ECRM) consisting of two pillars:

If you thought the bank bailout was bad, wait until the mortgage defaults hit home - Ireland is effectively insolvent – the next crisis will be mass home mortgage default, writes Morgan Kelly. SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. It will be remembered that, after a lengthy period of poverty following her acrimonious divorce from her English partner, in the 1990s Ireland succeeded in turning her life around, educating herself, and holding down a steady job. Although her increasingly riotous lifestyle over the last decade had raised some concerns, the Irish Patient’s fate was sealed by a botched emergency intervention on September 29th, 2008 followed by repeated misdiagnoses of the ensuing complications. With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . . .

Ireland is sinking - IRISH government bond yields have spiked to new records (the chart for the ten-year is at right), behind what some are calling a "buyers' strike": While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May. “It’s close to a buyers’ strike at this point,”  Ireland's own Doctor Doom, Morgan Kelly, paints a vivid picture of the scene: As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.

Ireland 'Increasingly' Likely to Tap European Fund, NCB Says - Ireland is “increasingly likely” to seek aid from the European Union-backed rescue fund as its borrowing costs continue to rise before the government’s 2011 budget, NCB Stockbrokers said.  “When your sales force doesn’t believe it can drum up sufficient demand for Irish bonds at feasible rates, it gives an indication of sentiment,” NCB Chief Economist Brian Devine in Dublin wrote in an e-mailed report today, referring to comments by primary dealers in Irish bonds. “It is increasingly looking like the European Financial Stability Fund is the most likely scenario.”  Irish bonds fell for a 10th day today, pushing the yield on the country’s 10-year debt above 8 percent. The government, which said it needs 15 billion euros ($21 billion) in savings over the next four years, is struggling to convince investors it can reduce its budget deficit and cover the cost of bank bailouts without outside help.

Irish, Portuguese Yield Spreads Caught in `Vicious Spiral,' WestLB Says - The extra yield investors demand from Irish and Portuguese bonds instead of German bunds may widen further amid greater prospects for debt defaults, according to WestLB AG.  “At times, you feel the spreads offer fundamental value,” . “Then you start to realize that the longer the spreads and higher yield levels hold in place, the greater the default risk has become because they simply cannot afford to finance the interest burden, and then you’re in a vicious spiral situation.”  The difference in yield, or spread, between 10-year Irish bonds and German bunds widened to a record 554 basis points today, or 5.54 percentage points. The Portuguese-German 10-year yield spread widened as much as 20 basis points to 452 basis points, the most ever, according to Bloomberg generic data.  The cost of insuring against default by the Irish and Portuguese governments rose to the highest levels on record earlier today. Credit-default swaps on Irish government debt rose to 602 basis points, before closing 30 basis points lower at 567 basis points. Portugal reached 473.5 basis points, before closing at 457 basis points, according to data provider CMA.

Eurozone bond spreads reach new record - Another day, another record: Irish and Portuguese spreads reach their highest levels ever, as markets ponder the possibility of long-term insolvency; the euro is weakening again, as investors are seeking refuge in the US markets; Ireland still balks at suggestions that it should raise its corporation tax rate; Breakingviews says ECB policy not enough to secure solvency of the eurozone periphery; G20 summit seems to settle only for a modest proposal on the regulation of too large to fail banks; Beijing clings to the status quo, and rejoices in the fact that the spotlight of criticism has moved away from China to the US over QE2; Wolfgang Munchau says the European have no reason to complain about QE2, having pursued beggar-thy-neighbour policies themselves; Martin Wolf defends QE2 on the grounds that this will help the US evade a deflationary trap; German council of experts forecast German economyto grow 3.7%, the highest rate since reunification; in Italy meanwhile, former ally Giancarlo Fini calls on Berlusconi to resign after being involved in yet another sex scandal. [more]

Irish Fight to End Bond `Buyers Strike' as EU Examines Budget - Ireland will try to win support this week from the European Union to avoid a Greek-style bailout as investors balk at buying the country’s bonds.  EU Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today for a two-day visit after the government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros ($8.4 billion) in 2011.  While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.  “It’s close to a buyers’ strike at this point,”

Ireland's crisis flares as investors dump bonds-- Anxiety over heavy government debts in Europe flared up again Wednesday, as investors questioned whether countries like Ireland, Greece or Portugal can cut their budget deficits without choking off desperately needed economic growth. Markets were increasingly betting that Ireland might be next in line for a massive financial bailout from its partners in the euro currency, after Greece's euro110 billion rescue from the brink of bankruptcy in May. The interest rate, or yield, on Ireland's 10-year bonds jumped above 8 percent for the first time since the euro was introduced in 1999, reaching 8.64 percent in afternoon trading. Portugal managed to raise euro1.25 billion ($1.74 billion) in 6- and 10-year bonds, but at significantly higher interest costs than in September and August. The fall in Irish bonds was accompanied by an announcement from London-based LCH.Clearnet Group, the world's second-largest bond clearing house, that it is significantly increasing the cash deposits it requires from traders dealing in those bonds.

Ireland's fate tied to doomed banks - With doubts swirling about the solvency of the Irish state in early September, Finance Minister Brian Lenihan summoned a dozen senior government and bank officials to a conference room nicknamed the "torture chamber," a nod to its history as a venue for painful meetings.  Mr. Lenihan needed to halt the drip-drip of bad news that was leading his country to ruin. "I want a final figure ASAP," he told the group. Two weeks later, the estimate came in: Up to €50 billion—nearly $50,000 for every household in the Emerald Isle. But now, investors are betting the bill could be higher still and could reignite Europe's sovereign-debt crisis. The unpopular government is bracing for collapse, and on Tuesday, Irish government bonds continued a week-long slide to a fresh record low. The debt is judged as risky as Greece's was this spring just before that nation begged for a European Union bailout. Mr. Lenihan, racing to ease those fears, proposed Thursday shrinking the country's 2011 budget by €6 billion. Proportionally, that's as if the U.S. suddenly eliminated the Defense Department.

Learning from Ireland - I love the way that the WSJ today covers the collapse of Ireland’s banking system, and with it the country’s fiscal leadership. There’s little if any actual news here, but that’s a feature, not a bug: it frees up the WSJ’s writers and editors to present the big-picture narrative in as clear and compelling a manner as possible, without having to overemphasize some small factoid which they happen to be breaking. The story reads like one of those epic lyric tragedies of old, where no one ever learns from their mistakes, and errors simply compound endlessly. First, the Irish government, convinced that the country’s banks were suffering from a liquidity crisis rather than a banking crisis, decided to solve that problem in the way that only a government can — with a blanket guarantee of substantially all of the banks’ liabilities. But of course the banks were fundamentally insolvent, and so began a series of cash drains on the government, each one meant to be the last and final.

Portuguese banks open fire on Fitch - Portuguese banks have hit out at credit rating agency Fitch and one lender has terminated its contract with the group in a row over successive downgrades of their ratings due to funding and liquidity risks. The dispute has been triggered by Portugal’s sovereign debt difficulties, which have virtually cut off access to capital markets for Portuguese banks, forcing them to rely heavily on funding from the European Central Bank. Banco Espírito Santo, one of Portugal’s top five banks, said it was terminating its contract with Fitch because there was “no valid justification” for downgrading its credit rating by three notches in less than four months. Millennium BCP, one of the country’s biggest privately-owned banks, said there had been “no new fact that reflects or implies a significant change in the financing conditions, liquidity, solvency or profitability of Portuguese banks”. Fitch cut the ratings of BES, BCP and two other Portuguese banks on Monday, citing increased funding and liquidity risks, as well as a deterioration in domestic performance and asset quality.

Portugal, Ireland, Spain CDS spreads hit records -- Fears surrounding sovereign-debt problems on the periphery of the euro zone drove the cost of protecting the debt of Ireland, Portugal and Spain to record highs on Thursday, according to data provider Markit. The spread on five-year Portuguese credit-default swaps widened to 505 basis points from around 491 on Wednesday, topping the 500-level for the first time, Markit reported. That means it would now cost $505,000 a year to insure $10 million of Irish sovereign debt against default for five years. The five-year Irish CDS spread widened 27 basis points to 620, while Spain's spread widened to 294 basis points from 279. Greece's spread was 12 basis points wider at 890

European Debt Update - Some people have asked why I've posted so often about Ireland the last few weeks, I think these hockey stick graphs show why ... Ireland 10-year bond yield at 8.64%. Portugal 10-year bond yield at 7.04%. And for Spain, the 10-year bond yield has risen to 4.5%. And for Greece, the yield is up to 11.55%. From the WSJ: European Debt Markets Take Hits And from the Financial Times: Irish bond yields leap after selling wave Last week LCH.Clearnet warned investors of higher margin requirements to trade in Ireland’s debt. That went into effect today - here is the memo:

Ireland's next blow: mortgages - Ireland's commercial-property bust has knocked the country's banks to their knees. Now the lenders are bracing for another blow: losses on home loans..So far, residential mortgages haven't been nearly as big a problem for Irish banks as their portfolios of loans to finance real-estate development and construction projects. Those ill-fated property loans have saddled the banks with tens of billions of euros in losses, forcing the government to mount a series of costly bailouts that have pushed Ireland to the brink of insolvency. But problems in the residential-mortgage arena are starting to crop up, fueling fears that a second wave of losses could hit even Ireland's healthiest banks. Those fears are one reason why jittery investors punished shares of Irish banks. An index of Irish financial stocks fell 5.3%, and shares in Bank of Ireland, one of the country's biggest mortgage lenders, tumbled 5.6% in Dublin.

Ireland's fiscal crisis: trouble ahead - Some clarification is in order for recent accounts of the EIU’s forecast for Ireland. Specifically, we do not expect a default, as was reported here (and repeated elsewhere). Instead, our central scenario forecasts that Ireland will need to access the IMF-backed European Financial Stability Facility in mid-2011, when the country must return to the capital markets to service its debt. Ireland’s beleaguered banks will likely require further bailouts next year, and the government’s economic projections look far too optimistic. Following the recent spike in Irish yields, the government will struggle to convince bond markets that there is much more it can do to calm investors’ nerves.

Ireland says surge in borrowing costs "very serious" (Reuters) - Ireland warned on Thursday that a surge in its borrowing costs to record highs had become "very serious" and the EU said it was ready to act should the humbled former "Celtic Tiger" require a rescue from its euro partners. European officials said they were monitoring developments in Ireland closely, but denied for a second day running that Dublin was seeking financial aid, in an ominous echo of the rhetoric that preceded an EU/IMF bailout of Greece six months ago. "The bond spreads are very serious and there is international concern throughout the euro zone about that," Irish Finance Minister Brian Lenihan said in Dublin

Ireland: Bank funding problems? - Ireland is fully funded until mid-2011, however I've heard this morning that certain European investors are no longer willing to provide Irish banks with overnight funding. This could lead to a serious liquidity problem for the Irish banks - and some investors believe that Ireland may need to borrow from the IMF or the EFSF to support the banks. And some comments from officials, first from the Financial Times: Barroso reaffirms offer of help to Ireland José Manuel Barroso, European Commission president, said ... “What is important to know is that we have all the essential instruments in place in the European Union and eurozone to act if necessary, but I am not going to make any speculation”. Both the Irish Central bank governor Patrick Honohan (See: IMF would use same fiscal policy - Honohan) and the Irish Finance Minister Brian Lenihan said today they believe Ireland will not need help (See: Irish FinMin: c.bank comments not laying ground for help). The Ireland 10-year bond yield is at 8.9%. For much more on the problems for Ireland (and Portugal), see: Life on the Edge of the EFSF, by Elga Bartsch & Daniele Antonucci at Morgan Stanley.

Ireland going down - Irish 10 year yields hit 8.7%, and the spread with German bonds is now 6.5%; LCH Clearnet imposes larger margin requirements for Irish trades; the Greek adjustment programme is collapsing, as the projected 2010 deficit is now put at 9.3%, as opposed to a projected 7.8%; Papademos insists on no restructuring; an increasing number of market participants now believe that Greece and Ireland will eventually default, as they are beginning to digest the implications of the German crisis resolution proposals; Portuguese yields also rise, while Spanish and Belgian yields hardly moved; Manuel Gonzales Paramo of the ECB picked a really great moment to explain that the ECB may soon raise interest rates; Bruegel has proposed its version of a European Crisis Resolution Mechanism; Mervyn King, meanwhile, says failure to agree on an agenda on imbalance will produce another crisis within twelve months. [more]

Ireland, Portugal Bailout Would Help Resolve Market Tension, Goldman Says - A bailout of Ireland and Portugal through the European Financial Stability Fund would resolve current market tension and not lead to contagion, according to Goldman Sachs Group Inc. “The likelihood of Ireland and Portugal entering an IMF- designed adjustment program funded by the EFSF has, in our view, increased,”Francesco Garzarelli, chief interest-rate strategist at Goldman in London, wrote in a research report today. “Unlike in the aftermath of the Greek ‘bailout,’ we are of the view that such an outcome will not lead to contagion. Rather, it may mark a resolution of ongoing European Monetary Union sovereign tensions.”

Irish Debt Woes Revive Concern About Europe - When interest rates soared last week on Irish government bonds, it served as a grim warning to other indebted nations of how difficult and even politically ruinous it could be to roll back decades of public sector largess.  An Irish bond market already in free fall plunged further after Ireland announced on Thursday that it planned to nearly double its package of spending cuts and tax increases to try to rein in its huge deficit. Investors took it not as a sign of resolve but rather of Ireland’s desperation and uncertainty about the true extent of its problems.The yield on Ireland’s 10-year bond climbed to 7.6 percent on Friday, expanding the gap with the 2.5 percent interest rate on comparable bonds issued by Germany, which is emerging most strongly from the European debt crisis.

The Irish Mess (VI) - Yesterday evening the yield on the Irish 10-year was up near 9%; Merkel reaffirmed her tough line on bond haircuts: French Finance Minister Christine Lagarde said yesterday that investors must share in the cost of safeguarding sovereign debt. German bunds advanced on demand for the safest assets, while Portuguese debt recovered from earlier losses. Italian bonds fell. “Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for so-called peripheral nations’ debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.” It was going to be all eyes on Ireland and the Euroauthorities today, with bets being taken that the weekend was going to be a busy one in Dublin, Berlin, Paris, etc. But lo, this morning the Irish 10 year yields 48bps less, the Portuguese one is a wee bit firmer, the Spanish one only a wee bit softer. This clarificatory communique from Seoul might have something to do with it: So – no haircuts for Irish bondholders then, when it comes to a bailout. Give me chastity and continence, but not yet.

Ireland: the battle against "markets" - Rebecca Wilder - Is it the sheer size of its contingent liabilities that is driving Irish spreads? Finance Minister Brian Lenihan thinks so via the Irish Independent: "There is no doubt in my mind that while the announcement on the banking sector in September was not disbelieved by the markets, it wasn't fully believed either because there is a wait and see policy of seeing whether it is an accurate account of exposures in the banking system," the minister said.Or is it German Chancellor Angela Merkel's recent rhetoric? According to the Irish Times, since her most recent statement on private haircuts, "All stakeholders must participate in the gains and losses of any particular situation", officials are readying the EFSF for possible tapping by the Irish government: The Irish Times has established, however, that informal contacts are under way between Brussels, Berlin and other capitals to assess their readiness to activate the €750 billion rescue fund in the event of an application from Dublin.The EU quashes this rumor. Or is it that "markets" just don't buy the Irish fiscal austerity reduces the Irish budget deficit story? According to the Irish Independent, this is the opinion of Nobel laureate Joseph Stiglitz (mine, too, by the way):

The Irish crisis heats up - The article is here.  Although some diplomats say it is to Ireland’s advantage that the Government is not at present borrowing from the investors, fear of contagion emerged again yesterday as the premium on Spanish and Italian debt jumped to record levels. The Irish have enough funds on hand to finance their government through next summer and they mention this repeatedly.  But is that good?  The lack of an ongoing market test increases uncertainty about market opinion and perhaps leads more people to wonder about the worst.  From other sides it encourages denial about the basic problem.  What will that first bond auction look like when it comes?  (What will China ask for in return?)  Extant bonds are traded, but that market is thin. Ireland used to say "We are not Greece."  These days it is Greece saying "We are not Ireland." Here are data on Irish competitiveness.  The unofficial word is that the hat is being passed for the actual bailout.  Merkel is holding tough, which is building pressure on the other weak euro economies.  It is a common mechanism that denying a bailout raises the ultimate cost of the bailout you must make.

Ireland on the verge of tapping the EFSF, as bond market crisis spreads - Irish Times reports that talks are under way about an Irish bailout through the EFSF; Barroso says EU stands ready to help; Germany, French, UK finance ministers due to meet today to discuss Ireland; bond market crisis spreads, as Spain, Belgian and Italian bonds yields rise; the ECB is now the only large buyer in the market; Merkel tells the world that Germany cannot, and will not bail out investor bail-ins; Elena Salgado admits that the discussion about crisis resolution have played a direct role in the latest round of the crisis; Jurgen Stark says eurozone recovery almost self-sustaining, as he hints at a tightening of monetary policy; the euro falls against the dollar as markets are nervous about the crisis; the G20 summit, meanwhile, is settling on a minimal agenda on imbalances, which is essentially to ask the IMF to write regular reports, which will then be safely ignored by governments.  [more]

Merkel refuses to back down over debt burden - Angela Merkel is refusing to back down from her push to force private investors to share the burden of the euro debt crisis, which helped send Irish borrowing costs to record levels. Speaking in Seoul, where she is attending the G20 summit, Dr Merkel acknowledged her demands have upset the markets but insisted it was unfair for taxpayers to be saddled alone with the cost of sovereign rescues. “Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr Merkel said. “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.” European Commission chief José Manuel Barroso moved to shore up confidence in Ireland by saying euro countries stand prepared to provide emergency aid if required, but officials stressed the Government has not asked for such assistance.

G20 concern over Irish debt as bond yields pass 9% - THE RELENTLESS pressure on Irish sovereign bonds showed no sign of abating yesterday, as Irish bonds fell for a 13th consecutive day, pushing yields past 9 per cent, more than 650 basis points higher than the equivalent German bond. Last night the rating agency Moody’s said it was awaiting the release of Ireland’s four-year fiscal plan later this month to decide whether to downgrade the country’s credit rating. “We intend to conclude this review in the course of December,” a Moody’s spokesman said. A possible rating downgrade could send Ireland’s debt spreads even higher. Ireland’s public debt woes forced their way to the top of the agenda at the G20 meeting in Seoul when European Commission president José Manuel Barroso said the European Union was ready to bail Ireland out “in case of need”.

Spain Stagnates as Austerity Bites - Spain’s economy stalled in the third quarter, the Bank of Spain estimated, as the deepest austerity measures in three decades undermined the recovery. Gross domestic product was unchanged from the previous three months and expanded 0.2 percent from a year earlier, the central bank in Madrid estimated in its monthly bulletin today. The economy grew 0.2 percent from April to June, as consumers brought forward purchases ahead of a sales-tax increase in July.
Industrial production fell the most in seven months in September, a separate report showed today. Output contracted an annual 1.4 percent, compounding an annual decline of 12.7 percent in the same month last year, the National Statistics Institute said. “This was an exceedingly poor outcome given that industrial output had fallen by 12.7 percent year-on-year in September 2009,”

Spanish Bonds at Risk as Contagion Gathers Force: Euro Credit (Bloomberg) -- Spain's efforts to cut the euro region's third-biggest deficit may not avert record borrowing costs, as investors speculating on a bailout for Ireland or Portugal trash the bonds of Europe's peripheral countries. The extra yield investors demand to hold Spanish 10-year bonds over German bunds jumped as much as 34 basis points this week to 229, nearing June's euro-era record of 232 basis points. The risk premiums for Ireland and Portugal soared to record highs of 652 and 484 basis points, respectively.

European Leaders Try to Stem Bond Rout as G-20 Leaders Discuss Irish Debt - European finance ministers sought to reassure investors who have driven bond yields to records in Ireland and Portugal as leaders at a Group of 20 summit in Seoul addressed the Irish debt crisis amid speculation the European Union will need to step in with a bailout.  Officials from Germany, France, Italy, Spain and the U.K. issued a statement in South Korea saying a crisis-resolution mechanism they’re discussing that may force bondholders to share the cost of a bailout wouldn’t apply to outstanding debt.  German Chancellor Angela Merkel said a financial backstop agreed upon by the EU in May is “in place” if any country needs it. She rejected criticism by Ireland and others that her push to hold bondholders accountable in any debt crisis after mid-2013 worsened Europe’s current woes.

Ireland Default Predicted by Majority in Global Investor Poll - A majority of global investors predict Ireland will default on its sovereign debt, showing that weeks of efforts by the government of the onetime “Celtic Tiger” haven’t allayed concerns about its creditworthiness.  As the Irish government puts the finishing touches on a plan to find 15 billion euros ($20.5 billion) in savings, 51 percent of respondents in the latest Bloomberg Global Poll say they regard a default as likely, compared with 42 percent who say it is unlikely. The ranks of those anticipating an Irish default have tripled since a poll in June. Ireland ranks behind only Greece -- with 71 percent of those polled -- and ahead of Portugal -- with 38 percent -- among nations seen as most likely to default, according to the quarterly poll of 1,030 Bloomberg customers who are investors, analysts or traders, conducted Nov. 8.

Britain backs EU rescue measures for debt-ridden Ireland -Britain today stepped into the crisis enveloping the Irish government when it backed EU measures to mount a rescue operation if the country proves unable to repay its debts. David Cameron agreed to add Britain's name to a statement giving assurance that the EU would step in to guarantee 100% of Irish debts if the country is unable to tap international money markets for extra funding. Ireland has come under pressure to repair its battered finances after the interest rate it pays on debts jumped to 9%. There had been concern in the markets over German moves to force private investors to bear a share of the burden in future bailouts of countries in fiscal crisis. But a joint statement released by Britain, France, Germany, Italy and Spain made clear that "any new [bailout] mechanism would only come into effect after mid-2013, with no impact whatsoever on the current arrangements". However, the unusual move underlined fears that Ireland is edging towards bankruptcy unless it receives further support from its Eurozone neighbours.

Ireland Urged by European Officials to Accept Aid to Contain Debt Crisis - Ireland is being urged by European policy makers to take emergency aid to contain a debt crisis rattling their markets, according to a person briefed on the discussions.  In a conference call of European Central Bank officials around noon Frankfurt time yesterday, Ireland was pressed to seek outside help within days, the person said on condition of anonymity. Separately, a European Union official said a request for assistance was likely even as Irish Finance Minister Brian Lenihan told RTE Radio that such a call “makes no sense” as the government is fully funded to mid-2011.

Cowen denies reports of EU talks on emergency funding - Taoiseach Brian Cowen has denied reports that negotiations are going on behind the scenes for emergency funding for Ireland from the European Union. Mr Cowen denied the wire-service reports which cited eurozone sources. “We have made no application whatever for funding. As the Minister for Finance has outlined, we have funding up to mid-year because of the pre-funding arrangements done by the National Treasury Management Agency.” Quoting an unnamed source, the Reuters news agency reported that Ireland was likely to become the second euro zone country, after Greece, to obtain an international rescue. "Talks are ongoing and European Financial Stability Facility (EFSF) money will be used; there will be no haircuts or restructuring or anything of the kind," Reuters' euro zone source said.

ECB’s Trichet Is Buyer of Only Resort as Debt Crisis Worsens - European Central Bank President Jean-Claude Trichet is the buyer of only resort as the euro area’s bond market melts down.Just six months after he threw out his rule book to prevent Greece’s debt crisis from splintering the euro area, the 67-year old Frenchman may again be the only policy maker able to prevent the collapse in Irish and Portuguese bonds from spreading. That may require him to ignore opposition from Bundesbank President Axel Weber to the ECB’s bond-buying program and expand purchases of sovereign assets, according to Citigroup Inc. and Royal Bank of Scotland Group Plc. “The ECB’s lack of action is puzzling to say the least and begs the question as to whether it’s fulfilling its financial- stability mandate,” “The more the ECB waits, the bigger the purchase program will have to be.” With Greece, Ireland and Portugal “now having virtually lost access to capital markets,” Cailloux said the ECB must “extend dramatically” its bond purchases. He called on it to buy Spanish assets to limit contagion and spend an additional 100 billion euros by the beginning of next year. So far, the ECB has spent a total of 64 billion euros.

Government campaigns to avoid EU financial bailout - THE GOVERNMENT is campaigning to avert the threat of being forced to seek emergency fiscal aid from the EU authorities as it battles a drastic loss in investor confidence. Uncertainty about Ireland’s frail position will come to the fore again on Tuesday when euro finance ministers gather in Brussels for their monthly meeting. Minister for Finance Brian Lenihan will be asked to provide an update on the bank rescue and on preparations for the 2011 budget and the four-year plan. Two well-placed sources told The Irish Times, however, that Irish officials have been involved in ‘‘technical’’ discussions about the procedures to be followed in the event of any aid application being made to the European Financial Stability Facility (EFSF).

Greek FinMin: Greece Not Ireland, Banks Under Control - Greek Finance Minister Giorgios Papaconstantinou sought to distance his country from troubled Ireland tonight, saying that Greece "is not Ireland" and stressed that Greece's banks had not got ahead of themselves as in Ireland.  "Greece is not Ireland, we don't have a banking system ahead of itself, we have a credibility problem with sovereign that became a funding problem in international markets for our banking system".  In a speech at the London School of Economics, the minister warned that Eurostat's estimate for the budget deficit of Greece in 2009 would be "substantially" higher compared with that already announced.  Papaconstantinou said that Greece would end this year with the budget deficit 5.5% percentage points lower than it started but that the country had only taken the "first steps on a long and difficult road".

Greek Finance Minister: Please Don't Insult Our Banking System By Comparing It To Ireland - You know things are bad for Ireland when even Greece is trying to distance itself from the comparison.Finance Minister Giorgios Papaconstantinou via iMarketNews: Greece is not Ireland, we don't have a banking system ahead of itself, we have a credibility problem with sovereign that became a funding problem in international markets for our banking system".In a speech at the London School of Economics, the minister warned that Eurostat's estimate for the budget deficit of Greece in 2009 would be "substantially" higher compared with that already announced. Papaconstantinou said that Greece would end this year with the budget deficit 5.5% percentage points lower than it started but that the country had only taken the "first steps on a long and difficult road". "Where are we at? Well, we're going to close the year having in fact closed the deficit by at least five and a half percentage points, maybe more". Greece is feeling confident after the ruling government avoided a snap election and appears to have political support to continue with austerity measures.

Greek unemployment rate up to 12.2 per cent in August - - Greek officials say unemployment in the debt-ridden country rose to 12.2 per cent in August, from 12 per cent in July, after some 46,000 jobs were lost lost. A statistical office statement says the total number of unemployed people rose to 613,108. The government has said unemployment is set to rise to 14.5 per cent next year and 15 per cent in 2012. Greece narrowly avoided bankruptcy in May, drawing from a €110 billion ($151 billion) rescue loan package from the European Union and the International Monetary Fund. In return, the Socialist government cut pensions and salaries and hiked taxes, hoping to reduce the budget deficit from more than 13.6 per cent of annual output in 2009 to 2.6 per cent in 2014.

Update from the French Barricades - In spite of the rogue government’s vote for further “austerity” measures, and in spite of the now manifest treachery of corrupted union leadership, the strikes and protests in France continue. As always, “austerity” means austerity for the people, not the criminal rich who triggered the Depression in the first place. “Austerity” means further robbery from the people to further bail out the banks and prop up every other corporate welfare and welfare-for-the-rich scheme. The French people know this and are trying to fight back. Unfortunately they’ve been betrayed not only by a rogue government but a rogue “union leadership”. This proves the complete failure of all pre-existing structures under corporate neoliberalism. As we’ll see in the quotes below, the unions themselves are thoroughly corporatized. Meanwhile the people understand the great call: Total Austerity For the Criminals, Not One Cent More From the People.

Eurozone rebalancing depends on German inflation -  Rebecca Wilder - German prices are very sticky, since the domestic economy doesn’t see the boom and bust cyclical behavior like that in other developed economies. However, inflation may headed north, especially if the trend in industrial prices (PPI), a +3.8% annual clip, is any leading indicator. (Click on chart to enlarge.) Will German policymakers see the inflation for what it is? It’s a shift in relative prices to drive real German appreciation in order to rebalance current accounts across the region amid a fixed currency regime. The Eurozone region is now characterized by current account imbalances, imbalances that are now being addressed through fiscal austerity measures. According to the IMF October 2010 World Economic Outlook, Germany will run the second largest current account surplus in the Eurozone as a percentage of GDP this year (second to Luxembourg), 6.1%, while Greece and Portugal will run the largest deficits, -10.8% and -10%, respectively. Among the bigger economies, Spain’s 2010 current account deficit sticks out at -5.2% of GDP. In fact, just 6 of the 16 Eurozone economies are expected to run current account surpluses in 2010. If these fiscal austerity measures are to succeed in Europe, the hardest hit economies – Spain, Portugal, Ireland, Greece – must generate income externally via export growth. In order to gain export growth, competitiveness must be drawn upon in one of three ways..

Markets alert for credit crunch 2.0 - Is there a second credit crunch looming? Between now and the end of 2012, UK banks and building societies must find ways of refinancing between £750bn and £800bn of lending. That's a number approaching half GDP.  If you think this a stretch, just take a look at the equivalent figure for the world economy as a whole. According to the Bank of England's last Financial Stability Report, there is approximately $5trillion (£3 trillion) of refinancing to be done by major banks around the world over the next three years.  Banks in Greece, Portugal and Ireland again find markets for all but very short term funding effectively closed to them. What chance do UK banks have of raising the necessary amid such humongous global competition?

David Cameron warns China over economic policies – David Cameron has warned of that “dangerous tidal wave of money” moving from one side of the world to the other could bring globalisation into “reverse.” The Prime Minister said China needed to understand what was at stake and he urged its leaders to open its markets.  In a speech in Beijing Mr Cameron explained that for the world economy to be able to grow strongly again – in particular the struggling Western economies – China had to start spending more and open its markets.  In a reference to the low valuation of the yuan, which has helped China's exports and allowed it to build up massive reserves of foreign currency, he said: “The truth is that some countries with current account surpluses have been saving too much while others like mine with deficits have been saving too little.

Jobless Britons may be told to do unpaid work - London: The long-term unemployed may be forced to do unpaid work or lose their welfare benefits under plans to be outlined by the UK government this week. Work and Pensions Secretary Iain Duncan Smith will announce that claimants needing work experience may be put on four-week community placements of 30 hours a week. If they refuse, they risk having their benefits stopped for at least three months. "What we are talking about here is people who have not been used to working having both the opportunity and perhaps a bit more of a push as well to experience the workplace from time to time," Foreign Secretary William Hague told BBC television Saturday. "The vast majority of people in Britain think that's the right thing to do," he said.

IMF warns austerity measures may have to be reconsidered - Government austerity measures may have to be rethought if the recovery slows, the International Monetary Fund (IMF) has warned. While the organisation approves of the Coalition's "forceful" plans to cut the deficit, it said the risks around its own predictions for 1.7pc growth this year and 2pc the next are "unusually large".  "There's considerable uncertainty around this forecast, which makes it very important for policymakers to be vigilant and flexible," said Ajai Chopra, who led the IMF's annual UK review. "If there's a sharp and prolonged downturn in the economy, the pace of fiscal consolidation may need to be adapted."  Potential threats to the recovery include rapid debt reduction among households and banks, a sharp new downturn in the housing market or greater than expected weakness in the Eurozone, the IMF reported.